Chapter 42: Risk management process (1)

Question 1

Risk management

Answer 1

the process of ensuring that the risks to which an organisation is exposed

• are the risks to which it THINKS it is exposed
• and to which it is PREPARED to be exposed.

Question 2

The risk management process consists of (5)

Answer 2

risk

• identification
• measurement
• control
• financing
• monitoring

Question 3

Risk management process:

- risk identification

Answer 3

identifying the risks that THREATEN the
- INCOME
- or ASSETS
of an organisation

Question 4

Risk management process:

- risk measurement

Answer 4

measuring the PROBABILITY AND SEVERITY of a risk

Question 5

Risk management process:

- Risk control

Answer 5

Mitigation to reduce the probability / severity of a loss.

Question 6

Risk management process:

- Risk financing

Answer 6

Determining the likely cost of a risk

… and ensuring the availability of adequate financial resources to cover the risk

Question 7

Risk management process:

- Risk monitoring

Answer 7

Regular review and re-assessment of risks together with an overall business review to identify new / previously omitted risks.

Question 8

Through risk management a provider will be able to (10)

Answer 8

• avoid surprises
• improve the stability and quality of their business
• improve their growth and returns by exploiting risk opportunities
• improve their growth and returns through better management and allocation of capital
• identify opportunities arising from natural synergies
• give stakeholders in their business confidence that the business is well managed
• price products to reflect the inherent level of risk
• improve job security and reduce variability in employee costs
• detect risks earlier meaning they are cheaper and easier to deal with
• determine cost-effective means of risk transfer

Question 9

The risk management process should (5)

Answer 9

• incorporate all risk (both financial and non-financial)
• evaluate all relevant strategies for managing risk
• consider all relevant constraints
• exploit hedges and portfolio effects
• exploit financial and operational efficiencies

Question 10

Each stakeholder needs to decide upon which risks to (5)

Answer 10

• avoid the risk altogether
• reject the need for financial cover (eg if the risk is trivial)
• retain, in part or fully
• transfer (insure or subcontract all the risk)
• share

Question 11

The extent of risk transfer will depend on (3)

Answer 11

• the probability of the risk occurring
• existing resources of the stakeholder
• cost of transferring the risk and willingness of a 3rd party to accept the risk

Question 12

4 Main tools for risk management

Answer 12

• diversification
• control measures to reduce likelihood of risk occurring
• control measures to ensure price paid for risk is fair
• control measures to mitigate consequences of risk event

Question 13

A company’s business unit might (6)

Answer 13

• carry out the same activity but in different locations
• carry out different activities at the same location
• carry out different activities at different locations
• operate in different companies
• operate in different markets
• be separate companies in a group, which each have their own business units.

Question 14

Reports and systems at the enterprise level

Answer 14

If risks are managed and budgeted at enterprise level then companies need a system of risk reporting across the whole enterprise.

It is important to understand whether the business units are using the risk exposure allocated to them so that expected diversification benefits are actually realised.

Question 15

4 Objectives of risk monitoring

Answer 15

• determine if the exposure to risk and/or the risk appetite of the organisation has changed
• identify new risks or changes in the nature of existing risks
• report on risks that have actually occurred and how they were managed
• assess whether the existing risk management process is effective.

Question 16

The key aim of risk management

Answer 16

To PROTECT an organisation against adverse experience

… that could result in it being unable to meet its liabilities.

Question 17

4 Methods that can be used in capital project appraisal to identify risks

Answer 17

• a high level preliminary analysis
• brainstorming with experts
• a desktop analysis
• a risk register or risk matrix

Question 18

Risk tolerance level

Answer 18

The extent to which the organisation is prepared to be exposed to each risk.

Question 19

Risk measurement

Answer 19

The estimation of the probability of a risk event occurring and its likely severity.

Question 20

Risk control measures aim to mitigate risks by: (3)

Answer 20

• reducing the probability of a risk occurring
• limiting the severity of the effects of a risk that does occur
• limiting the financial consequences of a risk that does occur

Question 21

How might natural risk hedging synergies exist in life insurance?

Answer 21

A life company may sell some products that expose it to mortality risk (eg term insurance) and others that expose it to longevity risk (eg annuities)

Question 22

How might natural risk offsetting synergies exist in life insurance?

Answer 22

A general insurer may find that good weather increases claims on its domest

Question 23

3 possible components of the “costs of a risk”

Answer 23

• risk control measures
• insurance
• self-insurance

Question 24

A decision must be made as to whether risk should be managed at: (2 different levels)

Answer 24

• business unit level

- group (enterprise) level