Ch25: Risk Governance Flashcards
USE THIS ONE
Define risk management and its aim
Risk management can be described as the process of ensuring that the risks to which an organisation is exposed are the risks:
* to which it thinks it is exposed
* to which it is prepared to be exposed.
Key aim of risk management:
To protect an organisation against adverse experience that could result in it being unable to meet its liabilities
Key steps of risk governance
- risk identification
- risk classification
- risk measurement
- risk control
- risk financing
- risk monitoring
Risk identification:
Define
Give two reasons for it
why is the hardest part
- Recognise the risk that can threaten the income and assets of organisation (if this is jeopardised than can’t meet liabilities). The business compiles a risk register that is regularly updated.
Reasons for risk ID:
* to ID threats to business objecties and reduce them
* to ID opportunities to exploit risk to gain competitive advantage and make profit
why it is the hardest part:
* It need to be comprehensive: because the biggest risk to a company is one not identified
* There are many risks
Risk Classification:
why is is done
Helps with :
* calculation of cost of risk
* calculate the value of diversification
* allocating a risk owner from management team - responsible for the control process of risk and helps in monitoring
Risk Measurement:
Define
when is it done
what is included
why is it done
- Define : an estimation of the severity and probalilty of risk
-
Why it’s done: it is a basis for evaluating and a selecting a risk control method .
i.e : Decline, transfere, mitigate, retain with/without controls\ - When : before and after implementing controls
- what is included: cost of risk + cost of controls
e.g high severity, low probability would be transfere
high probability, low severity would retained with controls
Risk Control:
Define
Aim
What is considered
- Define:
- Determing and implimenting methods of risk mitigation. If multiple options exist, need to be compared and choose one
- Involves rejecting , accepting or partially accepting risks involved.
- Involves having trigger point where management action will be taken.
- Aim: to reduce probability / severity/financial consequence of loss/risk event
- what is considered: risk appetite. setting risk appetite is important part of the risk governance
How does risk control reduce the consequnces of risk event
- Reduce probability
- Limit financial consequence: making use of reinsurance
- Limiting severity of risk: e.g sprinklers for a fir
- Reducing consequences of risk : e.g not being able to operate because building burnt down
Risk financing
- Determing:
- cost of mitigation : control, reinsurnace
- expected losses
- cost of capital to back/ cover losses from retained risk
Risk Monitoring:
Define
Objectives/Why
Define: Regular review and re-assessment of risks
together with an overall business review to
identify new / previously omitted risks
Why:
* Determine if exposure or risk appetite has changed
* ID new risk or changes in nature of risk
* Report on risks that have occured and how they were managed
* Assess effectiveness of risk management process
* Assess the accuracy of underlying assumptions
Benefits of a risk management process
Helps to :
* Avoid suprises
* Improve stability and quality of business
* Improve growth and returns:
- by exploiting risk opportunities
- through better management and alloaction of capital
* ID opportunities arising:
- natural synergies
- risk abitrage
* stakeholder confidence: that the business is well managed
Risk management process should:
* Incorporate all risks, both
financial and non-financial
* Evaluate all relevant strategies
for managing risk
* Consider all relevant constraints - political, social, regulatory,
competitive
* Exploit hedges and portfolio effects among the risks
* Exploit financial and operational efficiencies within the strategies
Risk arbitrage
Risk arbitrage - situations where provider may have different view on price of risk relative to another party
action/example:
Accept risk for higher premium than what you perceive the cost to be
Transfer risk for lower premium than what you perceive the cost to be
Upside risk
Risk should not be considered as only relating to adverse outcomes. Risk can be positive if the
outcome is better than expected.
SYSTEMATIC RISK vs DIVERSIFIABLE RISK
Systematic risk - affects entire market/ system. Can’t be diversified away
Diversifiable risk - affects a component of the marke/system. Can be eliminated by diversification
Whether diversifiable or systematic risk depends on context :
if restricted to local market then system if not then diversifiable.
Business Units
Divisions of a business as a result of different:
* Function/ activities
* Locations
* Markets they operate in
* Separate companies under one group.
