Chapter 25: Risk Governance

Question 1

Risk management control cycle

ICMCFM

Answer 1

Identification of risks
Classification of risks 
Measure risks (ProbSCoCo)
Control risks
Finance risks 
Monitor and feedback

Question 2

Risk management helps to (AEIOU PRC D)

ASGrow SPIDO D

Answer 2

Avoid surprises and threats to business objectives
Effective use of capital to improve growth/returns / Exploit risk opportunities
Improve stability and quality of their business / Identify risks
Opportunities from natural synergies identified
Uncertainty of stakeholders reduced (increase confidence)
Product pricing improved
Reduce variability in employee costs and job security
Cost effective risk transfer
Determine risks earlier and more cheaply

Avoid surprises
Stability and quality of business improved
Growth and returns improved by exploiting risk opportunities
Growth and returns improved by better management and allocation of capital
Stakeholders in business given confidence that business is well managed
Price products to reflect level of risk
Improve job security and reduce variability in employee cost
Detect risk earlier meaning they are cheaper and easier to deal with
Opportunities identified from natural synergies
Determine cost effective means of risk transfer

Question 3

Risk control methods:

FAT SIR LEP

Answer 3

Further research
Avoid
Transfer (likely, existing resources, cost/willingness of 3rd party)
Share
Insure
Reduce

Choice depends on:
Likelihood/severity of risk event
Existing resources in place to meet the cost of the risk event should it occur
Price/willingness of a 3rd party to take on the risk instead

Question 4

Risk financing should:

DRC MiD

Answer 4

Diversify
Reduce likelihood
Control price paid (e.g. insurance)
Mitigate financial consequences of risk events that do occur
Determine the amount of capital to hold to cover the retained risk

Question 5

Why ERM is effective:

VIS PROE SO

Answer 5

Variety of risk handled
Interdependence of risk used / Identify risk concentration
Senior management take responsibility of risk management
Pooling of risks done
Risk is diversified
Offsetting between risks
Effective allocation of capital / Economies of scale
Stable results are produced
Opportunities in the risks can be seen and exploited F

Question 6

Enterprise risk management - definition

Answer 6

Risk management becomes a major activity at enterprise level
Similar risk assessment procedures done across business
Combine several unit level risk models to assess risk at entity level
Company can then allow for pooling of risk, diversification, and economies of scale -PED
Take advantage of risk based opportunities
Similar risk assessments methods used - risk can be combined in a risk model
Effective capital allocation

ERM is a comprehensive and integrated framework for managing Credit risk, market risk, operational risk and economic capital in order to maximise company value. In this framework, Risk management becomes a major activity at enterprise level instead of a silo-based approach. This allows for similar risk assessments to be used across business and has various benefits such as: Economies of scale, Pooling of risk and diversification of risk to name a few.