Being quite different from value at risk approaches our value based risk management method is based on a risk analysis and on a financial analysis of the group.

The strategic objectives of industrial and commercial enterprises imply that the means at their disposal are used primarily to build up their core business operations. A voluntary retention of non core business risks is therefore only conceivable in situations of financial surplus.

As a consequence, when it comes to optimizing the risk financing strategy in light of the group's objectives, the management of any corporation needs to address the following questions :

• What is the financial capacity and are there potential surpluses ?
• What is the optimal mix between risk retention and hedging?
• What are the cost efficiency and protection level of each risk financing strategy ?
• How to take informed decisions on basis of easily interpretable results ?

Moreover, the approach should make it possible to balance long-term with short-term perspectives.

• Long-term perspective is important to consider in order to achieve sustainable growth of shareholder's wealth for investors.
• Short-term perspective is crucial to avoid excessive volatility leading to financing problems since the market punishes volatility.

This target cannot be fully achieved by techniques that are conducted on a pure probabilistic basis in order to define the risk/return balance or to set a maximum probability of loss or bankruptcy for the company at a given confidence level.

In practice, similarly to other major strategic and operating decisions, implementing Value Management in Risk Management proves to be the most efficient and accurate way to achieve this target. Such framework provides a structured approach linking the business strategy with the decisions that will deliver the maximum business value.

Such implementation requires the monitoring of financial measures for :

• the cost efficiency (long term value creation)
• the business strategic plan protection level (short term volatility of key ratios)

When performing Value Based Risk Management, the group's strategic objectives, financial priorities and risk financing decisions are interconnected and aligned.

Since 1998 Gecalux group has developed an innovative methodology, the Corporate Risk Adjustment to Capital (C.R.A.C. ©), which is dedicated to implementing Value Based Risk Management in the risk financing decision process.

By linking financial analysis to risk quantification and transfer-pricing techniques, our methodology enables a simple comparison of various risk scenarios and possible risk financing solutions in terms of their impacts as compared to the specific objectives of the group and the indicators used by analysts, investment banks, rating agencies,...

Taking into account the financial capacity constraints, the optimal risk financing strategy will be defined by the best balance between total cost of risk reduction (measured by long-term value creation) and business strategic plan protection (measured by short-term key ratios and credit scoring sensitivity).

In practice, the Corporate Risk Adjustment to Capital (C.R.A.C. ©) process is achieved according to three major steps:

1. Step 1 : Retention Level Analysis
2. Step 2 : Risk Measurement
3. Step 3 : Value Based Risk Management