5: Introduction to risk management Flashcards
What is risk?
The possible variation in an outcome and what is expected to happen
What is uncertainty?
The inability to predict the outcome from an activity due to lack of information
What three things can risk be broken down into?
- Variability
- Expectation
- Outcomes
What is meant by upside risk and downside risk?
Upside risk:
- possibility that an event will occur and positively affect the objectives
Downside risk:
- possibility of occurence being adverse
Name the risks faced by businesses in general (5)
There exists a risk that:
- trade conditions might be poor
- inadequate controls exist
- business may face financial nature
- ESG becoming more and more significant
- larger the business, the more varied the risk
What is the critical success factor (CSF)?
‘Those product features that are particularly valued by a group of customers and, therefore where the organisation must excel to outperform the competition’
What is risk appetite?
The extent to which a business is prepared to take on risks in order to achieve its objectives
What are the three attitudes to risk?
- A risk averse attitude
- A risk neutral attitude
- A risk seeking attitude
What are the three types of risk?
Business risk:
- arise from the nature of the business
- strategy, enterprise and product risks
Financial risk:
- can be uncontrollable or uncontrollable
Operational risk:
- arise from things just going wrong
Whare the sustainability and climate related risks?
- Physical risks
- Transition risks
- Reputational risks
- Finance risk
- Governance risks
- Regulatory risks
What is an operational risk?
The risk that actual losses, incurred becuase of inadequate or failed internal processes, people and systems, or because of external events differ from expected losses
What is the difference between population and sample?
Population:
- the entire set of data
Sample:
- small sample taken from inside population
What are the mathematical central tendencies?
- Median
- Mode
- Mean
- Expected value
What is the expected value?
E[X] = x1p1 + x2p2 + … + x_np_n
What is mathematical deviation?
For each value in a data set, deviation refers to how far from the mean that value is
(X - Xbar)
What is mathematical variance?
The average of the squared deviations in the values in a data set from the mean of that data
What is standard deviation written mathematically?
Sqrt variance
What is the coefficient of variation written mathematically?
Standard deviation / mean
What is risk management?
The identification, analysis and economic control of risks which threaten the assets or earning capacity of a business
When is risk management neccessary?
- Legal requirements
- May be required by licensing authorities
- Financial organisations may require risk management
What are the steps involved in risk management? (4)
- Awarness and identification
- Analysis: assessment and measurement
- Response and control
- avoidance
- sharing
- acceptance
- reduction - Monitoring and reporting
What are the two approaches to identifying risks and what are the differences between them?
A top-down approach:
- led by senior management
- linked to businesses’ CSFs
A bottom-up approach:
- involves a group of employees with an expert in risk management
- identify risk level upwards
What are the five categories of loss?
- Property loss
- Liability loss
- Personnel loss
- Pecuniary loss
- Interruption loss
What is risk assessment and risk measurement?
Risk assessment:
- assessing implications a risk might have on a business
Risk measurement:
- assessing probability of a risk occurring
What is gross risk?
The potential loss associated with the risk, calculated by combining the impact and probability of the risk before taking any control measures into account
What are the possible responses to a risk, so as to control it? (4)
- Risk avoidance
- Reduction
- Sharing
- Acceptance
What is ALARP and its relavance to risk management?
stands for ‘as low as reasonably practicable’
ALARP is the basis of many regulations relating to health and safety for work in the UK
employees are expected to take actions to reduce risk faced by employees to a level that is ‘reasonably practicable’ but have no duty to go beyond this
What is meant by reasonably practicable?
means that the risk has been reduced to a level such that it is proportionate to the cost that would be involved in reducing it further
reducing the risk below this point would require an excessive amount of expenditure or effort to achieve very small additional reductions
What is a crisis and what is crisis management?
Crisis: an unexpected event that threatens the wellbeing of a business, or a significant disruption to the business and its normal operations which impacts on its customers, employees, investors and other stakeholders
Crisis management is identifying a crisis and planning a response to resolve it
What is meant by business resilience?
A business’ ability to manage and survive against planned or unplanned shocks and disruptions to its operations
What are the four metrics to measure resilience from the ICSA?
- Compliance
- Completeness
- Value
- Capability
What is a disaster in business?
The business’ operations, or a significant part of them, break down for some reason, leading to potential losses of equipment, data or funds.
What is meant by a business continuity plan?
Will typically provide for:
- standby procedures
- recovery procedures
- personnel management
What is strategy risk?
the risk that the business’ objectives will not be achieved because it chooses the wrong corporate or functional strategy
What is enterprise risk?
The chance that a strategy will suceed or fail and shouldn’t have been undertaken in the first place
What is product risk?
The chance the customer will not buy a product or service in expected quantities
What is gearing risk?
finance itself by debt rather than shares
What is a credit risk?
Customers who end up not paying
What is a liquidity risk?
likelihood of running short on cash
What is the chronological order of risk management, response and control? (4)
- Avoidance
- Reduction
- Sharing
- Acceptance
