Risk Management

Question 1

What are the 3 concepts that can be done to prepare for and manage risk

Answer 1

1. Risk management = identification & acceptance or offsetting of risks threatening firm. comes before risk
2. Contingency planning = a plan for unseen events, inc. back up procedures, emergency response & post event recovery. Comes before risk
3. Crisis management = process of responding to and minimising damage from an adverse event. Comes after risk

Question 2

Define risk

Answer 2

Threat that may prevent or hinder the ability to achieve business objectives; possibility of loss

Question 3

What are 5 different ways to deal with risk

Answer 3

• ignore it
• reduce probability of risk
• reduce/limit consequences
• share/deflect risk (e.g insurance)
• make contingency plans

Question 4

What exactly is risk management

Answer 4

Identifying what and how things can/might go wrong. Understanding potential effects if things do go wrong

Question 5

Give examples of risk management in different business areas

Answer 5

• finance = credit insurance to protect against bad debts
• people = key man insurance - protects against loss of key staff
• operations = hold spare capacity

Question 6

Define contingencies

Answer 6

Uncontrollable events that are not anticipated for in the business plan

Question 7

What does a contingency plan involve

Answer 7

• preparing for predictable and quantifiable crisis
• preparing for unexpected and unwelcome events
• aim is to minimise impact

Question 8

How do you draw up a contingency plan?

Answer 8

1. Recognise need for it
2. Identify possible contingencies
3. Specify likely consequences
4. Asses degree of risk to each eventuality
5. Determine risk strategy
6. Prep plan and identify responsibilities
7. Rest plan

Question 9

What is scenario analysis

Answer 9

• involves constructing multiple but equally plausible views of the future
• consists of a story from which managers can plan

Question 10

What is sensitivity analysis

Answer 10

• involves testing the effect of a plan on alternative values of key variables
• e.g effect of a 25% loss of capacity

Question 11

Give the two classes of risk

Answer 11

1. Pure risk (insurable) = involve only the chance of loss, never opportunity for gain
2. Speculative risk (uninsurable) = involve both chance of gain or loss

Question 12

Give elements of an insurable risk

Answer 12

• loss must not be catastrophic
• loss must be unexpected or accidental
• must be large number of similar events in the past to make losses reasonable

Question 13

Give the two ways risks can be evaluated on an economic scale

Answer 13

Comparing…

• dynamic = result of economy changing
• static = losses caused by factors other than a change in economy

Question 14

Give factors determining an insurable risk

Answer 14

When insurance company has enough statistics to work out possibility of risk

Question 15

Give factors determining an uninsurable risk

Answer 15

• when an insurance company can’t calculate probability of risk and so can’t work out a premium that firms must pay
• risk is too widespread e.g war in country
• when loss is incurred by your own actions

Question 16

Give advantages of contingency planning

Answer 16

• increase motivation of staff cos they feel more secure
• reduces risk
• may enhance reputation of firm if forced to deal with a crisis and plan works

Question 17

Give disadvantages of contingency planning

Answer 17

• increase costs cos uses time and resources
• may be based on poor data so wrong action may be taken
• you can’t predict the unexpected

Question 18

What is the key to successful contingency planning

Answer 18

• good communication
• must estimate resources needed
• must identify critical firm functions
• must ensure they have up to date analysis of risks they face