RMIN Chapter 3

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Questions and Answers

Which of the following describes operational risks?

  • Risks arising from day-to-day business operations. (correct)
  • Risks arising from market changes and financial conditions.
  • Risks arising from external factors such as climate change.
  • Risks arising from regulatory and compliance issues.

What is not considered a financial risk?

  • Customer Service (correct)
  • Commodity Availability and Prices
  • Foreign Exchange Rates
  • Interest Rates

Which of the following is a challenge to implementing an ERM program?

  • Support from senior leadership
  • Improved decision making
  • Increased awareness of risk
  • Dynamic and always changing environment (correct)

Which technique does not fall under risk financing?

<p>Supply Chain Management (D)</p> Signup and view all the answers

Why should an organization implement an ERM program?

<p>To offset risks and reduce overall exposure. (C)</p> Signup and view all the answers

Which of the following is an example of strategic risk?

<p>Regulatory Changes (C)</p> Signup and view all the answers

What advantage does an ERM program provide?

<p>Increases organizational value (C)</p> Signup and view all the answers

Which of the following is a tool used in ERM?

<p>Risk Map (A)</p> Signup and view all the answers

What approach does Traditional Risk Management use to evaluate risks?

<p>Silo approach (B)</p> Signup and view all the answers

Which of the following is NOT a type of risk typically considered in Enterprise Risk Management?

<p>Environmental Risk (C)</p> Signup and view all the answers

Which role typically heads an Enterprise Risk Management program in large organizations?

<p>Chief Risk Officer (CRO) (C)</p> Signup and view all the answers

Which of the following risks is included in the Aon 2023 Global Risk Report's Top 10?

<p>Cyber Attack or Data Breach (A)</p> Signup and view all the answers

How does Enterprise Risk Management differ from Traditional Risk Management in terms of risk evaluation?

<p>It takes an inclusive, holistic view of all risks. (D)</p> Signup and view all the answers

What is the goal of Enterprise Risk Management?

<p>To support the achievement of business objectives by addressing risks. (B)</p> Signup and view all the answers

Which type of risk is specifically related to workplace injuries within Traditional Risk Management?

<p>Hazard (Pure) Risk (B)</p> Signup and view all the answers

Which of the following is a common misconception about the objectives of an ERM program?

<p>It prioritizes only strategic risks. (A)</p> Signup and view all the answers

Flashcards

Operational Risk

Risks that arise from day-to-day business operations, such as cybersecurity breaches, supply chain disruptions, or manufacturing defects.

Financial Risk

Risks related to changing conditions in financial markets, including commodity prices, interest rates, and credit risk.

Strategic Risk

Risks arising from external factors that a company has little control over, such as government regulations, economic downturns, or technological advancements.

Risk Map

A tool used in ERM to provide a visual representation of the likelihood and impact of various risks, helping prioritize risk mitigation efforts.

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Risk Register

A document used in ERM that lists the identified risks of an organization, their severity, and proposed responses for mitigation.

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Why should an organization use ERM?

ERM programs aim to achieve a holistic approach to risk management by combining different types of risks. This can lead to identifying opportunities to offset one risk against another.

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Soft Market

A period in the insurance market where competition is high, leading to lower premiums and looser underwriting standards.

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Hard Market

A period marked by limited insurance capacity and higher premiums as insurers tighten underwriting standards in response to higher losses or market conditions.

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Enterprise Risk Management (ERM)

A risk management approach that considers all risks an organization faces, regardless of their source, to improve decision-making and achieve business objectives.

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Traditional Risk Management

Traditional risk management focuses on insurable risks, such as damage to property or lawsuits. It typically involves a siloed approach, where different departments manage risks in isolation.

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Evolution of ERM

The evolution of ERM began in the 1990s, when organizations started to consider speculative financial risks alongside traditional risks. This shift led to a more comprehensive approach to risk management.

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Definition of ERM

ERM is a strategic business discipline that aims to help organizations achieve their objectives by managing all risks as an integrated portfolio. It considers the combined impact of risks and how they interact.

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ERM Program

An ERM program focuses on all risks across an organization, including operational, financial, strategic, and hazard risks. It uses a holistic and interconnected view of risk to improve decision-making.

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Hazard (Pure) Risk

Hazard risks are traditional insurable risks like property damage, business interruption, liability, and personnel issues. They are typically managed through techniques like insurance, risk mitigation, and risk transfer.

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Study Notes

Enterprise Risk Management (ERM)

  • ERM is a strategic approach to managing all risks faced by an organization.
  • Traditional risk management focuses on specific risks in isolation ("silo" approach).
  • Pure risks (e.g., property, liability, personnel) are often insurable.
  • Speculative financial risks (e.g., market fluctuations) were traditionally excluded.
  • ERM considers all risks holistically, treating them as an integrated portfolio.
  • ERM programs are typically overseen by a Chief Risk Officer (CRO) in large organizations.
  • ERM promotes a "risk culture" where all employees are responsible for identifying and managing risks.

Types of Risk

  • Hazard (Pure) Risk: Traditional risks like property damage, liability, and personnel injuries. Managed using loss prevention, loss reduction, risk financing, retention, non-insurance risk transfer, and insurance.
  • Operational Risk: Risks stemming from daily business operations (e.g., cybersecurity threats, supply chain disruptions, manufacturing defects, customer service issues, employee practices).
  • Financial Risk: Risks arising from changing market conditions (e.g., commodity availability and prices, interest rates, credit risk, foreign exchange rates, liquidity).
  • Strategic Risk: External risks that an organization has little or no control over, necessitating a responsive approach. Difficult to predict.

ERM Tools

  • Risk Score: A numerical rating system for risks.
  • Risk Register: A document outlining potential risks, likelihood, and impact.
  • Risk Map: A visual representation of risks on a matrix (plotting frequency against severity).

Aon 2023 & Allianz 2024 Risk Reports - Top 10 Risks

  • Aon 2023 (Top 10): Cyber attack, business interruption, economic slowdown, failure to attract/retain talent, regulatory changes, supply chain issues, commodity price risk, reputation damage, failure to innovate, increasing competition.
  • Allianz 2024 (Top 10): Cyber incidents, business interruption, natural catastrophes, ESG-related regulatory changes, macroeconomic developments, fire/explosions, climate change, political risk, market developments, shortage of skilled workforce.

Other Risks

  • Regulatory/Compliance: Taxes, OSHA, SEC/FDA regulations.
  • Reputational: Damage to brand image.
  • Terrorism
  • Pandemic related risks.
  • Climate change

Advantages of ERM

  • Increased risk awareness and assessment
  • Integrated response to a wider range of risks
  • Alignment with organizational risk tolerance and strategies
  • Fewer operational surprises and losses
  • Greater regulatory compliance
  • Improved accountability, efficiency, and decision-making
  • Increased organizational value

Challenges to ERM

  • Dynamic nature of risk, always changing
  • Lack of commitment from senior leadership
  • Resistance to change in responsibilities ("turf wars")
  • Communication challenges

Why Use ERM?

  • By combining all risks into a single program, organizations can offset risks against each other and reduce overall risk.

Insurance Market Dynamics

  • Underwriting cycles ("soft" and "hard" markets)
  • Insurer combined ratio
  • Insurer investment returns
  • Insurer capacity/surplus

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