Module 2

Question 1

State the claimed benefits of RM (as distinct from ERM)

Answer 1

The claimed benefits of RM are:
1. RM can benefit society (e.g. reduce contagion risk)

2. RM overseen by the Board will be more effective than if done by shareholders, who have lesser resources (e.g. lower quality information)
3. Earnings volatility can be reduced (e.g. by reducing the likelihood and impact of unpleasant surprises)
4. Shareholder value can be maximized (e.g. by reducing the cost of capital and allocating capital more effectively)
5. Job security and rewards can be enhanced.
6. Improved understanding of risk profile and risk appetite.

Question 2

State the claimed benefits of ERM (emphasis on the ‘E’!)

Answer 2

The claimed benefits of ERM are:
1. Increased RISK TRANSPARENCY - senior management are better informed through better reporting of risks across the whole organization, and hence make better decisions.

2. Increased OPERATIONAL EFFECTIVENESS of the organization (e.g. through improved co-ordination through a central RMF).
3. Improved BUSINESS PERFORMANCE (e.g. through better use of capital)

Question 3

Outline in more detail the benefits of senior management being better informed

Answer 3

Senior management:

1. Better understand the organization’s risk exposure
2. Better comprehend the links between business growth, corporate risk and return.
3. Better understand the impact of changing external factors, such as interest rates.
4. Can assess more accurately the risk/return trade-offs of a particular decision.
5. Can align strategy more closely with risk appetite.

Question 4

Outline in more detail how an organization’s operational effectiveness might be improved by ERM

Answer 4

1. By coordinating risk management activities across all parts of the organization.
2. By encouraging and facilitating the sharing of risk information.
3. By identifying and assessing links between risks managed by various teams.
4. By improving efficiency (e.g. with respect to management time and business resources)

Question 5

Outline in more detail how an organization’s business performance might be improved by ERM

Answer 5

1. Using and allocating capital more efficiently.
2. Minimizing losses and unpleasant surprises.
3. Pricing, managing and/or transferring risks better.
4. Optimizing risk mitigation strategies (e.g. allowing for natural hedges between business units)
5. Reacting more quickly, e.g. seizing opportunities
6. Deriving value from the time, effort and money spent on risk management, rather than it being viewed as a box-ticking exercise.

Question 6

Outline reasons why an organization may decide to implement ERM

Answer 6

1. Increased expectations from stakeholders that companies will manage risk effectively.
2. Tools to assess and manage risk more widely available.
3. Pressure to improve risk management practices as a result of:
   - Previous management failures
   - A ‘near miss’ within their own organization
   - A high-profile disaster in another similar organization
   - Criticism or demands from a regulatory body or auditor
   - Concerns from (other) stakeholders