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Yin and Yang of Credit Underwriting

Yin and Yang of Credit Underwriting

This title seems especially appropriate following the recent Beijing Olympics. But today we are not talking about Chinese culture, we are talking about qualitative data and quantitative data, risk data and financial data, causes for success and causes for failure. What do these have in common? As the Chinese definition goes, they are two complimentary qualities that, when put together, form the whole.

Yin-yang Symbol

At the end of the day, business is about achieving profitability, which is defined as the ability of an enterprise to generate revenues in excess of the costs incurred to produce those revenues and is often measured by a rate of profit or rate of return on investment. Credit underwriters also seek to achieve profitability, and that means avoiding large, unforeseen losses. To maximize profitability, underwriters need to find the optimal balance between premiums charged and risk present.

Unfortunately, as discussed in The Risky Game of Credit Underwriting, underwriters are often working with insufficient, inadequate, or obsolete data so measuring the “risk present” becomes quite a tall order, and many times involves outright guessing. They have no way of knowing where the applicant lies in the ERM – Business Success Matrix. Fortunately, with the advent of a standardized mean to collect and analyze qualitative data, most of these underwriting deficiencies can be overcome. In this post, we’ll discuss how qualitative and quantitative data fit together to form a complete picture of an applicant during the credit underwriting process.

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Will the Real Risk Manager Please Stand Up!

Will the Real Risk Manager Please Stand Up!

Today I met an individual who asked what I did for a living. I was somewhat distracted and mumbled the word “risk management.” As I regained my focus this gentleman said “Oh, you’re a risk manager. I’ve had trouble with my Workers' Compensation...” and he began to talk about insurance. This was a prime example of the perception surrounding the terms “risk management” and “risk manager,” and how they’ve been equated solely to insurance coverage and insurance professionals in the past. I've witnessed this misrepresentation of the terms so many times that I felt not just inspired, but a public obligation, to write this article and help clear the confusion with the terminology that began long ago. PASSING THE SMELL TEST In the early 1960’s, two professors, Robert Mehr and Bob Hedges, developed the concept of Enterprise Risk Management. These two could easily be called the Godfathers of Risk Management. They published the first text to fully address the subject of business risk, "Risk Management in the Business Enterprise." The book introduced how risk management of an entire business could maximize efficiency, which would result in greater productivity. The basic premise was that all business risks should be managed, not simply those that could be "insured."

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