What are the economic costs of eliminating risk?
Harm the earnings of an organisation in the short-term if the business is profitable but risky
What are the unintended consequences of eliminating risk?
Avoiding one risk may also affect the probability or potential severity of another
When is elimination best?
The most feasible way of achieveing risk avoidance is at the design or planning stage of a new project
How do we control a risk?
Reduce the frequency of a particular event or reduce its severity
What are preventative controls?
Designed to reduce the possibility of undesirable events being triggered
What are corrective controls?
Reduce the losses and disruption of adverse risk events that have already taken place
e.g. contract terms, business continuity planning, insurance
What are directive controls?
Designed to make people behave in a specific way
e.g. rules and training for the personal safety of workers, procedure manuals/protocols/specifications, job descriptions
How can we measure cost-effectiveness?
Estimated by comparing the severity of an uncontrolled risk (inherent risk) with the severity of the same risk assuming the proposed control is in place (residual risk). The difference between the two must at least be greater than the cost of implementing the control
What is risk transfer?
The owner of a risk passes it to another person or organisation
What is securitisation of risk?
Refers to a range of instruments that enable an organisation to transfer financial risk to a professional risk carrier rather than a traditional insurance contract
What are financial derivatives?
Contracts enabling someone to buy or sell a specified asset at a specified date in the future at a specified price
What are CAT bonds?
Investment bonds that provide a return to investors based on insurance-type events rather than on financial market developments. Life of a cat-bond is normally 3-5 years. They make payments of specified amounts on the occurrence of one event happening during the period.
What is current expense as a risk financing option?
Losses as a result of certain risks are treated as current operating costs
What is contingency reserve as a risk financing option?
A part of the surplus from trading each year is held in a reserve which is equal to the expected cost of losses during the period
What is the internal risk fund as a risk financing option?
Separate fund designed to ensure the availability of liquid funds specifically to pay losses
What is the captive insurance company risk financing option?
An in-house insurance provider, formed primarily to insure its owner and affiliated companies
What is borrowing as a risk financing option?
Either internal or external to meet the cost of losses
What is co-payment as a partial retention method?
A policyholder agrees to share a fixed percentage or any loss applied on top of any excess or deductible. Used in American insurance in medical or health insurance and pet
What is business continuity management?
Advance planning as a form of risk control for if a major incident occurs or a crisis develops
What is the focus of BCM?
The immediate response to an incident, the speedy recovery from disruption caused and a return to business as usual as soon as possible
What are the benefits of ISO 22301 standard?
- inspire trust in your ability to continue operations throughout a disruption
- protect your reputation
- respond to legislative requirements
- reduce cost of disruption
- create a competitive advantage
- contribute to organisational resilience
What is the main drawback of BCM?
Establishing and integrating into the culture of an organisation incurs the cost of specialist skills and requires time and support from busy leaders and workers for plans that may never need to be implemented
What are main two ways a risk register can be used?
In risk assessment and in review and monitoring
How can a computer-based risk management system help?
Aid the process of reminding and reporting as well as simplifying the admin of a risk register
