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RMI Cap Quiz 1
Capstone Quiz 1 - ERM and SRM
| Term | Definition |
|---|---|
| 3 conclusions from Titanic reports | 1. iceberg caused sink, not weaknesses in ship 2. lack of communication of captains 3. Artificial deadline made by ship-makers to ensure that they dominated the market |
| Gross risk analysis vs. net risk analysis | Looks at frequency and severity of risk, the other only looks at the risk itself |
| Compliance of titanic | The makers of titanic met regulations in that they needed to provide life boats for 50% of the population of the ship, but that doesn't mean it is good risk management |
| Hymie's Case: business | Deli/restaurant, privately owned by 3 brothers, high Jewish and Muslim population due to the kosher food, and a good mix of everyone else, elastic demand curve |
| Hymie's Case: Risk management policy (3 priorities) | Customer safety and satisfaction/reputation; Employee safety; business continuity |
| Hymie's Case: Business Continuity | Hymie's can't afford to be out of business very long because people will go elsewhere to eat; and for cash flow needs they need to retain as little risk as possible |
| Hymie's Case: Loss Prevention aspects of RM policy | Customer safety and reputation/satisfaction; employee safety |
| Hymie's Case: Insurance aspect of RM policy | Business continuity - can get insurance products to deal with WC, business interruption, property |
| Hymie's Case: Risk identification - the most significant exposures | 1. Food borne illness 2. Housekeeping/condition of property 3. Key employee injury 4. Damage to restaurant 5. Reputation |
| Hymie's Case: Hazard - liability | customer injury; damages - economic and noneconomic; bodily injury; negligence |
| Hymie's Case: Hazard - property damage | Direct: lost inventory- food; building - cost to repair or replace; personal property - tables and chairs; indirect - net income |
| Hymie's Case: Net income | business interruption results in lost revenue and continuing expenses - rent, electricity, security, payroll for key employees; extraordinary expenses - to get you back in business ASAP - this is the real exposure |
| Hymie's Case: Operational risk | Personnel - employee injury. Key employees are the unit staff and deli men; Lost market share; Reputation |
| Risk classifications | Pure and speculative; objective and subjective; diversifiable and non-diversifiable |
| Pure risk | chance of loss or no loss - no gain, i.e. a building with a fire will either burn or not burn; always undesirable because there will never be a gain from it |
| Speculative | chance of loss, no loss, or gain; i.e. a business venture that can result in a profit, loss, or revenue and cost can balance out; desirable because of the chance of gain but may always be a loss/stay neutral |
| 2 types of speculative risk: | Price and Credit |
| Price risk | Uncertainty over size of cash flows resulting from changes in cost of raw materials and other inputs |
| Credit risk: | the risk that customers or other credits will fail to make promised payments as they come due |
| Speculative risk investments (4) | Market risk, inflation risk, interest rate risk, liquidity risk |
| Market risk | fluctuations in the market – prices of financial securities like stocks or bonds |
| Inflation risk | Loss of purchasing power because of an overall increase in the economy’s price level |
| Interest rate risk | A security’s future value because of changes in interest rates |
| Liquidity risk | being able to liquidate an investment easily at a reasonable price |
| Subjective risk | Perceived amount of risk based on an individual's opinion of an organization |
| Objective risk | the measurable variation in uncertain outcomes based on facts and data |
| Reasons by subjective and objective risk can differ | familiarity and control; consequences over likelihood; risk awareness |
| Diversifiable risk | Not highly correlated and can be managed through spread of risk; i.e. fire in one area is likely to only affect one or a few buildings - diversify by having buildings in different locations |
| Non-diversifiable risk | Affects a large segment of society at the same time - inflation, unemployment, hurricanes; correlated events in which the gains/losses tend to occur simultaneously rather than randomly |
| Systemic risk | the potential for a major disruption in the function of an entire market or financial system - one loss can affect another organization like failure of Lehman brothers affected banking sector and contributed to financial crisis |
| Quadrants of risk | hazard, operational, financial, strategic |
| Hazard risk | a pure risk - general the subject of insurance; includes property, liability, or personnel loss exposures |
| Operational risk | a pure risk - people or a failure in a process, systems, information technology, or controls, |
| Financial risk | a speculative risk - effect of market forces on financial assets/liabilities; market, liquidity and price risk |
| Strategic risk | a speculative risk - trends in the economy/society - changes in economic, political, and competitive markets, and demographic shifts |
| Internal ERM | desire for comprehensive approach to managing risks that threaten an organization; recognition of ERM’s value in strategic planning |
| ERM's greatest value and purpose in decision making (internal drivers) | risk appetite and risk tolerance |
| Risk appetite | total exposed amount that an organization wishes to undertake on the basis of risk – return tradeoffs for one more desired and expected outcomes |
| Risk tolerance | the amount of uncertainty an organization is prepared to accept in total or more narrowly within a certain business unit, a particular risk category or for a specific initiative |
| External ERM drivers | legislation, regulatory requirements, risk management standards, credit rating agencies, investors, social responsibility, catastrophic events |
| Value of ERM | improves strategic decision making, anticipates risks and minimizes threats, improve business performances, comply with legal and regulatory requirements |
| RIMS definition of ERM | a strategic business discipline that supports the achievement of an organization’s objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an interrelated risk portfolio |
| CAS definition of ERM | the discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organization’s short and long-term value to its stakeholders |
| COSO definition of ERM | a process; affected by an entity’s BOD, mgmt, & other personnel;applied in a strategy setting & across the E, designed to identify potential events that may affect the entity, manage risk within its risk appetite, provide assurance of achieved objectives |
| ERM Governance model | Dodd-Frank Act which requires certain types of financial companies to appoint a board risk commit, which may consist of the full board, audit committee, or a dedicated risk committee - cross disciplinary approach |
| Example of an ERM governance model | From top to bottom - board of directors, CEO & Board risk committee, CRO/Chair executive risk committee, Line managers (Risk owners) |
| Combined impact | have to bring in all major discipline in an organization to fully understand and see al perspectives |
| Apply your knowledge: An organization with many locations in the US provides (flammable) oxygen related supplies to customers who need it for medical reasons - risk of fire and explosion at these locations. describe a traditional RM approach vs. ERM | Traditional: procure property, liability, WC insurance, possibly a safety function to prevent occurrence and analysis if event does occur. ERM: risk transfer/safety, repetitional risk, effect of demographic on future of business,how to continue post loss |
| Focus of quadrants | Focus on the risk source and who traditionally manages it i.e. CFO manages financial risk, RM manages hazard risk |
| Source of hazard risk | Property risk, legal risk, personnel risk, consequential loss |
| Source of operational risk | people risk, IT risk, management oversight, business processes |
| Source of financial risk | market risk, credit risk, price risk, liquidity risk |
| Source of strategic risk | economic environment, political environment, demographics, competition |
| Apply your knowledge: New Company manufacturers electronic consumer products in a highly automated plant located in the US, but purchases components from 3 companies in Asia. Most sales are in US but European sales are growing. Describe risks -4 quadrants | H: property damage to plant, equip damage from fire/storm, injury to EEs and liability from products. O: EE turnover, inability to find skilled EEs, supply chain/IT risks; F: exchange rate, price risk; S: competition, econ factors, politics supply country |
| Dodd-Frant Act | external driver - Financial reform legislation (2010) - establishes requirements for risk committees at bank holding companies and certain nonbank financial holding companies and sets specific rules for risk oversight and reporting |
| SEC Rule 33-9089 | external driver - Requires that publicly traded companies disclose board risk oversight activities. A company's proxy statements must provide a discussion of how the company's compensation policies & practices relate to the overall RM program |
| Zurich's ERM RM objectives | to promptly identify, measure, manage, report, and monitor risks that affect the achievement of their strategic, operational, and financial objectives. |
| Zurich's 4 major ERM objectives | protect capital base by monitoring risks that aren't taken beyond the group's risk tolerance; enhance value creation and contribute to an optimal risk-return profile; support decision making process by providing risk info; protect reputation and brand |
| Strategic Risk Management | |
| Strategic risk management article: ERM framework broken into 4 categories | strategic (high level goals aligned with supporting its mission), operations, reporting, compliance |
| Strategic Risk Management | A process for identifying, assessing and managing risks and uncertainties, affected by internal and external events or scenarios, that could inhibit an organization's ability to achieve its strategy and strategic objectives with one goal |
| Ultimate goal of SRM | create and protect shareholder and stakeholder value |
| Focus of SRM | focused on the most consequential and significant risks to shareholder value |
| First critical step of SRM | assess the maturity of the organization's ERM efforts relative to its strategic risk |
| Second critical step of SRM | Conduct a strategic risk assessment |
| Third critical step of SRM | Review the process for strategy |
| Fourth critical step of SRM | Review the process to measure and monitor the organization's performance |
| Fifth critical step of SRM | Develop an ongoing process to periodically update the assessment of strategic risks |
| From 809 responses for risk and insurance managers in 20 European countries, survey found that | 28% of companies with advanced RM practicesA report EBITDA growth rate >10%, compared to 22% whose RM was classes as mature, 15% for moderate and 16% for emerging |
| Among companies with an EBITDA growth rate > 20%, | 74$ have matured or advanced RM practices |
| SRM (RIMs article definition) | a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities that affect an organization's strategy and strategy execution |
| Principles of SRM | value-driven, reflective, structured, informed, dynamic, process-based, condition based, consequential, interdisciplinary, scenario driven |
| Value driven | specifies the foundation and approach for creating, capturing and protecting enterprise value, while service as a source of competitive advantage |
| reflective | addresses the unintended consequences and potential exposures arising from and created by operational plans designed to execute strategy |
| structured | evaluates risk and reward trade-offs within the organization's appetite for risk and its control framework |
| informed | increases risk intelligence and risk-informed decision making with respect to strategic decisions at the board and executive management level |
| dynamic | recognizes the positive as well as negative impact on enterprise value arising from emerging and dynamic changes in the environment |
| process-based | represents an applied method and process in effective strategic decision-making, operational implementation of decisions and responsiveness to industry, economic or technological changes |
| condition-based | evaluates strategies in the context of significant internal and external conditions, such as organizational capabilities, environment, forces, events, trends and stakeholders |
| consequential | prioritizes and manages strategic exposures by relevance, importance and uncertainty in risk taking as well as mitigating strategic risks |
| Interdisciplinary | encompasses the intersection of strategic planning, risk management and strategy execution |
| Scenario-driven | focuses on the calculation of investment, resource needs and capital allocation through scenario and stress testing |
| 100 largest declines in corporate value (Oliver Wyman) | Strategic risks = 61%, Operational = 33%, Financial 6%, hazard 0% |
| Cone of uncertainty | Planned vs less favorable vs. more favorable outcome in the SRM operating environment |
Created by:
nicolefassak