Chapter 4 - The Risk Management Process Flashcards
What does it mean to manage risk?
Understand the risks faced and then make decision on how to move on e.g. accept and live with, remove it, reduce it
What two commercial contracts were used in Europe since the medevial times for risk management?
= Futures & Hedging -> e.g. selling crops two months before harvest for a guaranteed price of framers and product for customers
What were the earliest forms of insurance and when did the capacity grow?
Earliest form is Marine and can trace back to 1547 in England. Capacity increased when investors combined resources to create the insurance ‘companies’
What was the impact of the industrial revolution on the risk management process?
Created new concerns about injury and death to workers - moved from futures & hedging to eliminate and reducing risk i.e. the risk management process. = Protecting people, not just the assets
How was the risk management process influenced in the 1950s?
Begins in the USA in 1950s, large corps start to self insure and in doing so, take greater care of the risk processes
What happened in the 1970s which influencing the risk management process?
- A revolution in financial risk management = new financial risks evolving driver by price fluctuations, commodities and foreign exchange rates. Traditional insurance companies offered little cover for the financial risks but risk management found ways to bypass this using ART (alternative risk transfer) and derivatives
What are the 5 steps of the risk management process?
1 Establish the context - understand the objectives & culture of the business
2. Identify risks - Understand the threats
3. Analyse the risks - Understand the potential of damage from the risks
4. Evaluate the risk - Decision on what level the risks are acceptable
5. Treatment - elimination, control of transfer to reduce frequency/severity
COMMUNICATION & MONITOR/REVIEW IS KEY FACTOR IN ALL STAGES
What indicates a level of an organisation’s risk maturity?
How embedded the risk management processes are, which can be determined through observation, audit and review. More embedded the risk processes are, the more effective and greater gains
Are there published risk management standards, and if so why?
There are standards that seek to establish a common view on frameworks, processes and practice which are generally set & recognised international standards bodies and groups. The standards are normally voluntary although adherence to a standard may be required by regulators or by contract
How did developments in financial risk drive the adoption of enterprise-wide approach to risk management?
Traditional risk managers were slow to adapt to new world of financial risk so become separate financial risk managers and traditional risk managers. Exacerbated as large multinational companies operate in ‘solos’ (independent departments)
What is enterprise risk management, compared to traditional risk management?
Development of risk management in an enterprise-wide approach to organising the risk management, e.g. focus on risks in relation to each other, objectives of the organisation, all insurable risks, and often the adoption of a chief risk officer therefore all categories of risk faced by the organisation
What is a fundamental role in the ERM philosophy?
Balancing opportunity risks (upside risk) with the risk of loss
