ERM - Lesson 1 Flashcards
The process by which economic entities identify, assess, and treat their exposures to loss.
Risk Management Process
Entity-wide focus
Enterprise Risk Management
Focus on pure risk
Corporate Risk Management
3 Reasons Why Interest in Risk Management Is Growing
- Catastrophe loss events,
- Corporate financial failures
- Shrinking employee benefits
Exposure that can result in a loss or no change
Pure Risk
Exposure that can result in a loss, no change, or gain
Speculative Risk
Firms and individuals prefer to take less risk rather than more.
Risk Aversion
If taking more risk, firms and individuals expect a higher return
Risk - Return Trade-Off
Risks that can be offset by diversification
Diversifiable Risks
May be used to capture advantages of diversification
Risk Pooling
Some, including insurer, use the _________ to benefit from pooling
Law of Large Numbers
6 Benefits Compared to No Insurance
- Stability of families
- Aids planning ability to businesses
- Facilitates credit transactions
- Anti-monopoly device
- Reduces credit costs
- Increases capital efficiency
The default strategy is _________, to retain the possible loss.
Retention
When the subject has not identified the exposure or underestimates the potential severity of the exposure
Passive Retention
A better alternative is _____________.
Personal Insurance Protection
2 Types of Personal Insurance Protection
a. Social insurance
b. Private insurance
Offset particular risks
Employee Benefit Plans
Looks at the exposures of a firm and seeks to treat them in a logical manner
Corporate Risk Management
Is a financial agreement in which an individual pays a premium to transfer the financial consequences to a risk pool.
Insurance
Administered and funded by governmental bodies
Social Insurance
Independently owned and operated
Private Insurance
Provided by firms as a protection from a number of personal pure risks:
Nonwage compensation
4 Nonwage compensation
- Health
- Life
- Disability
- Retirement
Steps in the Risk Management Process
- Establish the Goals of the Risk Management Function
- Identify Potential Loss Exposures
- Measure Potential Loss Exposures
- Choose Risk Handling Technique
- Implement Techniques and Monitor Effectiveness
3 Risk Handling Techniques
- Loss Control
- Loss Transfer
- Loss Financing
Reduce the frequency and/or severity.
Loss Control
(Contractual) arrangement to transfer risk to party that is best at mitigating, controlling, or
bearing it.
Loss Transfer
Arrangement to pay for future costs.
Loss Financing
What is TRM?
Treasury Risk Management
3 Measure Potential Loss Exposures
1.Frequency of the loss
2. Severity of the loss
3. Occupational Health and Safety
4 Identify Potential Loss Exposures
- Property Risks
- Liability Risks
- Human Resource Risks
- Indirect Losses
4 Loss Transfer
- Hold harmless agreements
- Hedging
- Financial Risk Management
- Leases
Transfer of risk through a contract.
Hold Harmless Agreements
Take equal but opposite position on an even based on chance.
Hedging
Techniques to deal with interest rate, currency value, and crop price changes.
Financial Risk Management
Transfers risk of obsolescence
Leases
4 ERM - Integrated Framework
- Top-Down Corporate Focus
- Broad Scope of Loss Exposures
- Portfolio Perspective for Diversification Opportunities
- Systematic Process of Risk Identification, Assessment, and Treatment
4 Types of Exposures
- Pure risk
- Operational
- Financial
- Strategic
What type of exposure is product development?
Strategic
What type of exposure is credit risk and currency risk?
Financial
What type of exposure is supply chain and distribution chains?
Operational
A new concept and a new occupant of the “C-Suite”
Chief Risk Officer
