Risk Management Flashcards
Stages of risk control cycle
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1. Risk identification
2. Risk classification
2. Risk measurement
3. Risk control
4. Risk financing
5. Risk monitoring
Risk identification
Defn: recognition of risks That can threaten income and assets of an organisation
1. Systematic vs. diversifiable
2. Risk appetite /tolerance level
3. Preliminary risk control processes
4. must be comprehensive
* Watch out for new, unidentified risks
5. Identify opportunities to exploit risk
6. CEF
*circumstances
*features
*environment
Risk classification
- Take risks identified and group them into higher order categories
- Aids calc for cost of risk and value of diversification
- Allocate risk owner
*responsible for control processes
Risk cycle - Risk measurement
Defn: estimation of probability of risk event occurring and likely severity (incl cost of risk control)
* before & after risk controls
Basis for evaluation and selecting methods of risk control and whether risk should be
1. Declined
2. Transferred (insurance)
3. Mitigated
4. Retained with or without control
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Risk cycle - Risk Control
Defn: determining and implementing methods of mitigation (P S FO )
Systems that aim to mitigate the risks or the consequences of risk events
1. Reduce probability of risk occurring
*implementing controls and processes
*triggers
2. Limit financial consequences of risk
*both pre (insurance) and post risk occurrence
3. Limit severity of the effects of a risk that occurs
*insurance
*safety measures
4. Reduce consequences of a risk that does occur
*survival of organisation post event
*business continuity plan
* models & assumptions & discussions
!management buy in = mngment action
Risk cycle - modelling
- Helps find trigger points
- Determines the value of management buy in and efficiency as well as other courses of action
- Assumptions and methods only valid to extent actions would be taken
- Helps choose best option
Risk appetite
Amount of risk business can tolerate
1. Quantitative -
2. qualitative - organisations risk preferences/extent organisation is willing to be exposed to risk
3. Set by board and senior members
4. Communicated to organisation
5. Contributes to risk management and risk controls
Risk financing
- Determine the likely cost of each risk
*mitigations
*post loss event
*capital implications - Sufficient financial resources
*continuation post loss event
Risk monitoring
Part/all - with/without
Defn: regular review and re-assessment of all risks previously identified + overall business review to identify new/previously omitted risks
NB: allocate management responsibility for effective mainland control processes
- C -change
- O -occured
- N -new risks
- E -evaluate effectiveness existing risk management process
Risk management - benefits
IR access
- Integrate risk into business processes and strategic decision making
*product development
*mergers and acquisition - reaction quick to emerging risks
- Aggregate risks and assess interdependencies
*concentration risk
* Natural synergies
–offsetting or hedging (mortality vs longevity)
* diversification - capital allocation and better management to improve growth and returns
- Confidence for stakeholders that business is managed well
*shareholders
*regulators
*credit rating agencies
6.Exploit risk opportunities - Improve stability and quality of business
- Surprises
Good Risk management process
Balance return, growth, consistency
CHAOS
1. Consider all relevant contrains
2. Exploit hedges and portfolio effects among risks
3. Incorporate all risks (financial and non-financial)
*political
*social
*regulatory
*competitive
4. Exploit financial and operational efficiencies within strategies
5. Evaluate all relevant strategies for managing risk
Risk vs uncertainty
Risk defn: arises as consequence of uncertain outcomes
*cannot say explicitly whether it can be modelled/measured
*upside risk
> can be measured & avoided
> likelihood & size can be quantified
- data availability & credibility
- distribution of potential losses not known
- nature of risks is difficult to asses
> can be good & bad
>might not be able to model
! risk is impact of uncertain outcome
Uncertainty defn
*probability associated with particular outcomes
*severity of loss associated with outcomes
*can not be modelled
*lack of certainty and lack of knowledge
*no choice as to whether you encounter uncertainty and may not be possible to reduce
> cannot be measured
> cannot be anticipated
> cannot be reduced
>cannot be modeled
>lack of certainty and knowledge
Risk measurement modelling challenges
- Credible data
- Cannot identify distribution of potential loss
- Exact nature of loss is difficult to assess
Systematic risk
*Risk that affects an entire financial market or system
*not possible to avoid systematic risk through diversification
*impacts entire market
*systemic - 1 company collapse could trigger whole system
Diversifiable risk
Defn: risk arises from individual component of financial market or system
*rational investor should not take on any diversifiable risk
*only non diversifiable risk taken on is rewarded
**securities riskyness is considered relative to the portfolio and not solo
