foundations of risk management · level 1 what is erm? rift pvt. ltd. /frm l1/foundations of risk...
TRANSCRIPT
FOUNDATIONS OF RISK MANAGEMENT
Level 1
What is ERM?
1RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
What is ERM?
• Describe enterprise risk management (ERM) and compare and contrast differing definitions of ERM.
• Compare the benefits and costs of ERM and describe the motivations for a firm to adopt an ERM initiative.
• Describe the role and responsibilities of a chief risk officer (CRO) and assess how the CRO should interact with other senior management.
• Distinguish between components of an ERM program.
4RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ENTERPRISE RISK MANAGEMENT:
1
The underlying premise of enterprise risk management is that every entity exists to provide value for its stakeholders. All entities face uncertainty, and the challenge for management is to determine how much uncertainty to accept as it strives to grow stakeholder value. Uncertainty presents both risk and opportunity, with the potential to erode or enhance value. Enterprise risk management enables management to effectively deal with uncertainty and associated risk and opportunity, enhancing the capacity to build value. Value is maximized when management sets strategy and objectives to strike an optimal balance between growth and return goals and related risks, and efficiently and effectively deploys resources in pursuit of the entity’s objectives.
Enterprise risk management encompasses:
Aligning risk appetite and
strategy
Enhancing risk response decisions
Reducing operational
surprises and losses
Identifying and managing multiple
and cross-enterprise risks
Seizing opportunities
Improving deployment of
capital
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ENTERPRISE RISK MANAGEMENT:
2
ERM Definitions:
• “ERM is a process, effected by an entity’s board of directors, managements, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its appetite, to provide reasonable assurance regarding the achievement of entity objectives.”
Committee of Sponsoring Organizing
of the Trade way Commission (COSO)
• “Risk is the effect of uncertainty on objectives and risk management refers to coordinated activities to direct and Control an organization with regard to risk.”
The International Organization of
Standardization (ISO 3000)
• ”Risk is a variable that can cause deviation from an expected outcome. ERM is a comprehensive and integrated framework for managing key risks in order to achieve business objectives, minimize unexpected earnings volatility and maximize firm value.”
FRM
Cont…
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ENTERPRISE RISK MANAGEMENT:
3
ERM Definitions:
Enterprise risk management is: ➢A process, ongoing and flowing through an entity ➢Effected by people at every level of an organization ➢Applied in strategy setting ➢Applied across the enterprise, at every level and unit, and includes taking an entity level portfolio view of risk ➢Designed to identify potential events that, if they occur, will affect the entity and to manage risk within its risk appetite ➢Able to provide reasonable assurance to an entity’s management and board of directors ➢Geared to achievement of objectives in one or more separate but overlapping categories
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ERM BENEFITS & COSTS:
4
Cont…
Integration of Risk Organization : Increased Organizational Effectiveness
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ERM BENEFITS & COSTS:
5
Cont…
Integration of Risk Transfer : Better Risk Reporting
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ERM BENEFITS & COSTS:
6
Integration of Business Processes : Improved Business Performance
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ THE CHIEF RISK OFFICER:
7
Attributes of successful
CRO
Champion of good risk
management practices & behaviors
throughout the organization
Mentors to the other
business leaders within the organization about the
meaning & benefits of strong risk management
and its practical application
Initiator of
management actions, decisions and strategies
based around good quality risk data in the context of
risk appetite, future developments of the organization and the
external business environment
Aggregator of the
risk management information across all risk categories &
across the entire business to ensure that a comprehensive view of the combined impact
of risk is taken, and that he/she is able to actively manage that risk and it’s
impact on the business and current and future capacity
adequacy
Challengers of the risk positions
created and held by other functional
leaders
❖The CRO is a top-level executive responsible for overall risk management in a centralized role.
❖Reporting to the CRO typically are the heads of the various risk functions, including the heads of credit, market, operational, and insurance risks.
❖The CRO provides overall leadership, vision and direction for ERM and develops a framework of management policies, including setting the overall risk appetite of the firm.
❖This includes measuring and quantifying risks and setting risk limits, developing the requisite risk systems, and communicating a clear vision of the firm’s risk profile to the board and to key stakeholders.
RIFT Pvt. Ltd. /FRM L1/Foundations of Risk Management
WHAT IS ERM?
➢ ERM FRAMEWORK COMPONENTS:
8
• Ensures that senior management and the board have the requisite organizational practices and processes to adequately control risks & helps in successful implementation of ERM program in their firm.
• Turnbull Report and the Sarbanes-Oxley Act are regulatory initiatives to improve corporate governance.
• An effective framework requires that all key risks are successfully integrated into the ERM program and those responsible for implementing the program have clearly defined risk roles and responsibilities, including the role of the CRO.
Corporate Governance
• Is the management of activities that directly to producing a firm’s products and services.
• Line management is critical as it integrates business strategy into corporate risk policy, assesses the relevant risks, and incorporates them into pricing and profitability decisions.
Line Management
• It provides a holistic view of the firm’s risks if there risks are viewed as individual components of the aggregate risks facing the firm.
• Active portfolio management aggregates risk exposures and allows for diversification of risks and prudent monitoring of risk concentrations against present limits.
• Firms that manage each of their financial risks independently will need to integrate these risks into a comprehensive ERM process to optimize firm risk and return.
Portfolio Management
• It reduces or transfers out risks that are either undesirable risks or are desirable but considered concentrated.
• Risks can be offloaded through derivatives, insurance, and hybrid products.
Risk Transfer
• It quantifies risk exposures for use in risk analysis, measurement, and reporting.
Risk Analytics
• It improve the quality of data used in evaluating risks.
Data technology and Resources
• It facilitates in communicating a firm’s internal risk management process to external stakeholders, Including shareholders, creditors, regulators, and the public.
Stakeholder Management
Thank You