26. Risk identification and classification Flashcards
Identification techniques
- Use risk classification
- Project management techniques
- Risk checklists
- Experience of staff who worked in similar orgs + consultants with broad experience in industry
Risk identification process for projects
- High-level preliminary analysis to determine if project too risk
- Brainstorm with senior staff + external staff with experience
- Desktop analysis to supplement 2
- Further discussion
- Risk register/matrix with risks and references to interdependency
Aim of risk identification brainstorm
- Identify likely and unlikely project risk + upsides and downsides
- Discuss risks and interdependency
- Broad initial evaluation on each risk, considering frequency + probable consequences thereof
- Generate initial mitigation options
- Briefly discuss these options
Risk categories
- Market
- Credit
- Liquidity
- Business
- Operational
- External
Market risk
Risks related to changes in investment market values/other features correlated with investments, such as interest and inflation rates.
Credit risk
Risk of failure of 3rd parties to meet obligations.
Examples of credit risk
Examples:
- Issuer of bond defaulting on interest/capital payments
- Risks associated with credit event
- Counterparty risk such as settlement risk (party pays cash/delivers A before counterparty is known to have carried out their part of deal
- Failure to repay credit
Decisison on which security to take depends on
- Nature of transaction underlying the borrowing
- Covenant of borrower
- Market circumstances and comparative negotiating strength of parties
- What security is available
Lender must be able realise security in cost-effective manner
Credit rating
- Given to company’s debt by credit-rating agency as indication of creditworthiness i.e. likelihood of default/credit loss
Liquidity risk
- Risk of not having sufficient financial resources to meet obligations as they rise (although solvent)
Liquidity risk for different organisations
Trading company
- Mostly stock and work in progress as assets
- Assets not realised = can’t pay back creditors
Insurance and benefit schemes
- Large proportion in cash deposits/stock/MM
- Little exposure
Banks
- Lend out depositors’ funds for longer periods than they offer the providers of the funds
- Retail bank must have sufficient liquid resources to withstand large number of withdrawals at same time
= offer good returns fixed deposits
CIS
- If invest in property, need protection in case its difficult to sell underlying
- Funds can defer withdrawals
- Hedge funds also have lock-in periods
Market liquidity risk
- Market doesn’t have capacity to handle volume of an asset to be bought/sold at time when deal is required
- Market depressed = risk of loss on sudden sale of A
Business risk
Risks specific to business undertaken
Types of business risk
Underwriting
- Inadequate underwriting standards
Insurance
- Uncertainties relating to claim amounts and rates
Financing
- Risk of financed projects/activities failing
Exposure
- Risks related to amount of business sold/retained or concentration or lack of diversification
Examples of business risk
- Inadequate underwriting standards = inadequate premiums
- Claims > Expected
- Investing business/project that fails
- Newly launched product fails
- Reinsurer having greater exposure to risk event than planned e.g. …
… writing whole account protection covers + primary reinsurance of risk - Music production company promoting CD that fails
- Competitor launching product week before your similar product launch
- Umbrella manufacturer’s sales suffering during drought
