RMIN 4000 Chapter 4 PDF

RMIN 4000 Chapter 4 Enterprise Risk Management pages 68-80 only Traditional Risk Management Risks evaluated in a “silo” approach. Loss exposures are usually insurable “pure” risks: o Property o Business Interruption o Liability o Personnel (for example, worke...

RMIN 4000 Chapter 4 Enterprise Risk Management pages 68-80 only Traditional Risk Management Risks evaluated in a “silo” approach. Loss exposures are usually insurable “pure” risks: o Property o Business Interruption o Liability o Personnel (for example, worker injuries) 2 Evolution of Enterprise Risk Management (ERM) In 1990s, many organizations began expanding their risk management programs to include speculative financial risks. Many organizations have now gone further in their risk management programs to consider all risks faced by the organization. 3 Definition of Enterprise Risk Management A strategic business discipline that supports the achievement of an organization’s business objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an integrated risk portfolio. 4 ERM Program Considers all risks an organization faces across the entire enterprise. Holistic/interconnected view of risk. Typically headed by Chief Risk Officer (CRO) and used in large organizations. Creates a “risk culture” within the organization in which everyone is responsible for identifying and managing risk. 5 Aon 2023 Global Risk Report Top 10 1.Cyber Attack or Data Breach 2.Business Interruption 3.Economic Slowdown or Slow Recovery 4.Failure to Attract or Retain Top Talent 5.Regulatory or Legislative Changes 6.Supply Chain or Distribution Failure 7.Commodity Price Risk or Scarcity of Materials 8.Damage to Brand or Reputation 9.Failure to Innovate or Meet Customer Needs 10.Increasing Competition 6 Allianz 2024 Risk Barometer Top 10 1. Cyber incidents 2. Business interruption 3. Natural catastrophes 4. Changes to legislation and regulation - “ESG” 5. Macroeconomic developments 6. Fire, explosion 7. Climate change 8. Political risk and violence 9. Market developments 10.Shortage of skilled workforce 7 Types of Risk within ERM 1) Hazard (Pure) Risk 4) Strategic Risk 2) Operational Risk 3) Financial Risk 8 1. Hazard (Pure) Risk Traditional Risk Management types of risks: Property / Business Interruption Liability Personnel What risk management techniques are used to treat hazard risks? o Loss Prevention/Loss Reduction o Risk Financing o Retention o Non-insurance risk transfer o Insurance 9 2. Operational Risk Risks arising from day-to-day business operations Examples: Cybersecurity Supply Chain Interruption of utilities Manufacturing Defects Customer Service Employment practices and procedures What Risk Management techniques might you employ? 10 3. Financial Risk Risks arising from changing conditions within financial markets: Commodity Availability and Prices Interest Rates Credit Risk Foreign Exchange Rates Liquidity What Risk Management techniques might you employ? 11 4. Strategic Risk External Little or no control over risk; must be in position to respond 12 Other Risks Regulatory/Compliance Taxes OSHA SEC (Public companies) FAA / FDA Reputational Terrorism Pandemic / COVID Climate Change 13 ERM Tools Risk Score Risk Register Risk Map 14 Risk Register 15 Risk Map 16 Advantages of an ERM Program Increase awareness and assessment of risk Integrated response to the full range of risks Alignment with organization’s risk tolerance and its strategies Fewer operational surprises and losses Greater compliance with regulatory and legal requirements Improved accountability, efficiency and decision making Increase value of the organization 17 Challenges / Barriers to an ERM Program Dynamic; always changing Lack of commitment from senior leadership Resistance to change / disagreement over responsibilities / turf war Communication 18 Why should an organization use ERM? By combining all risks into a single risk management program, the organization may be able to offset one risk against another and reduce its overall risk. 19 Insurance Market Dynamics Underwriting Cycles: “Soft” markets “Hard” markets Insurer Combined Ratio Insurer Investment Returns Insurer Capacity / Surplus No test questions on topics in Chapter 4 after the middle of page 80 20