25 - Risk Governance

Question 1

Define: Risk Management Process

Answer 1

Ensuring that the risks to which an organisation is exposed are the risks to which it thinks it is exposed and to which it is prepared to be exposed

Question 2

Give the steps that make up the Risk Management Process

Answer 2

1. Identification
2. Classification
3. Measurement
4. Control
5. Financing
6. Monitoring

Question 3

Give the concerns that the Identification step in risk management looks to address.

Answer 3

To identify risks that threaten the income or assets of an organisation and some preliminary controls

Question 4

Give an important factor of risk classification other than the classes/categories of risks.

Answer 4

Ownership of the risks and who is responsible for managing them.

Question 5

Give the objectives of risk control in risk management.

Answer 5

1. Reducing the probability of a risk being realised
2. Limiting the potential financial severity of a risk that is still unrealised.
3. Creating systems to limit the damage a risk can cause after it is realised.
4. Reducing the non-financial or business impacts a risk can cause after it is occured.

Question 6

Describe risk financing.

Answer 6

Determining the likely cost of each risk, including the cost effectiveness of risk control options and the availability of capital to cover a retained risk.

Question 7

Which business management aspects need to be recorded and monitored for change with regards to the risk management process?

Answer 7

1. Changes in risk appetite of stakeholders
2. New or changed risks to the organisation that are identified.
3. Reporting on how risks realised over the period were managed.
4. Assess the risk management process itself.

Question 8

Give the benefits of a risk management process.

Answer 8

1. Avoid surprises
2. Improve the stability and quality of business
3. Improve growth and returns by exploiting risk opportunities.
4. Improve growth and returns through better management and allocation of capital.
5. Identify opportunities arising from natural synergies of products.
6. Identify risk arbitrage opportunities
7. Give business confidence to stakeholders

Question 9

Give the main aims of risk management process.

Answer 9

1. Incorporate all risks, financial and non-financial
2. Evaluate all relevant strategies for managing risks
3. Consider all relevant constraints
4. Exploit hedges and portfolio effects such as risk diversification.
5. Exploit financial and operational efficiencies.

Question 10

Give the conceptual difference between risk and uncertainty.

Answer 10

Risks are concerned with actions and uncertainties are concerned with events.

Question 11

Define: Systematic risk.

Answer 11

Risk that affects the whole market and cannot be diversified.

Question 12

Define: Diversifiable risk.

Answer 12

Arises from an individual component of a financial system or market and can be diversified away.

Question 13

Explain why the market does not necessarily achieve an equilibrium through market efficiency.

Answer 13

Different investors have different definitions, calculated values and views on risk and so the market may not behave in an objectively rational way.

Question 14

Give the main advantage and objective for Enterprise Risk Management over business component management strategies.

Answer 14

ERM allows a risk management strategy to factor in the pooling of risks and diversification of risks into risk allocation and restriction. This allows a greater efficiency of risk.

Question 15

Give the key features of Enterprise Risk Management.

Answer 15

1. Consistency across business units.
2. Holistic - consider the risks of an enterprise as a whole, thus allowing appropriately for diversification.
3. Seeking opportunities to enhance value.

Question 16

Describe two key concerns in managing different stakeholders actively involved in a risk management strategy.

Answer 16

1. There should not be infighting between the business units, in trying to maximise returns, and the risk management function, in trying to reduce risks.
2. The two sides of the business should be sufficiently independent to avoid risk compromise in order to achieve higher returns.

Question 17

Describe a key facet of an effective risk management strategy involving different internal stakeholders, outside of the identification, classification and controls of risks.

Answer 17

There should be clear reporting structures for the identification and monitoring of risks, such as risk taxonomies and all employees and other stakeholders should feel responsible for risk management.

Question 18

Describe the method of risk management at a business level of and give the advantages thereof.

Answer 18

1. The parent company can decide on overall risk appetite and allocates this to business units
2. Each business unit manages its own risk, for their specific business within the allowed risk appetite.
3. This creates a sense of responsibility within each business unit for direct involvement in risk management,
4. The management teams of the various business units are most closely involved in understanding the risks that business unit faces and how to deal with them.

Question 19

Describe risk management at the enterprise level and give the advantages thereof.

Answer 19

1. A group risk management function is established and the risk of the various business units are identified and combined.
2. Involves considering risks of an enterprise as a whole, rather than individual risks in isolation.
3. This approach makes allowance for the benefits of the diversification of risks.
4. It may provide insight at a group level into the areas with undiversified risk exposures or too much concentration of risk
5. Can help to ensure risk efficiency in using capital across a group.
6. ERM is more effective in enabling a company to take advantage of opportunities to add value.
7. Understanding risk better across the whole enterprise can allow the company to take greater risks in order to increase returns.