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
