A practical approach for risk‐adjusting performance

Abstract

PurposeRisk management has grown increasingly popular in recent years due to the recognition that risk should be as actively managed as performance. A key objective of risk management is to evaluate performance in the context of the relative volatility in which business operations are undertaken. However, accomplishing this has generally proven difficult. This paper aims to present a practical approach for risk‐adjusting performance.Design/methodology/approachThis paper presents a practical risk‐adjustment methodology that is based on a popular statistical measure. The utility of the approach is demonstrated in two practical examples: the first is an industry example and the second is an M&A example.FindingsThe results of the research suggest that the risk‐adjustment approach presented here could become an important part of both performance management and risk management programs.Research implications/limitationsThe approach detailed in this paper facilitates the practical risk‐adjustment of select performance measures and risk measures. As this is an introductory paper, further research could be conducted on the specifics of the risk‐adjustment process as well as the strategic context in which measures are risk‐adjusted.Originality/valueThis paper introduces a practical approach of risk‐adjusting performance that was inspired by a popular statistical measure, which is demonstrated in two practical examples.

What accounts for the high underwriting losses in the Ghanaian insurance industry?

“…As suggested by IBM Global Business Services (2007), companies should adopt risk-adjusted performance strategies to align performance and risk management. Calandro et al. (2008) also illustrate that risk-adjusted performance analysis provides an informed view of the performance of the US property and casualty insurance industry.…”

“…The recognition that risks as well as performance should actively be managed (see Calandro et al, 2008;Lowers, 2015;Horvey and Ankamah, 2020) has taken active roots in corporate and academic circles (Calandro et al, 2008;Hessami, 2019) because risk is essential for the survival of insurance companies (Omasete, 2014;Lowers, 2015;Atsakpo, 2019). As major risk managers insurers do not have only their own "weight" to contend with but are also required by their core business mandate to carry the "weight" of policyholders by providing them…”

“…The recognition that risks as well as performance should actively be managed (see Calandro et al. , 2008; Lowers, 2015; Horvey and Ankamah, 2020) has taken active roots in corporate and academic circles (Calandro et al.…”

“…The recognition that risks as well as performance should actively be managed (see Calandro et al. , 2008; Lowers, 2015; Horvey and Ankamah, 2020) has taken active roots in corporate and academic circles (Calandro et al. , 2008; Hessami, 2019) because risk is essential for the survival of insurance companies (Omasete, 2014; Lowers, 2015; Atsakpo, 2019).…”