Risk Management Foundation Cheat Sheet by djjang2

Risk management framework is the basic structure of integr­ating the risk management process throughout the organi­zation.

Effective risk management can add value to any organi­zation.

Effective Framework consists of: Risk Identi­fic­ation, Measur­ement, Mitiga­tion, Reporting & Monito­ring, and Governance

Scan the Enviro­nment - Evaluates how each risk management process aligns w/ Org's overall objective.
Performs review of internal & external enviro­nment

Analyze Risks - Loss exposures are analyzed by estimating the signif­icance of the possible losses previously identi­fied.
Applies the risk criteria to determine the source, cause, liklihood, and potential conseq­uences of the risk

Monitor & Review - Ensure it's achieving expected results and revise to accomodate changes in loss exposures.
Data produced during this step helps risk managers show the importance of managing risk at every level of the Org.

Tolerable Uncert­ainty: Provides awareness of potential losses & assurance of their effective management.
Keeping the worry of accidental loss at a tolerable level.

Earning Stability: Some Orgs. seek to maintain level earnings from year to year.
Requires exact foreca­sting of fluctu­ations in asset values, liability values, and risk management costs.

Business Continuity: Major goal for private entiti­es/­Ess­ential goal for public entities.
To avoid interr­upting operations for an unacce­ptable amount of time, Risk Managers should:
- Identify those specific activities for which continuity is essential.
- Determine the risks that could interrupt those activities and manage those risks approp­ria­tely.

Legal & Regulatory Compliance: Satisfy legal obliga­tions based on - the standard of care owed to others; Contracts; and Laws & regula­tions

Reduced Cost of Risk: Org. maintains its normal activities but with fewer and less severe accidental losses.

Cost of Risk - The total cost incurred by an organi­zation b/c of the possib­ility of accidental loss.

Cost of Loss Control: People; Processes; Equipment

Cost of Risk Mgmt Admini­str­ation:
Small Company - Risk Mgr
Larger Company - RM Staff, or also broker­/agent

Costs Related to Damage:
- Dmg to machine, tools, or other property or the spoilage of material

Pure Risks
- Chance of loss or no loss; no chance of gain
- Insurable

Insurance deals mainly with risks of loss, not risks of gain; so Pure risks as opposed to Specul­ative risks.

Objective Risks
- Measurable variations of uncertain outcomes based on facts & data.
- Insurable

Assessment of risks differ due to:
1. Famili­arity & Control: people tend to undere­stimate familiar risks and overes­timate dramatic, unfamiliar risk.
2. Severity over Frequency: people tend to assign a probab­ility of 0 to low frequency events such as natural disasters, murder, accidents. But tend to overes­timate low frequency events if they have personally been exposed to previously or the events gets increased media cov.
3. Risk Awareness: people who are not aware of risks will undere­stimate the likelihood of loss, an org's risk mgmt efforts become more effective as the entity's subjective interp­ret­ation of risk becomes closer to its objective risks.

Divers­ifiable Risks
- Affects only some indivi­duals, busine­sses, or small groups.
- Nonsys­tematic risks or Specific risks
- Can be managed by spreading the risk (diver­sif­ica­tion)
- Not highly correlated - occurs randomly; Can be managed thru divers­ifi­cation or spread of risk.
ex) Building fire, Care theft, Auto accident

Private Insurers tends to concen­trate on Divers­ifiable risks; Gov't Insurers is suitable for Nondiv­ers­ifiable risks

Hazard Risk
Pure risks arising from property, liability, or personnel loss exposures. Tradit­ionally addressed by Insurance
ex) Fire, Flood, Theft, Auto Accidents, Employee Accidents

Financial Risks
Speculative risks associated with an Org's financial activities.
*Market Risk, Credit Risk, Liquidity Risk, Price Risk
ex) Managing foreign exchange transa­ctions; Investing in Assets

Inflation Risk: Associated with the loss of purchasing power b/c of an overall increase in the economy's price level.

Intere­st-Rate Risk: Associated w/ a security's future value due to changes in interest rates.

Financial Risk: Associated w/ the ownership of securities in a company having large amt of debt on its balance sheet. *If the company defaults on its debt obliga­tions, its creditors might force it into bankru­ptcy.

Exposure - Any condition that presents a possib­ility of gain or loss, whether or not an actual loss occurs.
Provides a measure of the max potential dmg associated with an occurr­ence.
if risk is nondiv­ers­ifi­able, the risk increases as exposure increases.

Likelihood - A quanti­tative estimate of the certainty with which the outcome of a specific event can be predicted.
refers to the chance that a given outcome will occur

Time Horizon - Refers to the estimated duration of the risk.
The longer the time horizon, the greater the risk.