25. Risk governance

Question 1

Risk management process

Answer 1

Process of ensuring risks to which org is exposed are risks to which it thinks it is exposed and to which it is prepared to be exposed

Question 2

Components of RM process

Answer 2

Identification
Classification
Measurement
Control
Financing
Monitor

Question 3

Risk identification

Answer 3

Identifying risks threatening income or assets of org, and of possible price controls

Question 4

Risk classification

Answer 4

Classifying risks into groups incl allocation of ownership

Question 5

Risk measurement

Answer 5

Quantifying probability and severity of risk event occuring

Question 6

Risk control

Answer 6

Mitigation to reduce probability/ severity/ financial and other consequences of a loss

Question 7

Risk financing

Answer 7

1.Determining likely cost of each risk incl:
o Cost of mitigation
o Expected losses
o Cost of capital from retained risk
2.Ensuring org has sufficient financial resources available to continue objectives after loss event

Question 8

Risk monitoring

Answer 8

Regular review and re-assessment of risks +

overall business review to identify new/previously omitted risks

Question 9

Benefits of effective risk management

Answer 9

• Avoid surprises
• Improve stability and quality of business
• Improve growth and returns by exploiting risk opportunities
• Improve growth and returns through better management and allocation of capital
• Find opportunities from natural synergies
• Identify risk arbitrage opportunities
• Give stakeholders assurance of good management of business

Question 10

Risk management should

Answer 10

• Incorporate all risks
• Evaluate relevant strategies to manage risk
• Consider relevant constraints
• Exploit hedges and portfolio effects
• Exploit financial and operational efficiencies

Question 11

Systematic risk

Answer 11

Risk affecting entire financial market or system and can’t be diversified away.

Question 12

Diversifiable risk

Answer 12

From individual component of a financial market or system

Question 13

Uncertainty

Answer 13

Unpredictable outcome

Question 14

Risk

Answer 14

Consequence of action contain some degree of uncertainty, but with some certain elements

Question 15

How business units might operate

Answer 15

• Same activity; different locations
• Different activities and different locations
• Different activities; same location
• Different countries
• Different markets
• Separate companies in group with own units

Question 16

Managing risk at unit level

Answer 16

• Parent company determines overall risk appetite and distributes it across units
• Each unit responsible for own risk management and capital decisions
• No/crude allowance for diversification
• Can’t take advantage of synergies at group level

Question 17

Enterprise risk management

Answer 17

Co-ordinates risk strategy across whole organisation; smiliar strategies, processes and reporting requirements

Question 18

Key features of ERM

Answer 18

• Consistency across business units
• Holistic view of risk management
• Seek opportunities to enhance value

Question 19

Benefits of ERM

Answer 19

• Accounts for risk pooling, diversification and economies of scale
• Can take advantage of strategic opportunities and synergies
• Gives regulators confidence that risks are well managed across business
• Helps in business planning
• May lead to most efficient use of capital
• Can identify undiversified risk exposures and deal with them accordingly
• Can illicit a quicker response to adverse events

Question 20

Risk appetite

Answer 20

Amount of risk an org/individual can tolerate, i.e. maximum exposure