Angeles, Cheena

Biana, Faye Isabelle HM-1C PART 5:RISK

RESPONSE
Inguito, Esther Joy
Pamisa, Mark John
GROUP 4
 ENTERPRISE RISK MANAGEMENT

• ENTERPRISE-WIDE APPROACH: Enterprise-wide Risk

Management Approach (ERM)
• The ERM approach means that an organization looks at all the
risks that it faces across all of the operations that it undertakes.
• ERM is concerned with the management of the risks that can
impact the objectives, key dependencies or core processes of the
organization.
• Also, ERM is concerned with the management of opportunities, as
well as the management of control and hazard risks.
• DEFINITIONS OF ERM
ORGANIZATIONS DEFINITION OF ERM
BS 31100 Enterprise risk management is the approach to
managing all of an organization’s key business risks and
opportunities with the intention of maximizing
stakeholder value.
ACT (Association of Corporate Treasurers) ERM is designed to enhance corporate decision-making
with tools being developed and implemented to
support actions ranging from optimization of the
insurance programme to analysis of overseas expansion
plans, business mix or capital allocation.
COSO ICAEW (Institute of Chartered Accountants in ERM is a process, effected by an entity’s board of
England and Wales) directors, management and other personnel, applied in
strategy setting and across the enterprise, designed to
identify potential events that may affect the entity,
manage risk to be within its risk appetite and to
provide reasonable assurance regarding the
achievement of entity objectives.
• DEFINITIONS OF ERM

ORGANIZATIONS DEFINITION OF ERM

IIA (Institute of Internal Auditors) A rigorous and co-ordinated approach to

assessing and responding to all risks that affect
the achievement of an organization’s strategic
and financial objectives.

HM Treasury All the processes involved in identifying,

assessing and judging risks, assigning ownership,
taking actions to mitigate or anticipate them
and monitoring and reviewing progress.
• ERM IN PRACTICE BENEFITS OF ERM
FIRM RISK SCORECARD BENEFITS
FINANCIAL • Reduced cost of funding and capital

• Better control of CapEx approvals

• Increased profi tability for organization

• Accurate fi nancial risk reporting

• Enhanced corporate governance

INFRASTRACTURE • Effi ciency and competitive advantage

• Achievement of the state of no disruption

• Improved supplier and staff morale

• Targeted risk and cost reduction

• Reduced operating costs

• ERM IN PRACTICE
FIRM RISK SCORECARD BENEFITS
REPUTATIONAL • Regulators satisfied

• Improved utilization of company brand

• Enhanced shareholder value

• Good reputation and publicity

• Improved perception of organization

MARKETPLACE • Commercial opportunities maximized

• Better marketplace presence

• Increased customer spend (and satisfaction)

• Higher ratio of business successes

• Lower ratio of business disasters

• ERM AND BUSINESS CONTINUITY

• There is an important relationship between enterprise risk

management (ERM) and business continuity management (BCM).
The risk assessment that is required as part of the risk
management process and the business impact analysis that is the
basis of business continuity planning (BCP) are closely related

• The next stage in the process differs between ERM and BCP,
because the former is concerned with the management of the risks
that could impact processes, whereas continuity is concerned
with actions that should be taken to maintain the continuity of
individual activities.
• ERM ENERGY AND FINANCE
In the finance sector, the objective of an ERM initiative is to enhance
shareholder value by:

• improving capital and effi ciency by providing an objective basis for

allocating resources and exploiting natural hedges and portfolio effects;

• supporting fi nancial decision making by considering areas of high

potential adverse impact and by exploiting areas of risk-based
advantage;

• building investor confidence by stabilizing results and protecting them

from disturbances and thus demonstrating proactive risk stewardship.
• ERM ENERGY AND FINANCE

ERM in the energy sector is often dependent on the:

• Treasury function
• Specialist expertise of hedging against the price of a
barrel of oil.
• FUTURE DEVELOPMENT OF ERM

Future developments in the practice of ERM are likely to

be focused on two key areas:
• Firstly, ensuring risk management activities are fully
embedded in the business processes of the
organization;
• And secondly, demonstrating measurable fi nancial
benefi ts associated with the implementation of an
enterprise risk management initiative.
 IMPORTANCE OF RISK APPETITE

• RISK CAPACITY
• The Risk Capacity means the capability of an organization to
take risk.
• By contrast risk appetite is the total value of the corporate
resources that the board of the organization is willing to put at
risk.
• RISK APPETITE- the value that organization should risk
• RISK EXPOSURE – how much value is actually at risk
• The risk capacity of the organization needs to be fully utilized to
ensure that risk taking is at the optimal level and delivers maximum
benefit.
FIGURE 26.1 RISK AND UNCERTAINTY
• RISK EXPOSURE
• Total Cost or Risk (TCR) calculations were commonplace in the
1980s.
• These calculations were usually undertaken by organizations or
their insurance brokers.
• It enables an organization to determine the total cost of hazard
risks to the organization.
• Insurance premium
• money spent on loss-control actions
• cost of claims not covered by insurance
• The difficulty with this type of calculation was that it depended
substantially on historical information.
• Risk exposure will also increase when an organization decides
whether to embark on a merger or acquisition.
Consideration of at least the following features of the
acquisition opportunity:
• Financial strength and reputation of the proposed acquisition
• potential for developing further revenue/profit from the
acquisition
• risks associated with suggested purchase contract terms and
conditions
• anticipated profitability and sustainability of the proposed
acquisition
• investment required to deliver the anticipated future plans
for the acquisition
• impact on existing investment and business development
plans
• NATURE OF RISK APPETITE
• British Standard BS 31100 defines risk appetite as the
‘amount and type of risk that an organization is
prepared to seek, accept or tolerate’.
• The organization will need to quantify the possible
hazard risks and costs associated with those risks.
• The portion of risk appetite that is associated with
opportunities can be considered to be the opportunity
investment that the organization is willing to embrace.
• The organization may have an appetite for investing a
sum of money in an opportunity but it needs to be sure
that it has the capacity to endure any loss that may
result.
FIGURE 26.2 RISK APPETITE, EXPOSURE, AND CAPACITY
• The identification of the risk appetite for the
organization requires judgement.
• Risk appetite is likely to be an operational
constraint at line-manager level.
• RISK RESPONSE

• is the process of developing strategic options, and

determining actions, to enhance opportunities and
reduce threats to the project's objectives. A project
team member is assigned to take responsibility for
each risk response.
• ACTUAL RISK EXPOSURE
• Perceived risk is risk predicted by models and actual
risk is the fundamental underlying risk. We measure
perceived risk and care about actual risk.
• ULTIMATE RISK CAPACITY
• Risk capacity is the maximum amount of risk that an
organization is able to take on, and risk appetite is the amount
of risk that an organization is willing to take on.
• COST OF RISK CONTROL
• The cost of managing risks and incurring losses. Total cost of
risk is the sum of all aspects of an organization's operations that
relate to risk, including retained (uninsured) losses and related
loss adjustment expenses, risk control costs, transfer costs,
and administrative costs.
As can be seen, a line can be drawn to represent the effect
of each other individual risk control measure. It is obvious
that the longer the line, the greater the effect of the control.
It will also be the case that the longer the line, the greater
control effect is required, in terms of management time,
effort and money.
• RISK APPETITE AND LIFESTYLE
DECISIONS
• There is a relationship between personal risk appetite
and lifestyle decisions. Decisions will be taken about, for,
example long-term health issues, depending on family
history and personal lifestyle. Decisions will also be
taken on medium-term health issues, based on medical
treatment, dieting and weight gain. Short- term decisions
will also need to be taken on health issues, including
those related to exercise, alcohol and recent illness or
accident.
TOLERATE, TREAT, TRANSFER
AND TERMINATE

• Priority significant risks facing an organization are those

that have:
 High or very high impact in relation to the benchmark
test for significance;
 High or very high likelihood of materializing at or
above the benchmark level;
 High or very high scope for cost- effective
improvement in control.
Figure 27.1 Types of controls for hazard risks

In order to give some context to the range of risks that is being

considered, Table 27.2 provides examples of the range of
potentially significant risks associated with the headings of
the FIRM risk scorecard.
• Risk tolerance- is defined in British Standard BS 31100 as the
‘organization’s readiness to bear the risk after risk treatments in
order to achieve its objectives’. An organization may have to tolerate
risks that have a current level beyond its comfort zone and its risk
appetite.
• Risk treatment- When the level of risk exposure (likelihood)
associated with a particular hazard is high but the potential loss
(impact) associated with it is low, the organization will wish to
treat the risk.
• Risk transfer- When the likelihood of a risk materializing is low but
the potential is high, the organization will wish to transfer that
risk. Insurance is a well-established mechanism for transferring the
fi nancial consequences of losses arising from hazard risks and (to a
lesser extent) control risks.
• Risk termination- When a risk is both of high likelihood
and high potential impact, the organization will wish to
terminate or eliminate the risk. It may be that the risks of
trading in a certain part of the world or the environmental
risks associated with continuing to use certain chemicals
are unacceptable to the organization and/or its
stakeholders.
• Project and strategic risk response- The overall approach to
the management of control and opportunity risks is similar to
the approach adopted for the management of hazard risks.
However, there are sufficient differences in the range of
options available for these to be presented separately
Figure 27.3 Risk versus reward in strategy

Entrepreneurial opportunities will be explored at this time. As the

organization grows, potential rewards will increase while the level of
risk will remain high. The organization will seek to achieve growth, but
may feel that growth is too slow or the level of risk remains too high,
and if so it will exit from those operations