Standard & Poor's initiated a great deal of activity surrounding enterprise risk management (ERM) when it announced that it was going to specifically rate insurers' ERM functions and that those ratings would influence insurers' credit and financial-strength ratings. At the time, S&P offered specific ERM criteria from a variety of perspectives, one of which was termed strategic risk management (SRM).
The word “strategic” is much used, but implicit is the act of investment: allocating capital to a given product or line of business intended to generate a profitable return. The foundation of corporate investment is the business plan, which frequently contains a detailed description of the proposed investment as well as pro forma results.
Because a pro forma is a forecast and the future could develop unfavorably, some level of risk adjustment to that forecast is necessary. There are a number of ways to accomplish this—one of which is through a model.
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