the activity are at levels that are deemed appropriate by the organization's owners and managers. A second benefit of attempting to measure the risk capital associated with each activity is that the process helps management understand the uncertainty levels associated with each activity in the plan. The greater the amount of uncertainty and the greater the cost associated with the downside of the VaR estimate actually materializing, the more intensive must be the quality of contingency and remedial planning. The risk plan should paint a vision of how risk capital will be deployed to meet the organization's objectives. For example, the plan should define minimum acceptable RORCs for each allocation of risk capital. In so doing, it helps ensure that the return per unit of risk meets minimum standards for any activity pursued by the organization. The plan should also explore the correlations among each of these RORCs as well to ensure that the consolidated RORC yields an expected ROE, and variability around such expectation, that is at acceptable levels. Finally, the plan should also have a diversification or risk decomposition policy. This policy should address how much of the organization's risk capital should be spent on any one theme.5 A risk plan helps organizations define the bright line between those events that are merely disappointing and those that inflict serious damage. Strategic responses should exist for any franchise-threatening event-even if such events are low-probability situations. The risk plan should identify those types of losses that are so severe that insurance coverage (e.g., asset class puts) should be sought to cover the downside. For example, every organization pays fire insurance premiums to insure against the unaffordable costs of a fire. Fire is one of those events that are so potentially devastating that there is universal agreement on the need to carry insurance protection. Now, consider a more complex example from the world of investment portfolio policy. From an investment standpoint, there may be losses of such magnitude-even if they are infrequent and improbable-that they endanger the long-term viability of the investment plan. For example, firms or plans with large equity holdings6 could face material loss and earnings variability in the event of protracted and substantial stock market losses. In this case, the risk plan should explore the potential merits of financial insurance (e.g., options on broad market indexes). At a minimum, if such insurance is not purchased, the decision to self-insure should be formally discussed and agreed upon by the organization's owners and management. The risk plan should identify critical dependencies that exist inside and outside the organization. The plan should describe the nature of the responses to be followed if there are breakdowns in such dependencies. Examples of critical de- liver sificati on policies are routinely included in strategic planning. Such policies take the form of geographic diversification, product diversification, customer base diversification, and so on. Just as organizations produce standards on how much revenue should come from any one source, so too should they examine how much risk originates from any one theme (asset class, portfolio manager, individual security, etc.). 6In this context, a "large" holding refers to one that can generate earnings exposures that are deemed material vis a vis the business plan.