ARM54
Risk Management Principles and Practics
Risk Management Principles and Practics
Kartei Details
| Karten | 84 |
|---|---|
| Sprache | Deutsch |
| Kategorie | BWL |
| Stufe | Andere |
| Erstellt / Aktualisiert | 19.02.2016 / 03.10.2021 |
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Chapter 1
Describe how classifiiing risk helps an organization's risk management process.
Classification can help with assessing risks, because many risks in the same classification have
similar attributes. It also can help with managing risk, because many risks in the same classifrca-
tion can be managed with similar techniques. Finally, classifrcation helps with the administrative
function of risk management by helping to ensure that risks in the same classification are less
likely to be overlooked.
Chapter 1
Compare pure risk with speculative risk.
A pure risk is a chance of loss or no loss, but no chance of gain. In comparison, speculative risk
involves a chance of gain.
Chapter 1
Explain why it is important to distinguish between speculative risks and pure
risks when making risk management decisions.
It is important for an organization to distinguish between speculative risks and pure risks when
making risk management decisions because the two types of risk must often be managed differ-
ently. Further, most insurance policies are not designed to handle speculative risks.
Chapter 1
Explain the reasons why subjective and objective risk may differ
Subjective and objective risk may differ for these reasons:
- Familiarity and control-For example, although many people consider air travel (over which they have no control) to carry a high degree of risk, they are much more likely to suffer a serious injury when driving their cars, where the perception of control is much greater.
- Consequences over likelihood-People often have two views of low-likelihood, high-consequence events. The flrst misconception is the "It can't happen to me" view, which assigns aprobability of zero to low-likelihood events such as natural disasters, murdeq fires, accidents,and so on. The second misconception is overstating the probability of a low-likelihood event,which is common for people who have personally been exposed to the event previously. If the
effect ofa particular event can be severe, such as the potentially destructive effects ofa hurricane or earthquake, the perception of the frequency of deaths resulting from such an eventis heightened. This perception may be enhanced by the increased media coverage given tohigh-severity events.
- Risk awareness-Organizations differ in terms of their level of risk awareness and, therefore, perceive risks differently. An organization that is not aware of its risks would perceive the likelihood of something happening as very low
Chapter 1
Contrast diversifiable and nondiversifrable risk.
Diversifiable risk is not highly correlated and can be managed through diversifrcation, or spread,
of risk. Nondiversifiable risks are correlated-that is, their gains or losses tend to occur simultane-
ously rather than randomly.
Chapter 1
Describe the quadrants of risk.
One approach to categorizing risks involves divlding them into these risk quadrants:
- Hazard risks arise from property, liability, or personnel loss exposures and are generally the subject of insurance.
- Operational risks fall outside the hazard risk category and arise from people or a failure in processes, systems, or controls.
- Financial risks arise from the effect of market forces on flnancial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk.
- Strategic risks arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts.
Chapter 1
Classifii each of the following risks as pure or speculative, subjeclive or objec-
tive, and diversifiable or nondiversiûable:
a) Damage to an offrce building resulting from a hurricane
b) Reduction in value of retirement savings
c) Products liability claim against a manufacturer
These answers classify the described risks:
a. The risk of hurricane damage to an office building is a pure risk in that there is no chance of gain from the damage. The risk is both subjective and objective. The building owner may have his or her own idea about the frequency or severity of loss (subjective), and there are objective measures of frequency and severity based on historical data or catastrophe modeling. Hurricane damage to an office building is usually nondiversifiable because hurricanes affect
many properties simultaneously.
b. The reduction in value of retirement savings is a speculative risk because there is a chance of loss, no loss, or gain. The risk is both subjective and objective. The investor may have his or her own expectations of retirement investments (subjective), as well as historical data (objective) on investment returns. The risk is diversifiable because the investor has many investment options to offset the risk of a reduction in retirement savings.
c' A productsliabiliry claim against a manufacrurer is a pure risk, both subjective and objective,and diversifiable' The manufacturer can diversify intoother products or s".'oi.es to reduce its exposure ro producrs hability claims.
Chapter 1
Describe a common concept among the various definitions of enterprise risk
management (ERM).
The various deflnitions of ERM all include the concept of managing all of an organizarion,s risks
to help an organization meet its objectives. This link t"t.""n the managemenr of an organiza-
tion's risks and its objectives is a key driver in deciding how to assess and rreat risks.
Chapter 1
Identify the three theoretical pillars of ERM'
Three main theoretical concepts explain how ERM works:
- Interdependency
- Correlation
- Portfolio theory
Chapter 1
Compare the traditional and ERM risk managemenl function'
Under the traditional risk management organizational model, there is a risk manager and a risk
management department to manage hazardrisk. This traditional function mainly provides risk
transfer, such as insurance, for the organizarion. In ERM, the responsibiliy of the risk manage-
ment function is broader and includes all of an organiration's risks, not ¡ust hazardrisk. Additionally,
the entire organization at all levels becomes responsible for risk management as the ERM
framework encompasses all stakeholders.
Chapter 1
Describe the role of the chief risk offrcer (CRO) in enterprise risk management,
As facilitator, the CRO engages the organization's management in a continuous conversation that
establishes risk strategic goals in relationship to the organization's strengths, weaknesses, opportu-
nities and threats (SWOT). The CRO's responsibiliy includes helping the enterprise to create a risk culture in
managers of the organization's divisions and units, and evenrually individual employees, become risk owners.
Chapter 1
Describe communications in an organization with a fully integrated ERM program.
Anorganization with a fully integrated ERM program develops a communication matrix that
moves information throughout the organization. Communications include dialogue and discus,
sions among the different units and levels within the organization. The establishment of valid
metrics and the continuous flow of cogent data ure a critical aspect to this communication process.
The metrics are carefully woven into reporting structures that engage the entire organization,
including both internal and external steakeholders
Chapter 1
Provide two typical impediments to successfully implementing an ERM program.
An impediment to successfully adopting ERM is technological deficiency. Another and perhaps
the single largest impediment to succesful implementation of ERM ist the traditional organization
culture with its entrenched silos.
chapter 1
An organization manufactures and sells nonprescription pain-relief products.There is a products liability risk associated with this business. Dercribe a traditional risk management approach to this risk versus an ERM approach.
A traditional risk management approach would be to apply risk control techniques in the manufacture and distribution of this product and to purchase liability insurance to transfer some of the liability exposure related to consumers' use of the product. An ERM approach would, in addition to risk control and risk transfer techniques, also address the reputational risk related to product liability and the potential loss of business income if a particular product is removed from the market.
Chapter 1
Whick are the basic measures that apply to risk management?
-Exposure
-Volatility
-Likelihood
-Consequences
-Time horizon
-Correlation
Chapter 1
Whats the law of large numbers?
A mathematical principe stating that as the number of similiar but indebendent exposure units increases, the relative accuarcy of predictions about future outcomes (losses) also increase
Chapter 1
These classifications of risk are some of the most comonly used:
-
-
-
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- Pure and speculative risk
- Subjective an objectives risk
- Diversifiable an nondiversifiable risk
- Quadrants of risk (hazard, operational, financial and strategic
Chapter 1:
Definition of pure risk
A Chance of loss or no loss, but noch chance of gain
Chapter 1:
Definition of speculative risk
A chance of loss, no loss or gain
Chapter 1:
Definition of subjective risk
The perceived amount of risk based on an individual's or organisation's opinion.
Chapter 1:
Definition of objective risk
The measurable variation in uncertain outcomes based on facts and data
Chapter 1:
Definition of nondiversifialbe risk
A risk that affects a large segment of society at the same time.
Chapter 1:
Definition of diversifialbe risk
A risk that effects only some individuals, businesses or small groups
for example a fire
Chapter 1:
Definition of market risk
Uncertainty about an investment's future value because of potential changes in the market for that typ of invenstment.
Chapter 1:
Definition of liquidity risk
The risk that an asset cannot be sold on short notice without incurring a loss
Chapter 1:
Definition of credit risk
the risk that customers or other creditors will fail to make promised payments as they come due
Chapter 1
Tell the quadrants of risk.
- Hazard
- Operational
- Financial
- Strategic
Chapter 2
Definition of risk management standart
A document published by a recongnized authority that includes principles, criteria an best practices for risk management.
Chapter 2
Definition of Framework
A structure, including elements such as concepts, methods, procedures and metrics, that supports the risk management process.
Chapter 2
All of the standards and frameworks have these similarities:
- Adoption of an enterprise approach
- Structured process steps
- Understanding of an accountability for defining risk appetite
- Formal documentation of risk in risk assessment activities
- Establishment and communication of risk managment process goals and activities
- Monitored treatment plans
Chapter 2
For the risk management process to be implemented successfully, the standard (s) should be selected based on these criteria:
- Alignment with organizational objectives
- Adherence to controls
- Need to meet regulatory requirements (compliance)
- Risk governance
Chapter 2
Definition of risk governance
Integration of the management principles governing the organization with thr risk management process.
Chapter 2
The definition of risk as the effect of uncertainty on objectives is used in which of the following standarts?
a. Six Sigma
b. ISO 31000
c. COSO ERM
ISO 31000
Chapter 2
A risk management standard includes which of the following? Sellect all that apply
a. Process
b. Framework
c. Regulations
Process and Framework
Chapter 2
Definition of risk management framework
A foundation for applying the risk management process throughout the organization.
Chapter 2
Definition of Risk criteria
Reference standards, measures, or expectations used in judging the significance of a given risk in context with stretegic goals.
Chapter 2
ISO 31000 Standard: Risk Management Principles, Framework and Process (Exhibit is important for the test)
Exhibit is important for the test
Chapter 2
Definition of inherent risk.
Risk to an entity apart fom any action to alter either the likelihood or impact of the risk.
Chapter 2
Definition of residual risk
Risk remaining after actions to alter thr risk's likelihood or impact.
Chapter 2
Definition of risk-based capital.
Amount of capital an insurer needs to support its operations, given the insurer's risk characteristics.
