Chapter 1 Intro to risk management Flashcards
When did risk management environment change and why
After financial crisis of 2008 international regulatory agencies required improvement to risk management disclosures and processes
Traditional risk management only considered what?
Accidental loss
Dictionary definition of risk is?
The possibility of loss or injury: peril
Against all odds book defines risk as …
Derived from Italian word risicare meaning to dare. In this it is a choice rather than a fate. We are betting in an outcome. Outcome can be negative or positive.
ISO 31000.2009 define risk as?
Effect of uncertainty of objectives
COSO ERM:2004 committee of sponsoring organizations define risk as?
The possibility that an event will occur and adversely affect the achievements of objectives.
RIMS definition of risk is…
An uncertain future outcome that can improve or worsen your position
Risk management insight defines risk as…
The probable frequency and the probable magnitude of future loss.
CFA institute define risk as
Exposure of a proposition of which one is uncertain.
Definition of risk management ISO 31000:2009
Coordinated activities to direct and control and organization with regard to risk.
COSO ERM 2004 risk management definition
The identification assessment and response to risk to a specific objective
RIMS definition of risk management is?
Strategic risk management is a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities that affect and organization’s strategy and strategy execution
There are four high level categories of risk..what are they?
Hazard or pure risk
Operational risk
Financial risk
Strategic risk
Hazard risk is?
Risk of accidental loss including the possibility of loss or no loss
Risk profile is
A set of characteristics common to all risks in. Portfolio
Systemic risk is?
The potential for a major disruption in the function of an entire market or financial system
Cost of risk is?
The total cost incurred by an organization because of the possibility of accidental loss
Reducing the cost of hazard risk associated with a particular asset or activity is the total of four things what are they?
Cost of accidental losses not reimbursed by insurance
Insurance premiums or expenses incurred for noninsurance indemnity
Cost of risk control techniques to prevent or reduce the size of accidental losses
Cost of administering risk management activities
Reduce deterrence effects of hazard risks making losses less frequent, less severe and more foreseeable benefits an organization how?
Alleviates management fears of potential losses and increase feasibility of ventures that once appeared to risky
Increase profit potential by greater participation in investment or production activities
Make the organization a safer investment and therefore more attractive to suppliers of investment capital
How to reduce the downside of risk consider the following…
Risk management Intelligent risk taking Maximize profitability Holistic approach to risk management Follow legal and regulatory requirements Benefits for the economy Reduce waste of resources improve the allocation of productive resources Reduce systemic risk
The benefits of risk management for an insurer are….
They can provide benefits to their clients and organizations by developing methods to reduce the cost of hazard of risk and provide cost effective risk transfer mechanisms Insurers require risk management programs to meet regulatory requirements
Risk management objectives should align with what?
They should align with overall corporate objectives
What are 8 typical risk management goals?
Tolerable uncertainty Legal and regulatory compliance Survival Business continuity Earnings stability Profitability and growth Social responsibility Economy of risk management operations
Tolerable uncertainty is?
Aligning risks with the organizations risk appetite
Value at risk is?
A threshold value such that the probability of loss on a portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in portfolio
Legal obligations are typically based on these three things…
Standard of care that is owed to others
Contracts entered into by the organization
Federal state provincial territorial and local laws and regulations
There are 4 steps an organization should take to provide business continuity and therefore resiliency they are?
Identify activities whose interruptions cannot be tolerated
Identify the types of activities that can interrupt such activities
Determine the standby resources that must immediately be available to counter the effects of these accidents
Ensure availability of these standby resources at even the most unlikely and difficult times
The basic measures that apply to risk management are
Exposure Volatility Likelihood Consequence Time horizon Correlation
Exposure is
Any condition that presents a possibility of gain or loss, whether or not an actual loss occurs
Volatility is…
Frequent fluctuations such as in a price of an asset
Law of large numbers is..
The mathematical principle stating that as the number of similar but independent exposure units increases the relative accuracy of predictions about future outcomes losses also increases
Time horizon is…
Estimated duration
Correlation is ..
A relationship between variables should be a measure that is applied to the management of an organizations overall risk portfolio
If insurer offered. A discount to clients that insure home and auto which of the following risk measures would likely increase? Exposure Volatility time horizon Correlation
Exposure as we have all the clients assets insured and larger losses could be likely and as the premiums used to pay for risk is lessened with discount as well.
Pure risk is?
A chance if Loss or no loss but no chance of gain
What are the most common classification a of risks used.
Pure and speculative risk
Subjective and objective risk
Diversifiable and nondiversifiable risk
Quadrants if risk (hazard, operational, financial and strategic
Speculative risk is?
A chance of loss, no loss or gain
Credit risk is
The risk of customers or other creditors will fail to make promised payments as they come due
Subjective risk is ..
The previewed amount of risk based on an individuals or organizations opinions
Objective risk is..
The measurable variation in uncertain outcomes based on facts and data
Diversifiable risk is
A risk that only affects only sine individuals businesses or small groups
Non diversifiable risk is
A risk that affects a large segment of society at the same time
Market risk is
Uncertainty about investment’s future value because of potential changes in the market for that type of investment
Liquidity risk is
The risk that an asset cannot be sold on short notice without incurring loss
Enterprise risk management defined is?
An approach to managing all of an organizations key business risks and opportunities with the intent of maximizing shareholders value. Also known as enterprise wide risk management
There are three theoretical concepts to ERM they are?
Interdependency
Correlation
Portfolio theory
The silo type thinking is a typical traditional risk management and ignores any interdependence
