ARM 54 - assignment 1

describe how classifying risk helps an organization's risk management process

Helps w/ assessing risks; many similar ones have same classification and can be looked at with similar techniques, also less likely to be overlooked

summarize role of RM in survival or organization

ID as many risks as possible that could threaten and manage those appropriately. Also depends on anticipating/recognizing emerging risks

describe risk management goal of satisfying organization's legal requirement

RM programs make sure an org's legal obligations are satisfied - standard of care owed to others - contracts entered into organization - federal, state, provincial, territorial, local laws and regs

explain how risk management can help an organization increase intelligent risk taking

RM shows analysis of risks and how to manage them - so the analysis can show potential rewards are greater than downside risks

An international manufacturing org has three major supplies located in the region of Japan where 2011 earthquake and tsunami occurred. In 2011, the org's production was disrupted because supplies could not be received, and this resulted in a loss of sales of $200 million. Explain whether these suppliers present a future risk to the organization according to the basic risk measures that should be managed.

Risk from exposure, consequences, and correlation. Exposure to occurrence, suffering from consequences, correlation b/c there is three

ex RM program goal conflict w/ goal of economy of RM operation: social responsibility

obligations can raise costs

categorize risk: cost of materials increase

operational risk

subjective risk

perceived amount of risk on individual's or organization's opinion

nondiversifiable risk

risk that affects large segment or society at the same time

liquidity risk

risk that an asset cannot be sold on short notice without incurring a loss

credit risk

risk that customers or other creditors will fail to make promised payments as they come due

diversifiable risk

risk that only affects some individuals, businesses, or small groups

risk profile

set of characteristics common to all risks in a portfolio

effect of correlation on org's risk

should be applied to overall risk portfolio; if two are more risks similar they are highly correlated; greater correlation comes greater risk

Describe ISO 31000_2009 def of RM

"coordinated activities to direct and control an organization with regard to risk"

Describe three benefits to an organization of reducing deterrence effects by risk management

- reduce deterrence effects make losses less frequent, less severe, more foreseeable. 1. reduce fears of potential losses, increases confidence for ventures that felt too risky before 2. increase profit potential by more participation in investment/production activities 3. makes org a safer investment; more attractive to suppliers of investment capital that allows them to expand.

how can risk management benefits the economy as a whole

- reduce waste of resources, improve allocation of resources, reduce systemic risk

ID steps org should take to provide business continuity

- ID activities whose interruptions cant be tolerated - ID accidents that could interrupt those activities - Determine standby resources that should be immediately available to counter effects of accidents - ensure availability of those resources

Describe how an organization's total cost of risk is associated with an asset or activity is calculated

- cost of accidental loss not reimbursed by ins or other comp - ins premiums/expenses incurred for nonins comp - costs of risk control techniques to prevent or reduce the size of accidental losses - costs of administering risk management activities

explain reasons why subjective and objective risk may differ

- familiarity and control - air travel vs car accident - consequences over likelihood - "can't happen to me" - risk awareness - orgs differ in level of risk awareness, perceive risks differently

ID 4 high level category of risks

1. Hazard risk 2. Financial risk 3. Operational risk 4. Strategic risk

why is it important to distinguish w/ speculative and pure risks when making risk management decisions?

B/c they need to be managed differently

describe role of chief risk officer (CRO) in ERM

CRO - engage org's management in cont convo to est risk strategic goals in relationship to org's SWOT - strngth;wkns;opprtnits;threats. Help create risk culture for whole office

describe holistic approach to risk management

To manage all risks, not certain ones. Insignificant ones can become significant. Helps org's develop a true perspective on significance to various risks.

Explain why evolution of RM occurred

high-profile failures of large org's in late 90s early 00's followed by global financial crisis

ex RM program goal conflict w/ goal of economy of RM operation: tolerable uncertainty

cost of RM efforts

ex RM program goal conflict w/ goal of economy of RM operation: legality

added expense

summarize how an organization should align its risk management objectives

align RM objectives with overall objectives - reflect risk appetite and internal/external context

explain the risk management goal of tolerable uncertainty

align risks with risk appetite - be assuring that whatever might happen is within bounds of what was anticipated

exposure

any condition that presents a possibility of gain or loss, whether or not an actual loss occurs

pure risk

chance of loss or no loss, but no chance of gain

speculative risk

chance of loss, no loss, or gain

describe how consequences are used to measure risk

consequence - see how occurrence could positively or negative affect organization; greater consequences, greater risk

contrast diversifiable risk vs nondiversifiable risk

diversifiable - small group, not highly correlated nondiversifiable - large group, highly correlated

time horizon

estimated duration

describe use of exposure as risk measure

exposure - shows maximum potential damage associated w/ occurrence; risk increases as exposure increases when risk is nondiversifiable

categorize risk: US dollar falls against euro, making org's dollar debts more expensive to pay

financial risk

categorize risk: credit rating is reduced by credit rating agency, results in increased cost of borrowing

financial risk

volatility

frequent fluctuations

categorize risk: computer hackers steal confidential information

hazard risk

categorize risk: fire at a plant

hazard risk

describe quadrants of risk

hazard risk - anything to do w/ insurance operational risk - falls outside of hazard risk financial risk strategic risk - trends in economy

ID 3 theoretical pillars of EDM

interdependency correlation portfolio theory

relationship b/w likelihood and consequences affects an organization?

likelihood/consequence - crucial to assess risk and how to manage it. See likelihood of event and its consequences. Need to know extent of possible of both.

risk related to short and long term horizons

long term is riskier

describe a common concept among various definitions of ERM

manage an org's risks and help org meet its objectives

law of large numbers

mathematical principle that says number of similar but independent exposure unit increases, the relative accuracy of predictions about future outcomes (losses) also increases.

objective risk

measurable variation in uncertain outcomes based on facts and data

explain how risk management helps an org meet the minimum profit expectation for an activity

must ID risks that could prevent goal to the reached; ID risks that could help achieve goal within objectives

systemic risk

potential for major disruption in function of entire market or financial system

explain how risk management can help an organization maximize its profit ability

provide info to evaluate possible risk-adjusted return on its activities and how to manage those activities; Managers can help org evaluate risks and potential returns of activities and show how activities can help organization meet its objectives

compare pure and speculative risk

pure risk: chance of loss or no loss, but no gain speculative risk: chance of loss, no loss, and gain

classify pure/spec; subt/objt; div/nondiv: products liability claim against manufacturer

pure; subt/objt; div

classify pure/spec; subt/objt; div/nondiv: damage to an office building resulting from a hurricane

pure; subt/objt; nondiv

correlation

relationship b/w variables

hazard risk

risk from accidental loss, possibility of loss or no loss

explain volatility on risk

risk increases as volatility increases

classify pure/spec; subt/objt; div/nondiv: reduction in value of retirement savings

spec; subt/objt; div

categorize risk: competitor hires key employees

strategic risk

two impediments to ERM

technological deficiency, traditional organization w/ entrenched silos

value at risk

threshold value - probability of loss on portfolio over given time horizon exceeds this value, assuming normal markets and no trading in portfolio

cost of risk

total cost incurred by organization b/c of possibility of loss

compare traditional and ERM risk management function

traditional: RM and RM dept to manage hazard risk ERM: RM and RM dept to manage all of org's risks; entire company responsible for RM

describe benefits of holistic risk management compared with traditional risk management of an organization

traditional: fragmented approach can miss critical risks holistic: looks at complete picture of risk profile and portfolio.

compare traditional concept of risk versus evolved concept of risk

traditional: hazard that could happen to any individual or organization evolved: effect of uncertainty on objectives

An organization manufactures and sells nonprescription pain-relief products. There is a products liability risk associated with this business. Describe a traditional risk management approach to this risk versus an ERM approach.

traditional: only look at accidental/hazard risk - appl RM in manufacture/distributing and purchase liability ins to transfer some of liability exposure related to product; risk control and risk transfer techniques ERM: address reputational risk

what are major changes in risk landscape

trends in tech, globalization, finance change dramatically

market risk

uncertainty about investment's future value b/c of potential changes in market for that type of settlement