ERM Chapter 1

Question 1

What factors relate to traditional RM?

Answer 1

1. Identifying the risks faced by an organisation
2. Assessing the likelihood and severity of those risks
3. Deciding how to deal with these risks (reduce, remove, transfer, retain)

Question 2

What are the key elements that differentiate ERM from traditional RM techniques?

Answer 2

1. ERM uses a holistic approach:
   - applies RM techniques consistently across the whole business or enterprise
   - RM is led by the board (top-down), coordinated through a RMF led by a CRO, and incorporated into the day-to-day operations of all personnel.
   - Recognises that risks interact through concentration and diversification and they are dynamic (change over time)
2. Value creation:
   - intergating RM and measurement into business processes and strategic decision making
   - considering not only downside risks but also upside risks.

Question 3

What are the key concepts of ERM?

Answer 3

1. Holistic approach
2. Downside and upside risks
3. Risk measurement - quantifiable risks
4. Risk measurement - unquantifiable risks
5. Risk responses

Question 4

What is the silo approach, how does it arise, and what are the problems?

Answer 4

The silo approach is the concept that RM is applied within individual departments or units of business.
It may arise due to the way a business has evolved (e.g. acquisition of individual businesses to form one conglomerate) or because of the way in which other aspects of the business are managed e.g. staffing.
The problem with the silo approach is that the diversification/concentration of risks between different business units will be missed. This can cause an inefficiency of operations by missing natural hedging opportunities, or can lead to large losses by missing concentrations.

Question 5

What is the holistic approach?

Answer 5

Risks are considered as a whole, rather than individual risks in isolation. This allows concentrations of risks to be appreciated, and diversifying effects to be allowed for.

Question 6

What are upside and downside risks?

Answer 6

Risk can be downside (the outcomes is adverse) or upside (outcome is better than expected) risks.

Question 7

What are quantifiable risks?

Answer 7

Risks that can be measured through a number of different measures, whether that is through ranking or by determining the absolute levels of risk. Good risk measurement practices deal with both the financial impact of a risk, and the likelihood of its occurrence over some given time horizon.

Question 8

What are unquantifiable risks?

Answer 8

Some risks cannot be measures, whether that be because the distribution of potential losses cannot be identified, or the exact nature of risk is difficult to assess. Many forms of operational risk fall under this bucket. Often dealt with in a qualitative manner e.g. probability and cost of occurrence is low/medium/high.

Question 9

What are risk responses?

Answer 9

When risks have been identified, and hen relevant quantified, the appropriate response to the risk must be determined. These responses are generally to retain, remove, reduce or transfer the risk.