Chapter 42: Risk management process (1) Flashcards

1
Q

Risk management

A

the process of ensuring that the risks to which an organisation is exposed

  • are the risks to which it THINKS it is exposed
  • and to which it is PREPARED to be exposed.
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2
Q

The risk management process consists of (5)

A

risk

  • identification
  • measurement
  • control
  • financing
  • monitoring
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3
Q

Risk management process:

- risk identification

A

identifying the risks that THREATEN the
- INCOME
- or ASSETS
of an organisation

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4
Q

Risk management process:

- risk measurement

A

measuring the PROBABILITY AND SEVERITY of a risk

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5
Q

Risk management process:

- Risk control

A

Mitigation to reduce the probability / severity of a loss.

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6
Q

Risk management process:

- Risk financing

A

Determining the likely cost of a risk

… and ensuring the availability of adequate financial resources to cover the risk

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7
Q

Risk management process:

- Risk monitoring

A

Regular review and re-assessment of risks together with an overall business review to identify new / previously omitted risks.

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8
Q

Through risk management a provider will be able to (10)

A
  • avoid surprises
  • improve the stability and quality of their business
  • improve their growth and returns by exploiting risk opportunities
  • improve their growth and returns through better management and allocation of capital
  • identify opportunities arising from natural synergies
  • give stakeholders in their business confidence that the business is well managed
  • price products to reflect the inherent level of risk
  • improve job security and reduce variability in employee costs
  • detect risks earlier meaning they are cheaper and easier to deal with
  • determine cost-effective means of risk transfer
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9
Q

The risk management process should (5)

A
  • incorporate all risk (both financial and non-financial)
  • evaluate all relevant strategies for managing risk
  • consider all relevant constraints
  • exploit hedges and portfolio effects
  • exploit financial and operational efficiencies
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10
Q

Each stakeholder needs to decide upon which risks to (5)

A
  • avoid the risk altogether
  • reject the need for financial cover (eg if the risk is trivial)
  • retain, in part or fully
  • transfer (insure or subcontract all the risk)
  • share
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11
Q

The extent of risk transfer will depend on (3)

A
  • the probability of the risk occurring
  • existing resources of the stakeholder
  • cost of transferring the risk and willingness of a 3rd party to accept the risk
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12
Q

4 Main tools for risk management

A
  • diversification
  • control measures to reduce likelihood of risk occurring
  • control measures to ensure price paid for risk is fair
  • control measures to mitigate consequences of risk event
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13
Q

A company’s business unit might (6)

A
  • carry out the same activity but in different locations
  • carry out different activities at the same location
  • carry out different activities at different locations
  • operate in different companies
  • operate in different markets
  • be separate companies in a group, which each have their own business units.
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14
Q

Reports and systems at the enterprise level

A

If risks are managed and budgeted at enterprise level then companies need a system of risk reporting across the whole enterprise.

It is important to understand whether the business units are using the risk exposure allocated to them so that expected diversification benefits are actually realised.

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15
Q

4 Objectives of risk monitoring

A
  • determine if the exposure to risk and/or the risk appetite of the organisation has changed
  • identify new risks or changes in the nature of existing risks
  • report on risks that have actually occurred and how they were managed
  • assess whether the existing risk management process is effective.
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16
Q

The key aim of risk management

A

To PROTECT an organisation against adverse experience

… that could result in it being unable to meet its liabilities.

17
Q

4 Methods that can be used in capital project appraisal to identify risks

A
  • a high level preliminary analysis
  • brainstorming with experts
  • a desktop analysis
  • a risk register or risk matrix
18
Q

Risk tolerance level

A

The extent to which the organisation is prepared to be exposed to each risk.

19
Q

Risk measurement

A

The estimation of the probability of a risk event occurring and its likely severity.

20
Q

Risk control measures aim to mitigate risks by: (3)

A
  • reducing the probability of a risk occurring
  • limiting the severity of the effects of a risk that does occur
  • limiting the financial consequences of a risk that does occur
21
Q

How might natural risk hedging synergies exist in life insurance?

A

A life company may sell some products that expose it to mortality risk (eg term insurance) and others that expose it to longevity risk (eg annuities)

22
Q

How might natural risk offsetting synergies exist in life insurance?

A

A general insurer may find that good weather increases claims on its domest

23
Q

3 possible components of the “costs of a risk”

A
  • risk control measures
  • insurance
  • self-insurance
24
Q

A decision must be made as to whether risk should be managed at: (2 different levels)

A
  • business unit level

- group (enterprise) level