Week 3

Question 1

Dealing with Risks
-> 4 possibilities

Answer 1

• Avoid
• Mitigate -> Insurance
• Transfer
• Accept

Question 2

Dealing with Risks
-> Insurance

Answer 2

• Mutualisation of risk
• Equivalence principle: premium = losses + costs + profit
• Only actual losses are reimbursed
• Risk layering / deductibles to structure risk transfer
• Moral hazard for user behavior
• Adverse selection through better risk pricing
• Danger of (hidden) risk accumulation in insurance portfolio

Question 3

Dealing with Risks
-> Ability of Guaranteed Cost Insurance to Meet risk Financing Goals

Answer 3

• Pay for Losses: Insurance can meet thi goal, porvided the loss exposures are covered by the guranteed cost insurance policies.
• Maintain Liquidity; Insurance can meet this goal because the organization requires less liquidity with guaranteed cost insurance compared with retention or other risk financing measures.
• Manage uncertainity: Insureance can meet this goal because much of the unceratinty about future losses is transferred to the insurer.
• Comply With Legal and Regulatory Requirementss: Insurance can meet this goal, especially regarding loss exposures that are reuqired (by law or contracutal obligation) to be transferred.
• Minimize the Cost of risk: Insurance can meet his goal, but it is ot ideal because insurance premium are designed to cover not only expected losses, but also insurer administrative costes. premium taxes, and any social loadings.

Question 4

Why are companies (or you) insured?

Answer 4

• We buy insurance knowing that we
  expect to pay 60-70% more than our
  expected losses.
• This is rational, because a large loss
  could be disastrous.

Question 5

Risk Management Frameworks
-> Process for Managing Risk

Answer 5

• Scan Environment
• Identify Risks
• Analyze Risks
• Treat Risks
• Monitor and Review

Question 6

Risk Matrix

Answer 6

Question 7

Risk Management

Answer 7

• Risk Tolerance depends on knowledge, experience, culture, confidence, economic situation etc.
• Savings increases with high risk accpetance
• Savings decreases with low risk acceptance

High Risk: Immediate Action
Medium High Risk: Short-Term Action
Medim Risk: Cost/Benefit - Assemssment
Low risk: Action normally not necessary

Question 8

The COSO Cube

Answer 8

• Operations: How well are the operations
  goals protected against know risks.
• Reporting: Internal and external reports. Tracking
  progress toward stated operation targets or meeting regulatory financial transparency requirements.
• Compliance: Regards any goals dealing with laws or regulations the organization is subject to.
• Sets the tone for internal controlling by
  providing resources, discipline and structure
• Identifies measures risks that threaten the
  organization’s objectives
• A collection of policies, procedures, and
  practices enacted to carry out the management objectives and risks mitigation goals
• System or process that communicates control responsibilities…
• Either external oversight or the internal
  application of independent methodologies,
  such as customized procedures or standard
  checklists

Question 9

Risk Management and Internatl Audit roles

Answer 9

The board of directors establiishes the riks mangement policy and risk appetite. It also determines the amount and types of risk that the organization wants to pursue, retain, reduce, or avoid.

Risk Management
* Designs and Implements the risk managemetn plan, including the choice of apporpriate tools and responses to risk, in accordance with board guidance.
* Works with the business managers to establish internal risk mangement controls.
* Monitor risk levels within the organization.
* Identifies and quantifies new, emerging risks and recommends apporpriate responses
* Is accountabel for whether the risk manamgenmet plan is effective

Internal Audit
* Reviews and critiques teh implementation on the risk management plan