Page 84 - RISK Management IC86 Ebook

Risk Management

enterprises have operational and financial risks thereby needing
capital to cover these risks. Efficiently managing capital and
risk together is essential to survival and will reduce the
enterprise risk.

n The first step is to outline risks of the firm and quantify
each one. Next, a dynamic financial model can be developed.
Most importantly, the model should recognize all courses
of capital available-including equity (for capital adequacy),
debt (for financial leverage), and insurance (for risk
leverage).

n Shimpi defines the term "Insurative" as "any corporate capital
resource". He then builds an Insurative Model defining total
average cost of capital (TACC):

TACC = cost of debt x debt value/firm value
+ cost of equity x equity value/firm value
+ cost of insurance x insurance value/firm value

n This model helps determine how capital can be used to increase
efficiency by using all sources of capital. Once the Insurative
model is completed, then the ERM team can review their
findings with the enterprise employees.

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