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SP9- ERM > Mod 04 How to do ERM – internal risk frameworks > Flashcards

Mod 04 How to do ERM – internal risk frameworks Flashcards

1
Q

Outline seven structural components of an ERM framework
(ActEd 97)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Components of an ERM framework

  1. corporate governance – to establish organisational processes and controls
  2. line management – to integrate risk management into business processes
  3. portfolio management – to aggregate risk exposures and identify diversification effects and concentrations of risk
  4. risk transfer – to mitigate excessive risk exposures cost-effectively 5. risk analytics – to measure, analyse and report on risk
  5. data and technology resources – to support the analytics and reporting
  6. stakeholder management – to communicate and report on risk

The ERM framework’s success will be dependent on there being a positive risk culture.

(ActEd 98)

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2
Q

Define corporate governance (CG)
(ActEd 99)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Corporate governance (CG)

CG is the system whereby boards of directors, or governing bodies, are responsible for the governance of their organisations upon appointment by shareholders.

So, CG is the way the Board controls the organisation and the processes it establishes so that it is run by the management in the best interests of the shareholders.
(ActEd 100)

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3
Q

Outline the responsibilities of the Board in relation to risk management
(ActEd 101)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Responsibilities of the Board in relation to risk management
1. set the risk appetite
2. approve risk strategy and/or risk policies of the organisation 3. monitor key risks
3. ensure the implementation of a suitable RM framework and/or internal controls framework
4. ensure compliance with supervisory requirements
5. establish / maintain a supportive risk culture
6. establish the organisational structure, roles and responsibilities 7. 7. ensure that risk personnel are fit and proper
8. review the outcomes of / lessons learnt from RM failures
9. align remuneration with medium to long-term objectives
(ActEd 102)

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4
Q

Outline line management’s responsibilities within an ERM framework
(ActEd 103)

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A

Line management’s responsibilities within an ERM framework

  1. day-to-day management of, and the reporting on all risks within the organisation
  2. implement the ERM policies approved by the Board through setting up RM processes and integrating the risk information collected into business decisions
  3. understand the risks being taken
  4. understand the extent of own risk-taking powers
    (ActEd 104)

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5
Q

State observable features of good corporate governance
(ActEd 105)

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A

Features of good corporate governance
1. vigorous leadership is provided by the Board
2. employees have codes of honesty and fair dealing – managers leading by example
3. responsibilities and accountabilities for identification and management of risks are clear
4. every employee has a responsibility for identification of new and increased risks
5. managers are responsible for the identification and management of risks within their areas of responsibility
6. the Board has responsibility of a shortlist of the most serious strategic risks (identified from the central collation of all risks)
7. the Board self-assesses progress towards full ERM on an annual basis
(ActEd 106)

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6
Q

List the areas covered by the key principles of excellent corporate governance
(ActEd 107)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Areas covered by the principles of excellent corporate governance
1. communication with stakeholders
2. Board independence
3. assessment of Board performance
4. Board remuneration
5. Board appointments
In some regions the following additional key characteristics have been identified:
1.fairness
2.social responsibility.
(ActEd 108)

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7
Q

Describe arrangements to ensure the independence of the Board
(ActEd 109)

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A

Board independence
The Board should be at arm’s length from day-to-day management of the organisation. Independence may be facilitated by the:
1. key subcommittees comprising exclusively of NEDs (ideally independent) to avoid agency risk −eg audit, remuneration, appointments 
2. Chief Executive Officer (CEO) not being chair −
or publish why and appoint lead director (to co-ordinate the activities of the independent directors)
3. NEDs meeting separately from EDs at least annually
4. the majority of NEDs are independent.
5. a sufficient presence of independent Non-Executive Directors (NEDs) to challenge the Executive Directors (EDs)
(ActEd 110)

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8
Q

Distinguish between an independent director and a Non-Executive Director (NED)

(ActEd 111)

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A

Independent director versus NED

Independent = no interest (financial or otherwise) in the company.
NED = not employed in the day-to-day running of the company (but not necessarily independent, eg may have stock options).

(ActEd 112)

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9
Q

State the circumstances that may impair the independence of a Non-Executive Director (NED), according to the UK Corporate Governance Code

(ActEd 113)

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A

Circumstances that impair independence

  1. is or has been an employee of the company within the last five years
  2. has, or has had within the last three years, a material business relationship with the company, eg directly, partner, shareholder
  3. has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme
  4. has close family ties with any of the company’s advisers, directors or senior employees
  5. holds cross-directorships or has significant links with other directors
  6. represents a significant shareholder
  7. has served on the board for more than nine years
    (ActEd 114)

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10
Q

List the characteristics of a good Board-performance assessment process
(ActEd 115)

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A

Characteristics of a good Board-performance assessment process

  1. regular, eg annual
  2. formal
  3. at individual, subcommittee and full Board level
  4. involves external / independent consultants (eg to avoid bias)
  5. feedback of results fed into training
  6. regular, independent development reviews and training for new Board appointees

(ActEd 116)

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11
Q

Outline the desirable characteristics of Board remuneration
(ActEd 117)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Desirable characteristics of Board remuneration
Directors should not be overly compensated, however, the remuneration should be enough to attract, retain and motivate, as well as reflecting the responsibility and risk of being a director.
Directors should be remunerated by reference to the organisation’s performance against medium-to long-term (risk-management) objectives.
A reasonable proportion of each director’s remuneration should be in company stock (exposing them to upside and downside risks and so aligning their interests with those of the shareholders).
Board remuneration (including share options and pension benefits) should be fully disclosed.
(ActEd 118)

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12
Q

Outline the desirable characteristics of Board appointments
(ActEd 119)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Desirable characteristics of Board appointments

  1. Board members should (combined) have appropriate skills, experience and knowledge.
  2. Appointments should be made on a formal and rigorous basis.
  3. Recruitment and succession should be based on merit.
  4. Diversity of gender, social and ethnic backgrounds, cognitive and personal strengths should be encouraged.
  5. Board members should serve limited term appointments.
    (ActEd 120)

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13
Q

List the key areas that should be covered by a risk subcommittee’s charter
(ActEd 121)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Areas covered by a risk subcommittee’s charter
1. role of the risk subcommittee – to provide strategic oversight of ERM on behalf of the Board, to set risk policies, to gather information on key risks and assess their treatment
2. responsibilities – eg to ensure an ERM framework is in place, to assets whether RM objectives have been achieved, to ensure compliance with supervisory requirements, to report to the Board on risk, to keep abreast of ERM developments
3. membership requirements – eg minimum proportion of NEDs, appropriate mix of knowledgeable and experience
4. meeting frequency
5. performance assessment criteria
6. resources available – eg which departments can/should be utilised, use of external consultants

(ActEd 122)

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14
Q

State the role of the audit subcommittee
(ActEd 123)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Role of the audit sub-committee

  1. monitor the integrity of financial statements
  2. monitor and review internal assurance functions such as financial control, risk management and internal audit
  3. recommend, monitor and review the external auditor
    (ActEd 124)

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15
Q

Outline key recommendations of The Walker Review covering all financial institutions in the UK

(ActEd 125)

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A

Key recommendations of The Walker Review
1. ‘comply or explain’ remains the best route to better CG practice
more
2. ‘challenge’ in Board discussions is required – from improved mix of capabilities and experience on the Board, and greater time commitment from NEDs
3. the set-up of a separate Board risk committee (CRO supported and with clear enterprise-wide authority and independence) to increase Board-level engagement with risk oversight
4. better engagement between fund managers (acting for their clients as beneficial owners) and the Boards of investee companies
5. Board remuneration committee’s remit should be extended to cover other senior influential employees, and this remuneration should be aligned with the medium-and longer-term risk appetite and strategy of the entity. The remuneration of these employees should be made publicly available on a ‘banded’ basis.

(ActEd 126)

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16
Q

Define risk culture
(ActEd 127)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Risk culture

There is no single definition!
However possible descriptions include:

  1. the company’s shared values, beliefs and behaviours (with regard to risk)
  2. the attitude of ‘agents’ (eg employees) to business activities, especially risk management activities
  3. ‘the way we do things around here’, including, the way judgments are exercised.

Risk culture may be used as a measure of whether ERM has been successfully integrated into the organisation.

(ActEd 128)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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17
Q

List what should be encouraged by an appropriate risk culture
(ActEd 129)

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A

An appropriate risk culture
1. consultative leadership
2. participation in decision-making on risks
3. openness
4. accountability rather than blame
5. organisational learning
6. knowledge sharing
7. good internal communication
(ActEd 130)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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18
Q

Describe a supportive risk culture
(ActEd 131)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

A supportive risk culture
1. all staff involved in risk management
2. focus on positive employee behaviours with regard to risk, training
3. inclusion of risk and RM risk in job descriptions and performance management, link to remuneration
4. clearly defined RM responsibilities and accountabilities
5. good communication, including reporting to a central point
6. processes to escalate risks to the appropriate level of seniority
7. culture of openness and accountability not blame
8. the Board lead from the top by displaying appropriate risk behaviours
9. praise for good risk behaviours, eg report on success
10. evaluation and review of the risk culture, eg through surveys

(ActEd 132)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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19
Q

Outline how an organisation might change its risk culture
(ActEd 133)

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A

Changing a risk culture

  1. from the top of the organisation (ie led by the Board and senior management)
  2. on an incremental basis (eg through changes to performance management processes and remuneration)
  3. as the profile of new recruits changes the views of the staff
    (ActEd 134)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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20
Q
A

SP9- ERM (9 decks)

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