David Merkel | Jun 25, 2013 08:26AM ET
In my career as an asset manager, and as a manager of financial risk, I have learned that all good risk management is done upfront, before the first purchase is made or product is sold. Secondarily, good risk management relies on the concept of feedback, i. e., are the results expected at inception happening? If not, are they happening in a way that makes us doubt the margin of safety that we thought we had?
I’ll give you some examples:
1) There are two ways to offer disability insurance (this applies to high-end P&C products for the wealthy, and other financial products):
2) After designing a living benefit for an annuity, you notice that one option is being chosen by policyholders, and the rest not. Do you:
3) You discover that you are the only company willing to offer a certain type of reinsurance, or a certain type of coverage. Do you:
4) On your new insurance product, the claims area sends you early claims data, showing you reasons for the claims. They reasons aren’t what you would have expected from the quality of the clientele that you thought you were marketing to. Do you:
5) You’re part of a team of value investors. A news event hits, showing that the company will be less profitable than expected by a wide margin. Do you:
6) The credit cycle has gotten long in the tooth, and securities that offer a decent yield versus risks undertaken have become few. You manage money for income seeking investors. Do you:
7) As a value manager, you have been underperforming for clients. Though you have tested and re-tested your processes, you can’t find anything wrong. You think there is a speculative mania going on. Several other managers that do things your way have been fired. Do you:
There will be a part 2 to this piece. I will finish up and summarize there.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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