Zurich Financial Services claims the credit crisis highlights the need for greatly improved risk management, and says firms must better prepare for extreme events.

In a thought leadership paper titled Dealing with the Unexpected - Lessons for risk managers from the credit crisis, Zurich claims that prior to the credit crunch many risks were poorly anticipated, and some were “flatly unexpected”.

As a result, by October last year world financial institutions had written off about $US900 billion ($1.4 trillion), a figure that may double by the end of the global financial crisis.

“There is no doubt that risk management failures have destroyed value at a massive scale,” the report says.

Zurich says risk management remains critical to business strategy and risk must continue to deliver value “as the other side of the coin of reward”.

The paper identifies five key elements to restoring adequate enterprise risk management procedures, including proper risk assessment and aggregation. Zurich says firms must identify and understand risk and also identify inter-linkages and the potential for extreme events to occur.

While models can assist risk forecasting, informed qualitative judgements from risk management professionals are indispensable, Zurich said.

The global insurer says firms must identify the desired risk appetite and entrench risk culture throughout the organisation.

“If risk management fulfils its strategic function it will determine the organisation’s choice of trade-off between risk and reward,” it stated. “This allows informed discussion on which risks to embrace and which ones to exclude.

“One lesson of the credit crisis is that risks that are not properly understood can be lethal.”