IRM DIPLOMA MODULE 5 : Risk Solutions - PowerPoint PPT Presentation

Loading...

PPT – IRM DIPLOMA MODULE 5 : Risk Solutions PowerPoint presentation | free to view - id: 16e199-ZDc1Z



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

IRM DIPLOMA MODULE 5 : Risk Solutions

Description:

1990:'Guinness Four' guilty, http://news.bbc.co.uk/onthisday/hi/dates/stories ... The Guinness Report and its impact on take over bids and corporate governance. ... – PowerPoint PPT presentation

Number of Views:99
Avg rating:3.0/5.0
Slides: 56
Provided by: ace93
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: IRM DIPLOMA MODULE 5 : Risk Solutions


1
IRM DIPLOMAMODULE 5 Risk Solutions
  • ALEX HINDSON
  • Lead Examiner
  • alex.hindson_at_aon.co.uk

December 2008
2
Advice on Approaching the Module
  • Read and understand fully the detailed study
    guide
  • The exam will be based on this scope of syllabus
  • Read as widely as time allows. The study guide
    will get you through the exam - just
  • You need to demonstrate post-graduate level of
    understanding and application of concepts
  • Keep up with developments in publications and on
    the internet.
  • Put together revision notes.
  • Look at sample example questions and mock
    papers when available to gauge level of answer
    needed

3
Exam Structure
  • Do 4 out of 6 questions
  • Section A
  • Each question approximately 5-7 marks
  • Short questions covering whole of syllabus
  • Section B
  • Each question in two parts, typically 10-15 marks
    each
  • Longer analytical questions on selected parts of
    syllabus

4
SYLLABUS OVERVIEW
  • Structured Approaches to Risk Management
  • Risk Management Strategies
  • Internal Controls
  • Hierarchy of Risk Responses
  • Eliminate Risk
  • Control Risk

5
SYLLABUS OVERVIEW
  • Finance Risk
  • Manage Uncertainty Capture Opportunity
  • Evaluating Management Options
  • Risk Management Programmes
  • Risk Management Culture

6
Element 1 Structured Approaches
  • Why is risk management needed?
  • Growing level of distrust in institutions
  • Higher expectations from stakeholders and
    shareholders
  • Enhanced regulatory and reporting requirements
  • Consequences of getting it wrong are getting
    higher
  • Failure of strategy in particular (eg/ Marconi,
    ICI, Northern Rock)
  • Failure to respond appropriately to a crisis
  • Eg/ Perrier, Coca Cola, Sandoz etc
  • Not to forget competitive advantage in doing it
    right

7
Element 1 Consequences of Not Managing Risk
8
Element 1 - Tylenol
9
Element 1 - Sandoz
Sandoz Incident 1987 Major agrochemical warehouse
fire causes disastrous environmental impact on
River Rhine.
10
Element 2 Risk Management Strategies
  • Different approaches exist and can be appropriate
    in a range of circumstances
  • Robustness
  • Redundancy
  • Flexibility
  • Resilience

11
Element 2 Regulation
  • Regulation is a form of risk management at
    societal level
  • Tends to be put in place to avoid reoccurrence of
    a major incident, accident or scandal
  • COMAH regulations post Flixborough and Seveso
    explosions
  • Clean Air Acts post major pollution incidents
  • Cadbury Code post Guinness and Mirror scandals
  • Sarbanes Oxley Act post Enron and Worldcom
  • Can be a blunt instrument
  • Precautionary Principle - controversial

12
Element 2 Consequences - Nokia / Ericsson Case
Study
March 17, 2000
Nokia Finland
Albuquerque New Mexico
Ericsson Sweden
Philips semiconductor plant
A 10 minute fire caused by a lightning bolt
hitting an electric power line
Philips The Netherlands
13
Element 3 Internal Controls what are they?
  • any action taken by management, the board or
    other parties to manage risk and increase the
    likelihood that established objectives and goals
    will be achieved.
  • They are designed to give assurance as to
  • Effectiveness and efficiency of operations
  • Reliable financial reporting
  • Compliance with laws and regulations

14
Element 3 Examples of Internal Controls
  • Senior management review
  • Line management review
  • Information processing
  • Physical controls
  • Performance indicators
  • Segregation of duties

15
Element 3 Internal Controls COSO Framework
  • The framework defines essential ERM components
  • Links Control Environment to wider Enterprise
    Risk Management process
  • Key elements from control perspective are
  • Control Activities
  • Information Communication
  • Monitoring

16
Element 3 What happens if controls fail or are
not implemented?
Guinness directors showed contempt for truth,
http//news.bbc.co.uk/1/hi/business/34910.stm
1990Guinness Four guilty, http//news.bbc.co.u
k/onthisday/hi/dates/stories/august/27/newsid_2536
000/2536035.stm The Guinness Report and its
impact on take over bids and corporate
governance. http//www.legal500.com/devs/uk/ma/ukm
a_a16.htm
17
Element 4 Hierarchy of Responses to Risk
  • Eliminate (Terminate)
  • Reduce (Treat)
  • Transfer
  • Maintain Flexibility
  • Accept

18
Element 4 Appropriately accepting risks
  • This may make sense in the following
    circumstances
  • The level of risk is so low that no risk control
    is not required
  • The risk is such that no risk control approach is
    appropriate especially if the cost of mitigation
    is excessive
  • The risk is such that no control measure exists
  • The opportunities associated with taking the risk
    so far outweigh the threats that it appear
    justified
  •  The primary challenges within organisations are
    to ensure that
  •  The risk is known, recognised and characterised

19
Element 5 Avoiding Risks
  • In the extreme this means withdrawing from a
    business activity completely if the risks
    considered inappropriate
  • This may be the appropriate response or a sign of
    a risk averse organisation that will fail to
    capitalise on certain market opportunities others
    are prepared to exploit
  • Outsourcing is not about risk avoidance. It is a
    form of risk transfer but that is not always
    understood.
  • Risks are handed to a third party who through
    expertise is hopefully better placed to manage
    the risks

20
Element 5 Inherent Safety
  • This is a concept whereby hazards are eliminated
    at source rather than trying to cure the symptoms
  • Eg/ why breed tigers for eating when sheep are
    less dangerous
  • Eliminating risk at source implies changing
    business processes and is therefore
    intellectually satisfying but not always
    possible.
  • Product substitution is often an example
  • Eg/ replacing leaded petrol with unleaded is risk
    mitigation for health environmental exposures
  • Moving to electric vehicles might represent a
    more inherently safe solution

21
Element 6 Controlling Risks
  • Property Loss Control
  • Safety, Health Environmental Management
  • Contract Risk Management
  • Supply Chain Risk Management
  • Fraud Risk Management
  • IT Risk Management
  • Business Continuity Management
  • Crisis Management Communication

22
Element 6 Purpose of Risk Control
  • The objective of any risk control approach is to
    treat or mitigate the risk in such a way as to
    render it acceptable to the organisation.
  • Generally this implies minimising the Total Cost
    of Risk.
  • The Cost of Risk for most organisations is
    defined as the total of
  • Costs associated with risk management and
    mitigation programmes
  • External Insurance premiums
  • Retained and uninsured losses
  • Costs associated with administering risk
    financing programmes

23
Element 6 Property Loss Control
  • Fire Protection
  • Eliminate/ Substitute
  • Segregate
  • Active protection
  • Passive protection
  • Physical security
  • Protection against natural hazards
  • Flood
  • Windstorm
  • Earthquakes

24
Element 6 SHE Management
Policy
Objectives
Communications
Roles Responsibilities
Risk Identification
Verification Audit
Risk Assessment
Monitoring Review
Risk Response
25
Element 6 Other Control Approaches
  • Contract Risk Management
  • Supply Chain Risk Management
  • Fraud Risk Management
  • IT Risk Management

26
Element 6 Business Continuity Management
BS25999 Part 1
27
Element 6 Crisis Management Communication
  • Communication is a key element of managing a
    crisis
  • Mistrust is a major issue in communicating to the
    public on risk issues
  • Remember Vincent Covellos pointers
  • Perception is reality as far as general public is
    concerned
  • The primary goal of crisis communication is to
    establish trust and credibility.
  • Sharing facts is a secondary activity.
  • Trust and credibility start at low level and need
    to be earned.

28
Element 6 - Crisis Management what can go wrong
  • June 1999 Coca Cola product contamination
  • 120 people sick in Belgium after consuming
    products
  • Further 80 people sick in France
  • Head office response merely a bad odour
  • Misjudged media regulatory response
  • Investigation revealed 2 separate issues
  • Defective Carbon Dioxide at Antwerp
  • Fungicide sprayed onto wooden storage pallets at
    Dunkirk
  • Story gathered own momentum

29
Element 6 Crisis Management Case Study
Global Impact
30
Element 7 Objectives of Risk Financing
  • Pre-loss objectives
  • operating efficiency
  • acceptable levels of risk retained
  • meet legal constraints
  • Post-loss objectives
  • survival
  • continuity of operation

31
Element 7 Insurance in Context
  • Volatility - survival after large losses (e.g.
    Vapour Cloud explosion)
  • Frequency survival after multiple smaller
    losses (e.g. Damaged boiler)
  • Risk Transfer to guarantee stability of earnings
  • Pooling of risk should allow insurers provide
    affordable capacity
  • Smooth Operating Costs
  • Earnings stability enables Capital Ventures
  • Loss Prevention

32
Element 7 Risk Retention
  • Why retain risk?
  • How to determine appropriate levels
  • Liquidity / Debt
  • Options for retaining risk
  • Expenses
  • Contingency funds
  • External risk funds
  • Captives

33
Element 7 Captive structures
  • Paper / Virtual
  • Small-scale
  • Rent-a-captive
  • Protected Cell Companies (PCC)
  • Full scale captive
  • ownership (Single / Multi-parent / Pool/ Mutual)
  • scope of operation
  • function
  • location

34
Element 7 Captive operation
Insurance Captive
Reinsurance Captive
35
Element 7 Captives benefits limitations
  • Access to Reinsurance/ARF markets,
  • Pricing- Reinsurance market operates on a lower
    cost structure
  • Reduce costs
  • Avoids commercial insurers admin costs/ margin
  • Recaptures underwriting profits
  • Earn investment income on unpaid loss reserves
  • Premiums not subject to industry wide performance
  • Generates ability to smooth results over time
  • As surplus increases greater ability to retain
    risk
  • Less reliant on commercial marketplace
  • Minimises effects of volatility of the Insurance
    market

36
Element 7 Alternative Risk Financing options
  • Loss portfolio transfer
  • Finite Reinsurance
  • Cash Assets
  • Overdrafts / Term Loans
  • Credit Lines
  • Long Term Finance
  • Long Term debt
  • Equity
  • Contingency Loans
  • Securitisation
  • Catastrophe Bond / Insurance Securitisation (see
    separately)
  • Capital markets / Derivatives (see separately)

37
Element 7 Insurance Securitisation
Interest
Premium
Premium
Bond
Capital Markets
Insured
Re/ Insurer
Special Purpose Vehicle SPV
Capital
Policy
Policy
38
Element 7 - Derivatives
  • Forward Contracts
  • Futures
  • Options
  • Caps, Floors and Collars
  • Currency / interest rate swaps

39
Element 7 Contract Risk Financing Outsourcing
  • Risk Control Transfer
  • Contractual transfer where transfer
    responsibility for controlling and financing
    exposures to third party
  • Risk Financing Transfer
  • Contractual transfer where only transfer
    responsibility for funding losses to third party
  • Outsourcing is a form of risk control transfer
    and is currently growing in application
  • Risks in outsourcing are not always understood
    and managed
  • Worth understanding what leads to successes or
    failures in this area

40
Element 7 Outsourcing Case study Ontario
Government and Accenture
  • Objective
  • Create a real-time, web-enabled application
    with some 800 rules governing social service
    payment eligibility, preventing fraud, reduced
    caseloads and improved service.
  • Press Headlines
  • Although tried and tested processes, poorly
    designed specifications resulted in significant
    scope creep
  • Result
  • Original quote 180 million Cost close to 400
    million
  • Frustration
  • Threat of litigation and adverse PR

41
Element 7 Outsourcing Case StudyBT and
Accenture
  • Objective
  • Accenture provides a wealth of support services
    to BT, including HR services, to 87,000 employees
    and pension administration for 180,000 policies
  • Press Headlines
  • Accenture HR services has a proven track record
    of consistently high quality service and a true
    partnership approach
  • Result
  • Renewal of previous 5 year contract for further
    10 years and 306 million

42
Element 8 Capturing Opportunities
43
Element 8 Responses to Uncertainty
  • Shapers
  • Aggressive strategy seeking to influence market
    directly and drive change to their advantage
  • Eg/ EasyJet and Ryan have changed aviation market
  • Adapters
  • Defensive strategy based on responding rapidly to
    market trends
  • Eg/ HP customising printers to end-user
    requirements local to market rather than driving
    needs

44
Element 8 Continuous Improvement
  • Toyota drove initial thinking around Continuous
    Improvement
  • Challenging organisations to drive out waste and
    become more efficient
  • PDCA cycle
  • Plan
  • Do
  • Check
  • Act
  • Business Process Management about reviewing and
    challenging current work methods

45
Element 8 Portfolio Management
  • Many organisations manage portfolios of
    opportunities and need to make decisions around
    which investments to develop
  • Oil / Gas reserves
  • Pharmaceutical Research pipeline
  • Private equity investment portfolio
  • Different techniques can be adopted to help
    evaluate and manage portfolios
  • Net Present Value
  • Decision Tree Analysis
  • Real Options

46
Element 8 Corporate Responsibility
  • commitment of business to contribute to
    sustainable economic development, working with
    employees, their families, the local communities
    and society at large to improve the quality of
    life.
  • Embracing Corporate Responsibility can be a
    proactive approach to protecting and enhancing
    brand and corporate reputation.
  • This is important because organisations are in
    competition for
  • Customers
  • Talent
  • Ideas
  • Investment

47
Element 8 Mergers Acquisitions
From CIMA Enterprise Governance
48
Element 9 Evaluating Options
  • Key steps include
  • Review causes and controls
  • Define risk mitigation objectives
  • Identify risk mitigation options
  • Design risk mitigation solutions
  • Evaluate risk mitigation solutions
  • Appropriateness
  • Effectiveness
  • Cost/Benefit

49
Element 9 Decision Making
  • Structured approaches include
  • Cost Benefit Analysis using financial models
  • Decision Analysis using structured scoring
  • Management decision making
  • Not always based on financial evaluation
  • Trade offs may be necessary
  • Absolute minimum
  • Barely satisfactory
  • Most cost-effective
  • Accepted industry norm
  • Best achievable result with current techniques

50
Element 10 RM Programme Design
  • Risk Management Programme
  • Needs to be integrated into other key business
    processes (planning etc)
  • Address both key business risks and risk
    management process itself
  • Risk Management Improvement Plan
  • Incorporate tangible activities than can be
    tracked towards completion
  • Capable of demonstrating benefits from investment
  • Support development of Risk Management within
    the organisation over time

51
Element 10 RM Programme Implementation
  • Risk Management programme is a change management
    exercise
  • Need to recognise change needs managing
  • Key success factors include
  • Clearly defined and communicated objectives
  • Effective stakeholder engagement
  • Coherent communication strategy
  • Clarity of roles and responsibilities
  • Risk Management infrastructure

52
Element 11 Risk Management culture
  • Risk culture is difficult to define but critical
    to successfully implementing Enterprise Risk
    Management
  • Key enabling factors include
  • Senior management sponsorship
  • Communicating a risk philosophy across the
    organisation
  • Selling success stories across the organisation
  • Securing local champions to drive the process
    forward
  • Encourage management to support staff taking
    appropriate risks

53
Element 11 Risk Culture - Challenges
  • Key challenges might include
  • Lack of senior management engagement
  • Inadequate resources available
  • Failure to clearly assign responsibilities
  • Failure to communication benefits
  • Sensitivity to different organisational and
    regional cultures
  • Time required to communicate and drive change
  • Time required to building capability and
    understanding

54
Element 11 Risk Culture - Skills
  • Embedding risk management requires the transfer
    of skills and knowledge within the organisation
  • Tangible skill transfer
  • Risk management knowledge
  • First hand experience of techniques
  • Clearly defined roles and responsibilities
  • Intangible skill transfer
  • Comfort in managing uncertainty
  • Encouraging Risk aware culture
  • Encouraging appropriate risk taking

55
IRM DIPLOMAMODULE 5 Risk Solutions
  • ALEX HINDSON
  • Lead Examiner
  • alex.hindson_at_aon.co.uk

December 2008
About PowerShow.com