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Definition
| Risk from accidental loss; including the possibility of loss or no loss |
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Definition
| A set of characteristics common to all risks in a portfolio |
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Term
| Traditional Concept of Risk |
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Definition
| Risk is a hazard that could happen to an individual or organization - fire or wind could destroy a home or business - negative sense - possibility of loss |
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Definition
| Uncertainty about outcomes that can be either positive or negative - much broader |
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| ISO 31000:2009 Definition of risk management |
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Definition
| Coordinated activities to direct and control an organization with regard to risk |
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Term
| Holistic Approach to risk management |
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Definition
| Manages risk across all levels and function within an organization - more complete picture of orgs risk portfolio and profile. Allows for better decisions and improved outcomes for senior management. |
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Term
| 4 high-level categories of risk: |
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Definition
1. Hazard/pure
2. Operational
3. Financial
4. Strategic |
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Term
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Definition
| Risks from property, liability, or personnel loss exposures and generally subject of insurance |
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Term
| What type of risk would represent a fire at the plant |
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Definition
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Definition
| arise from people or a failure in processes, systems, or controls, including those involving information technology. |
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Definition
| Arise from the effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk |
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Term
| What type of risk: cost of materials increases |
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Definition
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Term
| What type of risk: U.S. dollar falls against the euro, making the organization's dollar debts more expensive to pay. |
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Definition
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| What type of risk: Credit rating is reduced by a credit rating agency, resulting in increased cost of borrowing. |
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Definition
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Definition
| Arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts |
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Term
| What type of risk: Competitor hires key employees |
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Definition
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Term
| Why did the evolution of risk management occur? |
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Definition
| It is the result of recognition of the increasing variety, number, and interaction of risks facing organizations. Organizations now realize that it is important to manage all of their risks, not just those that are familiar or easy to quantify. |
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Term
| Describe the major changes in the risk landscape - |
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Definition
| Organizations operate in a global environment where they face hazard risks such as earthquakes and floods, political risks such as terrorism, economic risks such as recession, and financial risk such as currency exchange rates. Risk has increased. Internally, organizations face regulations requiring improved risk management processes, compliance, and reporting, organizations face newer types of risk, such as computer attacks, and magnified consequences of traditional risk, such as reputational risk resulting from an event because of the rapid spread of information on the internet. |
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Term
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Definition
| The potential for a major disruption in the function of an entire market or financial system |
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Term
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Definition
| The total cost incurred by an organization because of the possibility of accidental loss |
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Term
| Describe how an organization's total cost of risk associated with an asset or activity is calculated. |
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Definition
Total of costs of accidental losses not reimbursed by insurance or other outside sources
Insurance premiums or expenses incurred for noninsurance indemnity
Costs of risk control techniques to prevent or reduce the size of accidental losses
Costs of administering risk management activities |
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Term
| Describe 3 benefits to an organization of reducing deterrence effects by risk management. |
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Definition
| Alleviates or reduces management |
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Term
| Explain how risk management can help an organization increase intelligent risk taking |
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Definition
| Risk management can help the organization decide if the potential rewards are greater than the downside risks |
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Term
| Explain how risk management can help an organization maximize its profitability |
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Definition
| By providing it with the information to evaluate the potential risk-adjusted return on its activities and to manage the risks associated with those activities. |
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Term
| Describe the benefits of holistic risk management compared with traditional risk management for an organization |
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Definition
| Traditional RM was conducted in silos w/in an organization which can miss critical risks to the org and fail to provide senior mgt with a picture of the organization |
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Term
| Describe three benefits of risk management for the entire economy |
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Definition
Reducing waste of resources
Improving allocation of productive resources
Reducing systemic risk |
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Term
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Definition
| a threshold value such that the probability of loss on the portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in the portfolio |
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Term
| Summarize how an organization should align its risk management objectives. |
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Definition
| Objectives should reflect the organization |
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Term
| Explain the risk management goal of tolerable uncertainty |
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Definition
| Aligning risks with the organization |
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Term
| Describe the risk management goal of satisfying the organization's legal requirements |
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Definition
| Standard of care owed to others, contracts entered into by org., federal, state, provincial, territorial, and local laws and regs. |
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Term
| Summarize the role of risk management in the survival of an organization |
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Definition
| It identifies as many risks as possible that could threaten the orgs ability to survive and manages those risks appropriately. It also depends on anticipating and recognizing emerging risks. |
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Term
| Identify the steps an organization should take to provide business continuity |
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Definition
| Identify activities whose interruptions cannot be tolerated. Identify the types of accidents that could interrupt such activities |
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Term
| Determine the standby resources that must be immediately available to counter the effects of those accidents |
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Definition
| Ensure the availability of the standby resources at even the most unlikely and difficult times |
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Term
| Explain how risk management helps an organization meet the minimum profit expectation for an activity. |
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Definition
| To achieve that minimum amount, risk management professionals must identify the risks that could prevent this goal from being reached, as well as the risks that could help achieve this goal within the context of the orgs overall objectives |
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Term
| Give an example of how each of the following risk management program goals might conflict with the goal of economy of risk management operations: |
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Definition
a. Might conflict with the goal of economy of operations because of the cost of risk management efforts
b. Might conflict with the goal of economy of operations because implementing safety standards could be an added expense
c. Might conflict with the goal of economy of operations because obligations such as charitable contributions could raise costs. |
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Term
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Definition
| any condition that presents a possibility of gain or loss, whether or not an actual loss occurs |
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Term
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Definition
| frequent fluctuations, such as in the price of an asset |
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Term
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Definition
| a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also decreases |
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Term
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Definition
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Term
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Definition
| relationship between variables |
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Term
| Describe the use of exposure as a risk measure |
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Definition
| Exposure provides a measure of the maximum potential damage associated with an occurrence. The risk increases as the exposure increases. |
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Term
| Explain the effect of volatility on risk |
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Definition
| Provides a basic measure that can be applied to risk. Risk increases as volatility increases. |
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Term
| Describe how consequences are used to measure risk |
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Definition
| They are the measure of the degree to which an occurrence could positively or negatively affect an org. The greater the consequences, the greater the risk. |
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Term
| Summarize how the relationship between likelihood and consequences affects risk management |
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Definition
| The relationship is critical for risk management in assessing risk and deciding whether and how to manage it. Orgs must determine to the extent possible the likelihood of an event and then determine the potential consequences if the event occurs. In addressing the level of risk, the risk mgt pro must understand to the extent possible both the likelihood and the consequences. |
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Term
| Compare the risk related to short and long term horizons |
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Definition
| Longer time horizons are generally riskier than shorter ones |
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Term
| Explain the effect of correlation on an organization's risk |
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Definition
| This is a measure that should be applied to the mgt of an orgs overall risk portfolio. If 2 or more risks are similar, they are usually highly correlated. Greater the correlation, the greater the risk |
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Term
| An international manufacturing organization has three major suppliers located in the region of Japan where the 2011 earthquake and tsunami occurred. In 2011, the organizations production was disrupted because supplies could not be received, and this resulted in a loss of sales of $200 million. Explain whether these suppliers present a future risk to the organization according to the basic risk measures that should be managed. |
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Definition
| Yes - Risk from exposure, consequences, and correlation related to these suppliers. |
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Term
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Definition
| A chance of loss or no loss, but no chance of gain |
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Term
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Definition
| A chance of loss, no loss, or gain |
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Term
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Definition
| the risk that customers or other creditors will fail to make promised payments as they come due. |
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Term
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Definition
| Perceived amount of risk based on an individual |
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Term
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Definition
| measurable variation in uncertain outcomes based on facts and data |
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Term
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Definition
| risk that only affects some individuals, businesses, or small groups |
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Term
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Definition
| a risk that affects a large segment of society at the same time |
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Term
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Definition
| uncertainty about an investment |
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Term
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Definition
| Risk that an asset cannot be sold on short notice without incurring a loss |
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Term
| Describe how classifying risk helps an organization's risk management process. |
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Definition
| Many risks in the same class have similar attributes and can be managed with similar techniques. It also helps with the administrative function of risk management by helping to ensure that risks in the same class are less likely to be overlooked. |
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Term
| Compare pure risk with speculative risk |
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Definition
| Pure risk there is a chance of loss or no loss, but no gain. With speculative risk, there is a chance of gain. |
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Term
| Explain why it is important to distinguish between speculative risks and pure risks when making risk management decisions |
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Definition
| Because the 2 types of risk must often be managed differently. Most insurance policies are not designed to handle speculative risk |
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Term
| Explain the reasons why subjective and objective risk may differ |
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Definition
1. Familiarity and control (when the perception of control is greater, the likelihood of serious injury is higher)
2. Consequences over likelihood
3. Risk awareness |
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Term
| Contrast diversifiable and nondiversifiable risk |
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Definition
| Div. is not highly correlated and can be managed through diversification, or spread of risk. Nondiv. Are correlated. Gains or losses tend to occur simultaneously rather than randomly. |
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Term
| Describe the quadrants of risk |
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Definition
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Term
| Classify each of these risks as pure or speculative, subjective or objective, and diversifiable or nondiversifiable: |
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Definition
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Term
| a. Damage to an office building resulting from a hurricane |
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Definition
| PURE, SUBJECTIVE & OBJECTIVE, NONDIVERSIFIABLE |
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Term
| b. Reduction in value of retirement savings |
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Definition
| Speculative, subjective & objective, diversifiable |
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Term
| c. Products liability claim against a manufacturer |
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Definition
| Pure, Subjective & Objective, Diversifiable |
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Term
| Enterprise risk management: |
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Definition
| an approach to managing all of an organization |
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Term
| Describe a common concept among the various definitions of enterprise risk management (ERM) |
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Definition
| Managing all of an organization |
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Term
| Identify the three theoretical pillars of ERM. |
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Definition
| Interdependency, correlation, portfolio theory |
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Term
| Compare the traditional risk management function with the ERM risk management function |
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Definition
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Term
| Describe the role of the chief risk officer (CRO) in enterprise risk management |
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Definition
| Facilitator engages the orgs mgt in a cont. conv. That establishes risk strategic goals in relationship to the orgs SWOT. Responsibility includes helping the enterprise to create risk culture in which managers of the orgs divisions and units, and eventually ind. employees, become risk owners. |
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Term
| Describe communications in an organization with a fully integrated ERM program |
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Definition
| Develops a communication matrix that moves info throughout the org. It includes dialogue and discussions among the different units and levels within the organization. The establishment of valid metrics and continuous flow of cogent data are critical aspect to this communication process. The metrics are carefully woven into reporting structures that engage the entire org, including both internal and external stakeholders. |
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Term
| Provide 2 typical impediments to successfully implementing an ERM program. |
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Definition
Technological deficiency
Traditional organization culture with entrenched silos (single largest) |
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Term
| An organization manufactures and sells nonprescription pain-relief products. There is a products liabililty risk associated with this business. Describe a traditional risk management approach to this risk versus an ERM Approach. |
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Definition
| Traditional RM would be to apply risk control techniques in the manufacture and distribution of this product and to purchase liability insurance ot transfer some of the liability exposure related to consumers |
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