31, Implementing ERM Flashcards
What is proportionality?
Framework appropriate to one org (eg small motor insurer) not appropriate to diff one (e.g. global composite insurer), i.e., one size doesn’t fit all
What is the Pareto principle?
For ERM to add value, RM activities must feed through into action
Take decisions based on data, info and analysis
80% must be in data collection, analysis and reporting/ 20% in decision making. But 80% of value of ERM is due to informed decision making
What are the 4 key questions you must ask if you want ERM to be implemented successfully
- Governance structure and politics – who’s responsible for risk oversight and critical RM decisions?
- Risk assessment and quantification- how (ex-ante) will they make decisions?
- Risk management- decisions to be made to optimise risk/return profile?
- Reporting and monitoring- how (ex-post) will decisions be monitored
What are the 3 stages of ERM implementation
- Loss reduction- protect against downside losses
- Uncertainty management
- Performance optimisation - use in decision making
Outline controls that may be used as a form of loss reduction
o Credit controls – reduce P(default) and maximise recovery
o Investment + liquidity policies – minimise portfolio losses + ensure liquidity, by perhaps adopting lower-risk investment policies
o Other internal controls – reduce probability and severity of operational losses
o Audit processes- ensure finances in order
o Insurance coverage – risk transfer to 3rd parties
Outline controls to manage uncertainty/volatility?
o Credit models- better understand credit risk, predict and make provision for losses
o Market measurement and management techniques – e.g., simulation models, measurement tools incl. VaR and economic capital
o Increased management of operational risks, esp. crisis management + prevention
o Improved corp gov policies
o Wider application of risk transfer- derivatives, sophisticated insurance products, ART
Outline three business activities to optimise performance
o Active credit risk portfolio management – pricing for risk and disaggregating credit business into distinct activities
o Active balance sheet management – consider all A+L to optimise risk/reward trade-off
o Re-engineering processes to minimise operational risk and better understand + reduce costs
What are some challenges with ERM implementation?
- Promoting risk awareness
- Implementing a culture change
What are some strategies to promote risk awareness?
- Set tone from top -CEO act as role-model
- Ask right “risk” questions:
o Return/risk balance
o Limits and controls to minimise downside risk
o Systems
o Knowledge - Ensure common risk taxonomy
- Induction and ongoing train
- Link compensation to tisk to reward desired behaviours
How can you implement a culture change
- Set tone from top
- On an incremental basis
- As profile of new recruits changes staff views
List 4 ERM maturity models
- Lam’s 5 stage ERM maturity model
- McKinsey 4-stage ERM maturity model
- Deloitte 5-stage ERM maturity model
- IAA stages of ERM maturity
What are some key questions to ask when considering ERM maturity according to IAA?
- Board- what is their role?
- Risk appetite- how well is it defined, reviewed and communicated?
- Risk management policy- how comprehensive is it?
- Management accountabilities- how clearly are they defined?
- Management commitment and leadership – how committed is management to ERM?
- RMF- what responsibilities and resources does it have?
- Risk “language” – how well developed and documented is it?
- Risk management culture- how well developed is it?
- Performance management and reward systems- how well aligned with ERM are they?
- Risk and solvency assessments – how sophisticated are they?
- Reporting and monitoring processes and systems- how comprehensive are they?
- Internal audit of compliance with risk management policy- how comprehensive is it?
- New activities- to what extent are RM techniques applied?
- Business continuity plans / analysis- how comprehensive are they?
