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ENTERPRISE RM (Other RM tools (Risk management information system (RMIS) -…
ENTERPRISE RM
Financial RM
- pure & speculative risks
Types of risk
Interest rate risk
Exchange rate risk
Commodity price risk
Capital market instruments
Hedging a commodity price risk using
futures contracts
Protecting against stock price movements
Call option
- give owner the right to buy 100 shares at a given price during a specified period => when afraid price inceases
Put option
- give owner the right to sell 100 shares at a given price during a specified period => when afraid price decreases
The chaging scope of RM
intergrated RM program
- pure + speculative risks in the same contract
CRO (Chief Risk Officer)
double-trigger option
- provision that payment is made only when two specified losses occur
Enterprise RM
Pure
Speculative
Strategic
Operational
Advantages:
Improve risk assessment
Increase risk awareness
Intergrated response to full range of risks
Align risk tolerance with strategies and practices
Increase competitive advantage
Reduce earning volatility
Comply with corporate governance guidelines
Barriers:
Rigid org culture
Lack of committed leadership
Battles between departments
Lack of formal process
Lack of information sharing
Tech deficiencies
Lack of commitment to design the program
Emerging Risks
Terrorism (bombs, cyber attacks, CRBN)
Climate change
Cyber liability
Insurance Market Dynamic
- retain or transfer risk based on...?
The underwriting cycle
Insurance industry capacity
Surplus
- difference between insurer's assets and liabilities
Clash loss
- several lines of insurance experience large loss at the same time
Investment returns
- offset underwriting loss => insurer can set lower premium rate
"Hard" market
"Soft" market
Consolidation in the Insurance Industry
Insurer M&A
Broker M&A
Cross-industry consolidations
Securitization of risk
Insurable risk is transferred to capital markets through a financial instrument (
catastrophe bond
)
Insurance option
- derives value from specific insurance losses or from an index of value
Financial Analysis in RM
time value of money
- compounding, discounting
net present value (NPV)
- sum of present value of future cash flows - cost of project
internal rate of return (IRR)
- avg annual rate of return of a project
Other RM tools
Risk management information system (RMIS)
- computerize RM data
Risk management intranet
- website for searching, limited internal audience
Predictive analytics
- analysis of data to generate info for decision (credit scoring)
Risk map
- A grid detailing potential frequency and severity of exposures
Value at risk (VAR) analysis
- calculate worst probable loss, using historical data, computer simulation, applied to a portfolio of assets, used to evaluate solvency
Catastrophe modeling
- computer-assisted, estimate loss from catastrophic events, using seismic data, historical, value exposed to loss, used by insurer, broker, large companies