CHAPTER 2: Risk Management
[Link] management defined
[Link] of risk management
[Link] in risk management process
[Link] identification
[Link] measurement
[Link] the appropriate tools of risk
management
[Link] administration
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[Link] management defined
Risk management
Risk management is a scientific approach to dealing
with pure risks by anticipating possible
accidental losses and designing and
implementing procedures that minimize the
occurrence of loss or the financial impact of the
losses that do occur
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[Link] of risk management
What are the fundamental goals of an
organization?
The risk management program needs to
support the goals of the organization.
The objectives of risk management
can be broken into two components
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a) Pre-loss Objectives
Social Responsibility:
Improve public image “good corporate
citizen” – high value on human safety.
Externally imposed obligations:
Set out in statute, in contract or simply as
a commitment to a customer (making sure
a client complies is a proactive step).
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CO,N
“Peace of Mind”:
Each organization has a different tolerance level
for uncertainty (threshold beyond which they
will not survive financially).
Cost of risk:
Operate economically – all cost associated with
managing pure risk are known as “cost of risk”.
Budget for risk management must compete with
budgets for other organizational objectives.
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b)Post-loss Objectives
Social Responsibility:
Consider employees and communities
Survival:
As a going concern. Avoid bankruptcy or liquidation.
Operational Continuity:
Is the business indispensable? Will you lose market share?
Higher costs
Reciprocal agreements
Maintain stable earnings:
Cut Expenses?
Sustain Growth
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Conflicts Among Objectives
Economy vs. Continuing Operations
Objectives can conflict!
Priorities must be examined to develop a plan that
is consistent with overall goals.
The plan must be analyzed comparing costs to
benefits.
Social Responsibility vs. Continuing Operations
Social responsibility rarely has immediate benefit –
survival is priority.
Compromise possible?
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[Link] in risk management process
[Link] identification
How can you identify the causes and effects of the risks in
your company? What can happen?
In this first stage of the methodology, the
possible specific causes of business risks are
identified in a systematic manner, together
with the range and possible effects thereof,
which an entrepreneur must confront.
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continues
The proper identification of risks calls for a
detailed knowledge of the company, of the
market in which it operates, of the legal, social,
political and cultural environment in which it is
set. Risk identification must be systematic and
begin by identifying the key objectives of
success and the threats that could upset the
achievement of these objectives.
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continues
The identification of the risk must be
systematic and should begin by defining the
entrepreneur’s objectives, analyzing the
factors that are key to the business in order
to achieve success and reviewing what the
weaknesses of the project are and the
threats it has to deal with.
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continues
For this purpose, it is advisable to make
a SWOT analysis (Strengths,
Weaknesses, Opportunities and
Threats); particularly the weak points
and the threats will offer a view of the
risks facing the entrepreneur.
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Risk management process
(1) Determination of objectives
(2) Identification of risks
(3) Evaluation of risks
(4) Considering alternatives and selecting the
risk treatment device
(5) Implementing the decision
(6) Evaluation and review
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[Link] measurement
Risk measures are
statistical measures that are historical
predictors of investment risk and volatility,
and they are also major components in
modern portfolio theory (MPT). MPT is a
standard financial and academic methodology
for assessing the performance of a stock or a
stock fund as compared to its benchmark
index.
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[Link] the appropriate tools of risk
management
Include two broad approaches:
(1) Risk control focuses on minimizing the
risk of loss
A. Risk avoidance
B. Risk reduction: loss prevention & loss
control
(2) Risk financing focuses on finding
funds to meet losses
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[Link] administration
What is Risk Management?
Good management practice
Process steps that enable improvement
in decision making
A logical and systematic approach
Identifying opportunities
Avoiding or minimising losses
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Risk Management is the name given
to a logical and systematic method
of identifying, analyzing, treating
and monitoring the risks involved in
any activity or process.
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Risk Management is a methodology
that helps managers make best use
of their available resources
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Who uses Risk Management?
Risk Management practices are widely
used in public and the private
sectors, covering a wide range of
activities or operations.
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Effective Risk Management
is a recognized and valued skill.
Educational institutions have formal study
courses and award degrees in Risk
Management.
The Risk Management process is well
established. (International RM process
standards.)
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Risk Management is
now an integral part of business
planning.
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How is Risk Management
used?
The Risk Management process steps are a
generic guide for
any organization, regardless of the
type of business, activity or function
There are 7 steps in the RM
process
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The basic process steps
are:
Establish the context
Identify the risks
Analyse the risks
Evaluate the risks
Treat the risks
Communicate & consult
Monitor and review
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Establish the context
The strategic and organisational
context in which risk management will
take place.
For example, the nature of your
business, the risks inherent in your
business and your priorities.
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Identify the risks
Defining types of risk, for instance,
‘Strategic’ risks to the goals and
objectives of the organisation.
• Identifying the stakeholders, (i.e.,who
is involved or affected).
• Past events, future developments.
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Analyse the risks
How likely is the risk event to happen?
(Probability and frequency?)
What would be the impact, cost or
consequences of that event occurring?
(Economic, political, social?)
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Evaluate the risks
Rank the risks according to
management priorities, by risk
category and rated by likelihood and
possible cost or consequence.
Determine inherent levels of risk.
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Treat the risks
Develop and implement a plan with specific
counter-measures to address the identified
risks.
Consider:
• Priorities (Strategic and operational)
• Resources (human, financial and technical)
• Risk acceptance, (i.e., low risks)
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Document your risk management plan
and describe the reasons behind
selecting the risk and for the
treatment chosen.
Record allocated responsibilities,
monitoring or evaluation processes, and
assumptions on residual risk.
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Monitor and review
In identifying, prioritizing and treating
risks, organizations make assumptions and
decisions based on situations that are
subject to change, (e.g., the business
environment, trading patterns, or
government policies).
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Risk Managers must monitor activities
and processes to determine the
accuracy of planning assumptions and
the effectiveness of the measures
taken to treat the risk.
Methods can include data evaluation,
audit, compliance measurement.
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Risk Management in Customs
Customs administrations have turned
increasingly to Risk Management as an
effective means of meeting national
objectives.
Administrations provide facilitation while
maintaining control over the
international movement of goods and
persons.
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International Organizations encourage and
support the adoption of modern Customs
control techniques, using Risk Management
principles., e.g.,
WTO/Kyoto Convention.
APEC Sub-Committee on Customs
Procedures.
Transport Industry representative bodies.
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The process helps Administrations
focus on priorities and in decisions
on deploying limited resources to
deal with the highest risks.
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