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RISK MANAGMENT > CHAPTER 5 > Flashcards

CHAPTER 5 Flashcards

1
Q

How do we decide how to manage the underlying risk

A

When we understand all possible consequences of an incident

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2
Q

What is Risk assessment

A

This is a set of working tools used to examine threats that may bring damage or loss to an org, its responsbitiies and its objectives

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3
Q

What is the purpose of examiing threats

A

To stimulate decisions as to how those threats are to be managed

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4
Q

What do we need to do to istingus and catalogue risks for comparison

A

we need to quantify the damage that could result if each risk materialised

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5
Q

Combining impacct and probability gives us the basis for

A

Basis for risk comparison and ranking

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6
Q

Why does risk assessemen require exploring option for risk control

A

This is so becasue we need to see what risk reduction precautions are possible

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7
Q

why must risk and their analysis be associated with DATES

A

This is so that changes can be tracked over time and background to decisions can be revisited and reviewed

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8
Q

How must risk data be kept

A

Risk data must be kept in an easily understood and accessible file and in a form that allows for info to be used in related exercises like stress testig and risk modelling

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9
Q

The risk database must be able to accomodate

A

It must accomodate change and allow for measurements to assess effectivenes of controls

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10
Q

What will determine the software tools to be used in managment and future use of data

A

The size and complexity of data to be stored and intentions

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11
Q

What is risk categorisation

A

Putting riks into categories and then looking within each category to determine which risks are important and which risks can be ignored

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12
Q

Which risks are not worth investigating and controlling

A

Those risks whose impact is less than the value of resources employed

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13
Q

Why is risk categorization important

A

The system are importnat as they enable an org to identify accumulations of simila risks and clarify potential for applying common risk control strategies

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14
Q

Risk categorization system help with

A

They help organisations identify which strategies, tactics and operations are most vulnerable to anticipated threats

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15
Q

How do orgs decide which categories to use

A

they decide after considering what the information will be used for

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16
Q

The chosen categories for risk categorisato should cover

A

They should over all identified risks yet minimise the risk of overlap

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17
Q

Why have attempts to classsify risks been proved difficult in practice

A

This occurs when more than one casue can contribute to an event.

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18
Q

What isssue In insurance causes a separate category to be warrant

A

Preserving the liquidity ratuio

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19
Q

What is frictional risk

A

This covers the effect of changes in legal, accounting, regulatory,credit agency requiements or any similar event that puts u costs above those that would otherwise be reauired

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20
Q

whta is Basel II banking regulations

A

its another industry specific categorisation

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21
Q

What is a lst of official Base II events

A

-internal fraud
-external fraud
-employment practices and workpace safety
-clients,products and b’ness practice
-damage to physical assts
-business disruption and systems failures
-execution,delivery and process management

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22
Q

What is COSSO reporting mainly concerned with

A

Its concerned with the US legal requiremet to report accurate financial data

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23
Q

Financial Risks are concerned with

Risk categorisation systems

A

They are concerned with internal financial controls, risk related to maney managment, asset values, credit availability, liquidity and financial profitability

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24
Q

What does PESTLE stand for

A

Politics,Economics, Social,Technologial,Legal and Environment

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25
Q

What does PESTLE break down

A

It breaks down the external environment in which an org operates

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26
Q

when is PESTL and SWOT used together

A

They are used together when creating and reviewing strategic plans

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27
Q

Provide examples where PESTLE and SWOT have been used together for a cause

A

-Market Research
-Strategic analysis
-Mainly for exploring external factors that influence an organisation

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28
Q

What happens if risk categories and subcategories are selected

A

Compilation of annual reports and other publication for investors become easier, boards are presented with info in a more comprehensive form, questions from regulators,media and other stakeholders are more readily answered

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29
Q

If we want to compare and manage risks what do we need to do

A

We need to measure consequent losses or gains of risks materialise

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30
Q

When does it become difficult to attach monetary value

A

In situation of personal consequences like injury and loss of life, loss of reputation, consewuene and destruction of brand value

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31
Q

What are some of the types of daamges involved when measuring ompact of risk

A

-Health damage,injury or loss of lfe
-Asset Loss
-Time and resources
-Business survival
-Defining impact
-Aggregate Loss
-Risk Aggregation

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32
Q

What should be done to any risk that threatens survival of an org

A

High priority attentioneven if the probability of it materialising is remote

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33
Q

What are some examples of issues that could affect confidence

A

-Damage to the credibility of a brand
-concern with regulatory approvals and licenses
-security of intellectual assets
-Mistrusts of strategic direction

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34
Q

what other risk is associated with confidence

A

Reputation risk, damage to this in most businesses could directly result in loss of potential inome,divestment, loss of market value leading to susbequent takeover and in some cases for large org could result in closyre

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35
Q

How is credit,solvencu and liquidity risks controlled in an org

A

Affairs must be managed so that assets exceed liabilities and the organisation does not run out of cash

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36
Q

What is loss of credit equivalent to

A

It;s equivalent to running out of cash if the organisation relies on borrowing for day to day operations

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37
Q

Which oganisation are more prone to third party damages

A

-Nuclear power operation
-Aviation
-Chemicals
-Oil Exploration
-Transportation
As they can cause widespread human and environmental havoc if things go wrong

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38
Q

What some of the risks that could affect Business Survival

Survival Risks

A

-High monetary value incidence
-Loss of confidence
-Reputation risk
-Credit,Solvency and Liquidity risks
-Loss of credit
-Third party damage

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39
Q

How to measure risks that impacts cant be measured in financial terms

Defining Impact

A

Usually the solution is to attach codes to the risk that flag its importance in broad qualitative terms

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40
Q

When measuring non finacial impacts by attachng codes, how are these codes allocated

A

These codes are allocated after discussion with appropriate managers, e.g it could be a broad categories of assessment like intolerable,high,medium and low

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41
Q

How are money values allocated to the remaining risks after recording non - financial impacts

A

Impacts can be recorded at net cost or gross cost

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42
Q

When allocating money values to risks, what are net costs

A

they are costs afer any insurance claims are met ot recoveries from any other risk financing have been made

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43
Q

When allocating money values to risks, what are gross costs

A

These costs include sums even though they may eventually be recovered

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44
Q

What is maximum prossible loss

A

This means it’s impossible for quantam of loss to exceed the stated figure

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45
Q

What is maximum probable loss

A

This means its only proable that the loss will not exceed the stated amount

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46
Q

When must lossess be aggregated

A

When a risk results in simultaneous multile incidents of damage

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47
Q

When is historical data best used

A

They are best used to predict future trends if nothing has changed since the data was collected. However this is rarely the case

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48
Q

Withmeasuring probability what can produce output that is misleading

A

slight inaccracies or variables in input data

49
Q

The theory of statistical analysis depends on

measuring probability

A

It depends on their being a minimum number and spread of core incidents to enable the laws of averages to be applied and for clear and usable trends to emerge

50
Q

What is the prime use of historical data analysis in risk management

A

The prime use is to determeine expected values or ranges of value for particular ongoing risks

51
Q

What does the theory of probability set out

A

It sets out to illustrate likelihood or probability as a numerical value

52
Q

What does probability tell us

A

Probability tells us the chande that something might happen in a chosen period of time

53
Q

When is probability best used

A

when conidering infrequent high damage risks

54
Q

What is frequency

A

Is an expression of how often an event may occur

55
Q

what is the objective of any method of risk aggregation

A

To represent diverse risk exposures on a common numerical scale whose sum can be calculated in real time if required

56
Q

What are some obvious problems in trying to aggregate risks accross an organisation

A

-wide variety of type of risk involved
-combining qualitative and quantitative info esp qualitative
-different risk apetite thresholds at different levels in multile orgs and functioonal hierachies
-risk not confined to individual hieratches
-relationships between risks
-continually changing b’ness external and internal environment

57
Q

what may the risk department do if they have to present or publish risk information

A

They may bring probability and impact together by multiplying the two to create an overall risk factor indicating the size of the risk

58
Q

What is a risk factor determied by multiplying probabiliyy by potential loss/impact quatnified as

A

This is quantified as a measure of the possible loss to which an org is exposed as a result of some activity or event

59
Q

Exposure is well undestood in business often calculated for which things

A

-liability issues
-property loss/damage
-product demand variation

60
Q

In insurance how is exposure regulaly tracked

A

Its tracked in respect of outstanding claims

61
Q

What does risk ranking hide

A

It hides the distinction wheter a high level of exposure is due to high probability or impact value

62
Q

To deal with the issue that arises with risk ranking of hiding the distinction what may one do

A

They would buld a graphical demonstration of risk, by using a simple matrix format

63
Q

On face value a simple matrix presentation is a useful way of

A

Its a useful way of illustrating the relative importance of a number of risks but in practice a typical risk matrices must be treated with a great deal of caution

64
Q

what are some of the issues faced with a typical risk matrices

A

-with only a few categories this means that identical ratings can be allocated to quantitatively very different risks
-Error can result in higher qualitative ratings being allocated to quantitatively smaller risks
-Qualitative ranings are subjective rather than objective

65
Q

What is risk ranking

A

The process of comparing different risks and presenting them in an order of priority for the use of resources

66
Q

Risk compariosn is useful in

A

They are useful in benchmarking, for presentation purposes and to support arguments or explanatin

67
Q

Risk professionals are strongly advised to familiarise themselves with

A

They are advised to familiarise themselves with communication and presentation techniques if they want their recommedations to be accepted

68
Q

What can a careless graphical representation or risk comparison do

A

They can destroy the credbility of an argument even if it is logically correct

69
Q

Why is it convineient to adopt a numerical classification of impact

A

So that risks can be more easily compared

70
Q

What are risk factor indices

A

These are some standard classification used by an org to compare the risks they carry

71
Q

What is an important risk factor indices

A

Dow Fire and Explosion Index

72
Q

What is the Dow Fire and Explosion Index designed to do

A

This index is designed to classify particular hazards that lie within a process in a factory

73
Q

How does Dow Fire and Explosion work

A

It applies a predetermiend factor number to hazards within that proess tha re knon to increase overall risk of damage

74
Q

How is the Dow Fire and Explosion calculaton

A

The calculation process is staightforward usinf a standarised spreadsheet format

75
Q

The Dow Fire and Explosion has been proven to be useful in

A

It has been proven to be useful in determining plant layouts and separation between vessels in chemical process plants

76
Q

When are risk factor indices likely to be of best value

A

They are of best value when used to support decisions about prioities and resources to be applied to events that happen reasonably frequntly

77
Q

When are risk factor indices likely to be of best value

A

They are of best value when used to support decisions about prioities and resources to be applied to events that happen reasonably frequntly

78
Q

Risk factor indicies are best used for which estimaton

A

They are used to estimate likely total cost of a type of incident over a period of time

79
Q

What is risk apetite

A

The extent to which an orgnisation will tolerate a risk

80
Q

Risk Controls can be divided to four broad classes which are

A

-Preventive
-Corrective
-Directive
-Detective

81
Q

What is Preventitve measure for risk controls

A

Measure to stop a risk happening or unwanted outcome arising

82
Q

What is Corrective measure for risk control

A

This is a measure to limit sope of loss and reduce any undesirable outcomes that have come about once the loss or damage hs materialised

83
Q

What is Directive measure for risk control

A

Controls to ensure particular aim is realised

84
Q

What is Detective measure for risk control

A

after th event measures to identify when an incident has happened

85
Q

Most orgs implement which controls

A

Preventative controls, these are designed to reduce the possibility of undesriable outcomes

86
Q

What are corective controls designed to do

A

They are designed to correct undesirable outcomes that have already occured. They are a means of reocvery against loss or damage

87
Q

What is continuity planning

A

This is another corrective control, organisation plan for b’ness continuity and recovery after events which they could not prevent

88
Q

How is insurance a form of corrective control

A

It is as it facilitaties financial recovery when an insured risk materialises

89
Q

What are directive controls used for

A

They are instructions or regulations designed to ensure that a particular outcome is achieved

90
Q

What are directive controls commonly associated with

A

They are associated with health,safety and security. They are important when people’s behaviour can prevent a undesirable event

91
Q

What are some examples of directive controls

A

-requirements to wear protective clothing while performing dangerous duties
-staff are trained to certain skill levels before being allowed to work unsupervised

92
Q

what are checklists, worksheets and test schedules

A

these are directive controls

93
Q

Whichindustriies use directive controls best

A

-Aviation industry
-Oil and gas expliraton

94
Q

What are detective controls designed to do

A

They are designed to identify unwanted occurrences that have alreadhy happened and are thus only appropriate ehrn it is possible to accept the loss or damage incured

95
Q

What are some detective controls

A

-Stock checks
-Asset Checks
-Reconcilliation
As they can detect theft or similar anomalies

96
Q

How is reconcilitiona nother technique of detectie control

A

Reconciliting authorised payments with banks tatements will detect unauthorised transactions

97
Q

How are audits,inspections and quality quontorl detective

A

They are because they look for causes of defects in products and procedures with a view to introducing changes in the future

98
Q

What is market risk

A

This is concerned with risk of lossess inn tradingpositions arising from movement in market prices

99
Q

What are the prevention controls in avoiding market risks

A

The prevention controls aound the managmenet of this risk coudl involve decisions regarding investment strategis

100
Q

What are the corrective controls in avoiding market risks

A

They can be insurance and hedging

101
Q

What are the directive controls in avoiding market risks

A

Directive controssuch as limiting indivisual trading activities

102
Q

What are the detective controls in avoiding market risks

A

The detective controls coulld be adopted such as the org deciding to monitor unusual trading activity over an appropriate time frame

103
Q

What is credit risk

A

This is a risk that a counterparty will suffer real or percieved deterioration in financial strength or unable to pay mpunts in full due

104
Q

What are preventive controls in credit risks

A

This would include regular credit checks of current and potentia counterparties

105
Q

What are corrective controls in credit risks

A

Would include contract terms to safeguard assets held as securtes for loans and use of multiple insurers to protect large potential liabilityes

106
Q

What are directive controls in credit risks

A

This wouldl restrict trading to counterparties whose creit has been approved

107
Q

What is liquidity risk

A

This is a risk of running out of cash when it is neeed to meet financial obligation

108
Q

What are preventive controls in liquidity risks

A

Preventive controls would be strategic decisions on capital reserves and ratios, daily cash management and attention to contract payment terms and debt collection

109
Q

What are corrective controls in liquidity risks

A

This would include arranging overdraft facilities, hort trm credit and loan facilities or agreements with shareholders to inject capital at short notice

110
Q

What are directive controls in liquidity risks

A

This would be supporting managment in enforcing the discpline required

111
Q

Cost effectiveness of risk control can be estimated by

A

This can be estimated by comparing impact of uncontrolled risk with impact of the same risk assuming the proposed control is in place. The difference between the 2 impact assessments must atleast be greater than the ost of implementing the controls

112
Q

What is a risk register

A

This is a register of al risk information that is needed to be recorded

113
Q

What is the aim of a risk register

A

The aim is to build a complete picture or risk profile of the org or of selected individual or collection of risks deemed important

114
Q

What must the design of a risk register allow

A

It must alow useful informaton to be produced

115
Q

What will an org note as a risk register matures

A

The org disovers more uses for the information and will add further analysis or detail to the categories

116
Q

What are the essential data in a risk registfer

A

-Risk description
-Proability
-Impact assessment is supplemented by info about existing risk controls
-Ranking
-Priorities
-Risk ownership
-Recommendarion for new or improved risk control

117
Q

Risk registers can fulfill which dual role

A

-Faciliating practical management of risk
-Helping instil or condolidate risk management culture into day to day operations

118
Q

Typucal distributed risk register implementtion might involve

A

-automatic diary system to warn when risks are due for review
-tiered acess levels to individual risks
-authorisation procedures to accept new risk
-comprehensive enquiry and reporting facilities
-procedures for suggesting and authorising new/improved risk controls

RISK MANAGMENT (5 decks)

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