1 Risk Treatment Basics
What do large datasets about past events using computers, IoT devices, sensors, wearables, and telematic devices allow orgs to accurately do?
Identify patterns of risk, model risk, and predict risk
When is duplication appropriate
If an entire asset or activity is so important that the consequences of its loss justify the expense and time required to maintain the duplicates
When would an org choose to retain more risk?
In order to exploit an opportunity
What might an org find when analyzing its risk financing holistically across the enterprise
Inconsistencies in its approach to treating risk
Modify the risk
Increasing or decreasing an event's likelihood and/or consequences that will result in a positive or negative outcomes
Siloing risks
Individual risks in isolation
What does effective communication from risk professionals entail?
Inform decision makers and stakeholders of not only the overall strategy but also the steps needed to implement it and how its success can be measured
Internet of Things (IoT) devices, sensors, wearables, and telematics devices have had the greatest impact on which one of the following risk treatment techniques?
Risk Modification
When does an org exercise risk avoidance?
Risk is deemed too high to take on in any form
What other techniques is risk retentions typically used with?
Risk modification and risk transfer
What risks typically call for modification?
Risks that fall in the middle of loss likelihood and loss impact
Ed is investment manager of the Nellor Foundation, a charitable trust. Recently, Ed met with the president of the Foundation. Up until now, assets have been invested in financial assets. Ed told the president that after performing a simulation, he would like to add a high-yielding, higher risk real estate investment to the portfolio. When the president asked if it would be too risky, Ed replied, "It will actually increase expected returns while reducing risk." The purported reduction in risk occurs because
The real estate investment returns are negatively correlated with the other assets. - Sources of risk that have a low positive correlation, no correlation, or a negative correlation with other risk sources in a portfolio are generally good risk sources to add to the portfolio and tend to improve the organization's risk-return position by increasing risk diversification. If the real estate investment returns are negatively correlated with the portfolio, risk is reduced.
Risk treatement
The selection and implementation of actions to help manage or mitigate a risk
But what do risk management professionals need to factor in in terms of financing?
There is a cost associated with forecasting technology
Each of the risk control techniques of duplication, separation, and diversification
These three risk control techniques all reduce the severity of loss associated with the organization's loss exposures even though they increase the number of loss exposures overall.
The more risk an org retains...
the more funds it must allocate to finance those risks
Elements to a successful holistic risk treatment process
- Involvement from the entire organization - An organizational and departmental structure that facilitates managing risks as a group - Risk treatment policies that cross departmental barriers - Measurements that consider the entire org - visible engagement from upper management - Risk treatment performance metrics
What has Machine learning and AI allowed?
- developing products that specifically address certain risks - helped insurers price insurance policies more precisely - facilitated insurers' abilities to create alternative produces
What type of process is risk treatment?
A continual process
Hedging
A financial transaction in which one asset is held to offset the risk associated with another asset
Correlation
A scaled version of covariance expressed from -1 to +1 which is the correlation coefficent
Retain the risk
Accepting and absorbing some or all of the consequences of the risk
What activities are retained and accounted for in the annual budget?
Activities with losses that have a slight chance of occurring and are of low impact
How has risk management become forward looking?
Advances in data capture, data storage, and data analytics
Dashboard reporting
Aims to share info as succinctly as possible Providing all the info internal stakeholders need about a particular subject within a very brief period of time
Four categories of loss likelihood
Almost nil Slight Moderate Definite
Prouty Approach
Analyzes a risk's loss likelihood and impact to determine a proper treatment Matrix to determine which treatment is best
What are those funds to finance those risks used for?
Apply the risk treatments of avoidance, modification, transfer, and retention
Holistic risk treatment
Approach to treating all of an organization's risks and opportunities in a way that uses available resources as efficiently as possible to maximize outcomes
How to avoid status difference
Ask for ideas from lower-level persons before turning to those of higher standing Ask higher up people to concentrate only on certain aspects of the topic
How to deal with hidden agenda
Attempt to bring hidden agendas into the open - Ask questions or state your observations and ask for the person's reaction - Consider starting the meeting by asking people to state their concerns
Risk Treatment Technique options
Avoid the risk Modify the risk Transfer the risk Retain the risk Exploit the risk
Why are risk committees important in terms of tech?
Because tech and its risk management ramifications evolves too fast for any single person to keep track of
What does holistic risk treatment require?
Big-picture thinking
What is the infrastructure upon what smart contracts and built and implemented?
Blockchain technologies
What should orgs do if they choose to retain their risk?
Carefully analyzed so that the org fully understands the extent of the risk
Ethos
Character -- need to establish credibility - Convince the audience you are worth listening to and why they should take you seriously - Use your past as a means of persasion
What else do risk professionals have to do in holistic risk managment?
Communicate the effectiveness to internal stakeholders
Conor needs to deliver an important message to his staff. He has scheduled a meeting in a conference room with his staff of 10 individuals. Which one of the following is the best way for Conor to use his body language to convey confidence in his message and interest in his staff?
Conor should sit up and lean slightly toward the audience
What should treatment selection include?
Cost-benefit analysis to ensure that the benefits of a treatment option outweigh the related costs
Risk treatment metrics
Covariance and correlation
What is the goal of holistic risk treatment?
Create an all encompassing view of the possible risks, treatments, and outcomes a company may face
Status difference
Differences in the informal status and formal rank of participants - People hesitate to contradict people w more power
What do both covariance and correlation assess
How one risk factor affects another and are useful for selecting risks or opportunities to offset other risks
Covariance
How two variables will change in relation to each other
How do you lead effective meetings
Define specific objectives Decide who to invite to the meeting A plan for meeting your objectives at the end of the meeting Double checking your knowledge / anticipated questions
Most effective dashboard
Designed with its audience in mind What the audience objectives are, what types of decisions they make, and what information is needed to inform those decisions
Maxwell Company has just invested a large sum in new, highly-sophisticated computer equipment and building renovations. Maxwell arranged to lease identical equipment at another location so that it could use the equipment in the event of a disaster at its location. Maxwell's lease of identical equipment at another location is an example of
Duplication
What does successful risk management depend on?
Effective communication
Pathos
Emotion -- need to make an emotional appeal to your audience
Modes of persusasion
Ethos, Logos, Pathos
What does risk treatment entail?
Examining each risk treatment option in terms of whether it leads to a tolerable level of residual risk or helps the org maximize the potential benefits of an opportunity
What elements does a treatment plan must contain?
Explanation of treatment technique Proposed actions Resource requirements Roles and responsibilities Timeline Monitoring requirements
What type of risks do orgs that extend credit to customers face?
Financial risks related to those customers' failure to repay debts
What must every org do in order to achieve strategic objectives?
Find ways to pay for the corresponding risks and treatments
Risk financing
Form of risk treatment that is needed to pay for the cost of an org's risk
Why are gains in a holistic approach more substantial than siloed?
Gains in one area of an org can be used to offset losses from another - Eliminates the need to treat the risk resulting ina loss
What is one of the common ways financial risks can be transferred?
Hedging
What are the advantages of sioled aprroaches to risk treatment?
Help mitigate the effects of negative risks and optimize opportunities to achieve strategic goals
Two common communication problems
Hidden agendas and status differences
What orgs are in a better position to take full advantage of emerging technologies?
Orgs that use risk committees composed of cross-functional decision-makers and stakeholders and discuss emerging risks and potential technological treatments
Types of risk modification
Loss prevention Loss Reduction
What are good risk sources to add to a portfolio and why?
Low positive correlation, no correlation, or negative correlation - They tend to improve the org's risk-return position by increasing the portfolio's risk diversification
What does hedging normally involve?
Making an investment to reduct the risk of adverse price movements in an asset
What does risk treatment involve?
Making decisions based on the results of a risk assessment - Risk-response panning
Best communication skills
Mastering nonverbal messages Leading effective meetings Using modes of persuasion Overcoming common problems
What do the categories provide to risk management professionals
Means of communicating and justifying the priority they believe should be placed on a risk as well as a means of providing risk treatment suggestions
What could these advancements in forecasting result in?
Minimal financing being required to retain, transfer, or modify negative risks
What risk treatments have been affected the most by technology?
Modification and transfer
Are treatment techniques mutually exclusive?
No - Many risks call for a combo of techniques
Can strategic risks be transferred?
No Or the cost to transfer the risk exceeds the expected return
Meeting Killers
No stated purpose No agenda Wrong people attending Bad timing Lateness Wandering Lack of conclusion
Disadvantages of siloed approach?
Not as substantial as holistic approach - Might treat negative risk unnecessarily because the treatment of risk results in a loss without considering the possible gains in another area
When is risk retention used?
Often used only after other treatment techniques have been considered When the potential negative consequences associated with it are low
Why is Parametric insurance and microinsurance more prevalent due to tech?
Parametric insurance and microinsurance cover risks associated with small events or one-time events -tech advancements eased the admin burden and expense of these products by allowing apps, data, and premiums to be collected and processed electronically
Bow-Tie Diagram Method
Process of communication and collaboration that identifies a risk and then lists its possible causes and possible consequences on either side - Sees possible causes of risk that create specific consequences
Feedback loop
Process that allows constant, consistent monitoring of holistic risk management Find the risk objective, create a program for that risk, look at the results and either maintain that program or change it
What is a prime example of risk transfer?
Purchasing insurance
What does risk financing for risk transfer involve?
Purchasing insurance that shifts the risks associated with an org's product, process, or action to an insurer
Win/Loss Combination chart
Pure risk vs speculative Win,Win Win, Loss Loss,Win Loss,Loss
What can real-time data and AI do?
Push product offers to potential customers that are specifically tailored to the requirements of those individuals/orgs when needed - done via mobile devices
Logos
Reason -- support your message/claim with evidence
What is the goal of each risk identified as needing treatment?
Select one or multiple treatment options that best help the organization achieve its strategic objectives
What else does risk treatment involve?
Selecting, communicating, and implementing risk treatment options and measuring effectiveness
Smart insurance contracts
Self-executing contracts that will initiate a loss payment as soon as the parameters for the contract have been reached
Cold Coolers, Inc., has its main warehouse in St. Louis. It also stores inventory in two warehouses in other cities to reduce the distance between their warehouses and retail locations. Cold Coolers is using which one of the following risk management techniques?
Seperation
Transfer the risk
Sharing the risk with, or moving it entirely to, another party
Three categories of loss impact
Slight Significant Severe
Avoid the risk
Stop or canceling the activity that would cause the risk
Are these categories objective or subjective?
Subjective
Exploit the risk
Taking actions to maximize the expected gains of opportunities
What is dramatically changing the risk financing environment?
Technology
What does correlation measure?
The degree to which two variables are related -- the strength of the relationship
What can significantly affect an orgs outcomes?
The interconnectedness and interactions between risks and their treatments
Why should treatment include a cost-benefit analysis?
To ensure that the benefits of a treatment option outweigh the related costs
Because risks can be predicted so accurately, how far can it be modified?
To the point of being nearly preventable
What does risk financing typically entail?
Transfer or retention of risk
credit derivatives
Transfer the credit risk to a third party in exchange for a fee paid to that third party
Seperation
Type of modification and retention that disperses a particular asset or activity over several locations
Duplication
Type of modification and retention that duplicates exposure units
How do you get the best results when using nonverbal messaging
Watch how others react to you and adjust tone of voice to promote engagement and credibility - Sitting up and leaning slightly forward conveys confidence/interest
What can convince reluctant parties of the value of sharing info to inform and improve risk management strategies?
Well-practiced communication skills
When do risk professionals use correlation
When considering how a risk interacts with other risks - in the form of a matrix
How do you know if an org is effective at treating risks holisticially?
When the process is integrated into normal business operations as opposed to living in separate functions handked by those not involved in everyday
When is covariance used by a risk prfessional?
When there are two sets of data and he or she wants to see if they are connected to each other
What are typical questions a dashboard user strives to answer?
Whether any busienss objectives are at risk Whether all gov regulations are met Previous risk assessments that need to be revisted
Hidden agenda
a secret motivation that is unknown to the rest of the group, such as the desire to take control, undermine another person, or sabotage progress
When are holisitc risk treatments used?
it is broad in scope-- examines all risk treatments that could be applied to multiple risks faced by various departments Not siloing risks