24 - Risk Governance Flashcards
1
Q
What are the key steps of risk management by a financial provider?
A
- Risk identification
- Risk classification
- Risk measurement
- Risk control
- Risk financing
- Risk monitoring
- Cycle back
2
Q
What does risk identification concern?
A
- Recognise risks that will threaten the assets & income of the organisation by establishing context:
- > Business objectives
- > Company structures & finances
- > Who are the key stakeholders?
- > What is the area of business?
- > External environment - Systematic or diversifiable?
- Preliminary identification of possible risk control processes
- Identify exploitable risks to gain competitive advantage
3
Q
What is risk classification concerned with?
A
- Classifying risks helps with calculating cost of risk & the value of diversification
- Management allocates the risk to an “owner” who is responsible for the control processes of the risk
4
Q
What is risk measurement concerned with?
A
- Estimation of the probability of the risk event occurring and its severity
- Gives the basis for evaluating/selecting risk control methods:
o Decline risks
o Transfer risks
o Mitigate risks
o Retain risks with or without controls
5
Q
What is risk control concerned with?
A
- Deciding whether to fully/partially accept each identified risk
- Identifying possible mitigation options for risks where needed
- Risk control measures aim to mitigate risks or their consequences by:
o Reducing probability of risk occurring
o Limiting severity of the effects of occurring risks
o Limiting consequences of the risks that occur eg. adequate insurance
6
Q
What is risk financing concerned with?
A
- Determining the likely cost of each risk (including cost of mitigations, expected losses & cost of capital arising from retained risks)
- Ensuring the organisation has sufficient financial resources available to continue its objectives after loss event occurs
7
Q
What is risk monitoring concerned with?
A
- Identify new risks or changes in the nature of existing risks
- Determine if the exposure to risk and/or risk appetite of the organisation has changed over time
- Report on risks that have actually occurred and how they were managed
- Assess whether the existing risk management process is effective
8
Q
What are the benefits of a risk management process for a provider?
A
- Avoid surprises
- Improve stability & quality of the business
- Improve their growth & returns by:
o Exploiting risk opportunities
o Better management/allocation of capital - Identify opportunities from:
o Natural synergies
o Risk arbitrage - Give stakeholders in their business confidence that the business is being well managed
9
Q
Risk management strategies that balance risk, growth and consistency should ideally:
A
- Incorporate all risks, both financial & non-financial
- Evaluate all relevant strategies for managing risks, both financial & non-financial
- Consider all relevant constraints including political, social, regulatory & competitive
- Exploit the:
o Hedges & portfolio effects among the risks
o Financial & operational efficiencies within strategies
10
Q
What is systematic risk?
A
- Risk that affects the whole financial market or system
- It cannot avoided through diversification
11
Q
What is diversifiable risk?
A
- Arises from an individual component of a financial market or system
- Only non-diversifiable risks are rewarded within the scope of most financial systems
- Rational investor should not take on any diversifiable risk
12
Q
What are the main characteristics of ERM?
A
- Centralisation
- Board implementation & key objective of the board
- Evolving process
13
Q
What does the centralisation aspect of ERM concern?
A
- Portfolio approach (assesses all the risks across the company wrt their cumulative effect & correlations)
- Central Risk Function (single department responsible for risk assessment/objectives/monitoring lead by expertise & knowledge of CRO)
- Documentation (details of all risks & potential risks kept in one evolving source document)
- Reporting (one person, the CRO is responsible for reporting on overall risks to the company board)
14
Q
Advantages of portfolio approach:
A
- Assesses all the risks across the company wrt their cumulative effect & correlations
- Can lead to greater efficiencies in terms of:
o Insurance purchased
o Investment strategy
o Capital requirements
15
Q
Advantages of central risk function (CRF):
A
- Clearly defined risk objectives
- Without CRF, dilution of knowledge b/w different departments is likely
- More accurate/efficient reporting of risks from:
o Staff to CRO
o CRO to the board
o The Board back to all departments & employees - Less likelihood of gaps in analysis
- Central auditing of risks => less risk of over-confidence & anchoring
- Improvement of risk culture or an organisation
