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I11 - Intro to Risk Management > Chapter 6 - Risk Treatment > Flashcards

Chapter 6 - Risk Treatment Flashcards

1
Q

What are the 4 options for action relating to risks?

A
  • Eliminate (closing part of business or activity)
  • Control (remove or reducing)
  • Transfer (insurance)
  • Retain (tolerate)
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2
Q

What is the only certain way to prevent loss from a specific risk?

A

Avoid the risk entirely

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3
Q

What are some methods to eliminate a risk entirely?

A
  • Cease the activity giving rise to the risk
  • Change the location the activity is carried out
  • Change materials
  • Change method
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4
Q

What are the downsides of risk elimination?

A
  • Economic costs - inevitably harm earnings of an organisation in the short term.
  • Unintended consequences - Could affect the probability or potential severity of another risk
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5
Q

What it the most feasible way to avoid risk?

A

Achieve risk avoidance in the design or planning stage of a new project

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6
Q

What 4 broad classes can risk control be divided into?

A
  • Preventative - measures to stop risks happening
  • Corrective - limit scope of loss
  • Detective - After the event measures to identify when/how an incident happened
  • Directive - Controls to ensure a particular aim is realised
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7
Q

What are the most common forms of risk controls in organisations?

A

Preventative controls - designed to reduce the possibility of the undesirable event being triggered

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8
Q

What are some examples of preventative controls?

A
  1. Separation of duties - prevents irregularities
  2. Limit specified actions to authorised personnel - only suitably qualified and trained people can sign off certain actions
  3. Strategic decisions - at highest level of organisation to avoid certain types of activity
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9
Q

It can be helpful to think of risk controls as ………

A

= Barriers
Physical - actual hinderance
Natural - Distance, time & placement
Human Action -
(in order of reliability)

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10
Q

What is a corrective control and some examples of them?

A

= Reduce the losses of adverse risk events that have already happened:
- Contract terms
- Business Continuity Planning - helps in returning to operations as quickly as possible
- Insurance
- Diversification of business -> spreads the risk across the business as unlikely to be affected by the same loss
- Diversification of financial investment risk

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11
Q

What is a directive control and some examples?

A

= Designed to make people behave a specific way, ensuring a particular outcome is achieved… commonly associated with health, safety & security
1. Rules & training for health and safety - PPE/trained to level
2. Procedural manuals, protocols & specifications - checklists, worksheets & test schedules designed to ensure all critical aspects of a task has been completed properly
3. Job descriptions - define responsibilities

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12
Q

What is a potential weakness in directive controls?

A

= Human errors

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13
Q

What are detective controls and some examples?

A

= Designed to identify unwanted occurrence that have already happened
1. Accident investigations (identify root cause & preventative measures for the future)
2. Fraud detection
3. Audits & inspections e.g. errors in work

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14
Q

For complex risks, what is often the most effective way to control the risk?

A

Combinations of different types of controls

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15
Q

What is an important when a control is put in place?

A

The control is proportional (reasonable) in relation to the extent of the risk

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16
Q

How can the cost-effectiveness of a control be estimated?

A

Comparing the severity of an uncontrolled risk (inherent) with the severity of the same risk assuming the controls are in place (residual risk). Difference must be greater than the cost of implementing the control

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17
Q

What are the 3 main methods of transferring risk?

A
  1. Insurance
  2. Securitisation of the risk
  3. Transfer by contract
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18
Q

If we own a business and our premises are destroyed
by fire or one of our employees is injured, that risk is ours and cannot be transferred.
However, what we can transfer is the ‘……………………………………………………’ of a risk event occurring.

A

Financial consequences

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19
Q

Are some risk exposures compulsory?

A

Yes by law some must be insured by third-party insurers e.g. EL, PI & Motor

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20
Q

What are some advantages of insurance for risk transfer?

A
  1. Swap an unknown risk for a confirmed premium giving businesses confidence
  2. Insurers have wealth of experience in risk and risk funding mechanisms
  3. Additional services e.g. risk services
  4. Can ‘coinsure’ for high level of sums insured
  5. Premiums can be tax deductible
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21
Q

What are some disadvantages of insurance?

A
  1. For insurers to assess and cost risk look at the CAUSE whereas organisation looks at SEVERITY so insurers may not be able to cover all possible causes of loss/damage
  2. Risk acceptance & pricing can be too short a period of time
  3. Insurers cannot offer risks such as brand value (non-financial)
22
Q

What is the securitisation of a risk? and two examples

A

= Range of instruments that enable an organisation to transfer financial risk to a professional risk carrier (investment & banking world) rather than traditional insurance contract
1. Insurance derivatives
2. CAT Bonds

23
Q

What is an insurance derivative?

A

A development of a financial derivative which enable someone to buy or sell a specific asset at a specified date in the future for a specified time

24
Q

What is a CAT bond, why are businesses attracted to them?

A

= Investment bonds that provide a return to investors based on insurance-type events rather than financial market developments. Provide longer term cover (often 3 to 5 years) and make SPECIFIED AMOUNTS on the occurrence of one event (or multiple) happening in that period.

= Can transfer risk portfolios directly into capital markets -> SPREADING RISKS. An alternative if traditional insurance is too expected or does not provide required cover.

25
Q

Why do people invest in securitisation?

A

Valuable to investors as spread risks of portfolios across markets - SPREADING RISK

25
Q

Why may insurance & reinsurance companies seek to transfer policyholders’ risks by issuing securitised risk products?

A

String of high level catastrophe losses has exposed inability of insurance market to respond adequately. = Gives access to wider capital source

26
Q

If we are clear what risks we are transferring, recognise legal constraints preventing transfer of certain types of risk, and are careful with contract wording, then transfer by contract is a
viable method of risk transfer - what are some examples?

A
  1. Leases & hiring agreements -
  2. Surety agreements - A contract between 3 parties where surety takes risk a principle does not complete contract but can claim back losses from the principle
  3. Guarantees - a guarantor
  4. Waiver - can sue in breach of contract or tort
  5. Indemnity & hold harmless agreement - designed to release from legal claims
  6. Disclaimers - notice or statement limiting organisation’s responsibility for certain consequences or harm
27
Q

Even when insurance is available, there may be reasons organisations……….. WHAT……… some risks?

A

Retain

28
Q

What are the two main types of risk retention?

A
  1. Involuntary (no possibilities for elimantion, control or transfer can fully contain the risk)
  2. Voluntary (if exposure is insignificant )
29
Q

If none of the possibilities for elimination, control & transfer can fully triage and treat a risk, what is this risk retention known as and what are some examples?

A

= Involuntary risk retention
Why?
1. Insurance is not available - not available in the market, cost is too high for scale or risk or the desire to take an opportunity risk
2. Unplanned - did not foresee the risk or inadequate, derives from ignorance or unidentified risks occuring

30
Q

What are 2 reasons for voluntary risk retention?

A
  1. Economic reasons - If commercially insignificant, the cost of insurance could be a waste
  2. Managerial reasons - May encourage ownership amongst local risk managers and motivate them to work harder to reduce the risk
31
Q

What are the 6 options for financing risk retention?

A
  1. Non-replacement - absorb losses of income and does not replace asset
  2. Current expense - treated as operating costs
  3. Contingency reserve - Surplus trading is held in a reserve each year which is equal to expected losses
  4. Internal Risk Fund - Separate fund to ensure availability of liquid funds to pay losses
  5. Captive Insurance Companies - Inhouse provider insuring its own business, viewed as form of self-insurance
  6. Borrowing - can borrow to meet cost of losses
32
Q

When does partial retention occur and what are 4 methods?

A

= Arises at instigation of the organisation, the insurer, or as a compromise between both parties, e.g.:
1. Indemnity limit - limit per occurrence or time
2. Excess & deductible - organisation pays small amount of losses
3. First-loss cover - Mirror imagine of a deductible. Insurance company pays up to a limit and the organisation pays post that, if occurs
4. Co-payment - policyholder agrees fixed percentage of any loss applied on top of any excess or deductible

33
Q

What are some key considerations for making the right choice with regard to risk treatment?

A
  • Not waste money on unnecessary financing
  • Ensure strength of organisation are used for benefit of shareholders
  • Avoid retaining single risks large enough to destroy the organisation
  • ## Reflect that risks are multi-year and constantly changing
34
Q

Roughly define Business Continuity Management (BCM)

A

Advance planning for an organisation on what they will do if a major incident/cries occurs - another form of risk control.

35
Q

Does BCM provide valuable preparation for expected & unexpected events?

A

YES - BOTH
We know a lot of things can happen, just no the where, when and SCALE

36
Q

What do BCM plans include e.g. actions?

A

= Requisition urgently needed resources, ensure effective control of management of the incident

37
Q

when disaster strikes, a carefully prepared and rehearsed Business Continuity
Management plan will give an organisation an immediate, effective response and prepare
the way for the quickest possible route to a full recovery - what are some examples of low cost and high cost BCM?

A

Low cost - backing up computer data and storing off-site
High - contracts for stand-by machinery, physical locations and detailed recovery plans and exercises for all staff

DOESNT HAVE TO BE COSTLY TO BE EFFECTIVE THOUGH

38
Q

How has globalisation influenced BCM?

A

More interconnected so BCM need has become greater - cannot only consider own organisation but also supply chain disruptions at any stage

39
Q

A BCM programme is a mix of ….. & …… actions? Fill in the gaps

A

Core and facilitating
= An ongoing action which can never be regarded as complete, it not a linear process with beginning and end

40
Q

What are examples if core actions in a BCM programme?

A
  1. Crisis Management Planning - who does what in the immediate emergency?
  2. Continuity Planning - how do we week the business running & return to normal operations ASAP?
  3. Recovery Planning - how to get back to normal, pre-loss business levels
41
Q

What are examples of ‘facilitating actions’ in a BCM programme?

A
  • Impacts of disruption & survival priorities = starting point & originate from risk register and business impact analysis
  • Exercises and tests - ensure it work
  • Evaluation & improvement - corrective additions from audit & review
  • Leadership & support - needs people with appropriate knowledge and experience in place to contribute
42
Q

Are there internationally recognised BCM standards?

A

YES
1 = International Organisation for Standardization’s ISO Business Continuity Management is a widely adopted standard internationally e.g. UK’s British Standards Insitute
2 = Larger organisations can choose to the ‘certified’ following detailed inspections from industry bodies
3 = Professional bodies now offer certification to professionals working for an organisation

43
Q

Roughly define resilience, what it means and the difference between resilience and BCM

A

= Broader concept with a focus on encompassing all of the critical process that together produce the output of an entire organisation - about building capacity to step back from ‘business as usual’ to be alert for changes in the external environment and prepared for possibility of disruption.

Difference is BCM is focus on immediate response to an incident and speedy recovery whereas resilience is being alert and early preparation of the possibility of new events that could disrupt the organisation

44
Q

What are some examples of embedded behaviours which build resilience?

A
  • Capacity to respond to stress scenarios
  • Ability to maintain key services for clients
  • Training of staff and preparation for bad situations
  • Willingness to learn from past mistakes
  • Efficient communication
  • Proactive culture to managing risks
45
Q

What are some benefits & drawbacks of BCM?

A
  1. Inspire trust in ability to continue operations during a disruption
  2. Reputation
  3. Regulatory Requirements
  4. Reduce cost of disruption
  5. Create competitive advantage

Bad = incurs cost of specialist skills & requires time and support from busy leaders & workers

46
Q

What must all aspects of risk control be on a regular basis?

A

Reviewed

47
Q

Why is it important to evaluate risk controls?

A

To ensure they remain effective in controlling the risk to the intended standard and that it is financially cost-effective

Can learn that some controls are unnecessary and inappropriately complex and can be modified

48
Q

Who generally will assess and monitor risk controls of an organisation?

A

Part of the role of an internal audit team and have developed specialisms in this.

49
Q

What is a useful tool to prompt the review of risk controls and progress reports?

A

A risk register

I11 - Intro to Risk Management (7 decks)

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