Risk Consulting

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Welcome to the Risk Consulting Club

Risk management is an approach to managing uncertainty through risk assessment, developing strategies to manage and mitigate risk. The risk management strategies include
  • to transfer a risk to a third party
  • to avoid a risk
  • to reduce negative effects of a risk
  • to accept some or all of the consequences of a particular risk
Some risk managements are focused on risks stemming from physical or legal causes like natural disasters or fires, accidents, death and lawsuits that are mainly operational risks and legal risks. Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments like market risks, credit risks, liquidity risks or insurance risks. The objective of risk management is to reduce different risks related to a preselected domain to the level accepted by the public, the company, the company's regulator, the shareholders, the board of directors, the risk committee, the management, etc.. Risk may refer to numerous types of threats caused by environment, technology, humans, organizations, regulations, compliances, best practices, standards, methodologies and politics. On the other hand risk involves all means available for humans, or in particular, for a risk management entity like person, staff, organization.
  • Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events
  • Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit, either the principal or interest like the coupon or both.
  • Market risk is the risk that the value of an investment will decrease due to moves in market factors. The four standard market risk factors are:
    • Equity risk is the risk that stock prices will change
    • Interest rate risk is the risk that interest rates will change
    • Currency risk is the risk that foreign exchange rates will change
    • Commodity risk is the risk that commodity prices like grains, metals, etc. will change
  • Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade that asset.
  • Insurance risk is a risk that meets the ideal criteria for efficient insurance. The concept of insurable risk underlies nearly all insurance decisions.
  • Reputational risk is a potential loss in reputation that could lead to negative publicity, loss of revenue, costly litigation, a decline in the customer base or the exit of key employees.
  • Strategic risk is s the threat or possibility that an action or event will adversely affect the firm's ability to achieve its objectives. In this context of SRM, the management of strategic risk involves:
    • identifying key risks as well as strategic assumptions both implicit and explicit and determining the level of strategic vulnerabilities associated with each
    • making right decisions over time that result in maximum value protection and efficient coverage of opportunities
    • ensuring that the decisions are robust, given the uncertainties involved, and
    • charting a course to achieving objectives once those decisions are made
  • Legal risk is the risk associated with the impact of a defect in the documentation on cash flow or debt service. Legal risk in Basel II and Solvency II is included in operational risk
  • Regulatory risk is the risk associated with the potential for laws related to a given industry, country, or type of security to change and impact relevant investments
  • Competitive risk is the probability of loss from a decline in a firm's competitiveness
  • Systemic risk is the market risk or the risk that cannot be diversified away, as opposed to "idiosyncratic risk", which is specific to individual stocks. It refers to the movements of the whole economy.
Enterprise Risk Management or ERM includes the methods and processes used by organizations to manage risks or seize opportunities related to the achievement of their objectives. Enterprise Risk Management provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives like risks and opportunities, assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. Enterprise Risk Management can also be described as a risk-based approach to managing an enterprise, integrating concepts of strategic planning, operations management, and internal control. Enterprise Risk Management is evolving to address the needs of various stakeholders, who want to understand the broad spectrum of risks facing complex organizations to ensure they are appropriately managed. Regulators and debt rating agencies have increased their scrutiny on the risk management processes of companies. Enterprise Risk Management frameworks describe an approach for identifying, analyzing, responding to, and monitoring risks or opportunities, within the internal and external environment facing the enterprise. Management selects a risk response strategy for specific risks identified and analyzed, which may include:
  1. Avoidance: exiting the activities giving rise to risk
  2. Reduction: taking action to reduce the likelihood or impact related to the risk
  3. Share or insure: transferring or sharing a portion of the risk, to reduce it
  4. Accept: no action is taken, due to a cost/benefit decision
Monitoring is typically performed by management as part of its internal control activities, such as review of analytical reports or management committee meetings with relevant experts, to understand how the risk response strategy is working and whether the objectives are being achieved. The COSO Enterprise Risk Management Framework has eight Components and four objectives categories. The eight components - additional components highlighted - are:
  1. Internal Environment
  2. Objective Setting
  3. Event Identification
  4. Risk Assessment
  5. Risk Response
  6. Control Activities
  7. Information and Communication
  8. Monitoring
The four objectives categories - additional components highlighted - are:
  1. Strategy - high-level goals, aligned with and supporting the organization's mission
  2. Operations - effective and efficient use of resources
  3. Financial Reporting - reliability of operational and financial reporting
  4. Compliance - compliance with applicable laws and regulations
The primary risk functions in large corporations that may participate in an Enterprise Risk Management program typically include:
  • Strategic planning - identifies external threats and competitive opportunities, along with strategic initiatives to address them
  • Marketing - understands the target customer to ensure product/service alignment with customer requirements
  • Compliance & Ethics - monitors compliance with code of conduct and directs fraud investigations
  • Accounting / Financial compliance - directs the Sarbanes-Oxley Section 302 and 404 assessment, which identifies financial reporting risks
  • Law Department - manages litigation and analyzes emerging legal trends that may impact the organization
  • Insurance - ensures the proper insurance coverage for the organization
  • Treasury - ensures cash is sufficient to meet business needs, while managing risk related to commodity pricing or foreign exchange
  • Operational Quality Assurance - verifies operational output is within tolerances
  • Operations management - ensures the business runs day-to-day and that related barriers are surfaced for resolution
  • Credit - ensures any credit provided to customers is appropriate to their ability to pay
  • Customer service - ensures customer complaints are handled promptly and root causes are reported to operations for resolution
  • Internal audit - evaluates the effectiveness of each of the above risk functions and recommends improvements
Organizations by nature manage risks and have a variety of existing specialized departments or functions like "risk functions" that identify and manage particular risks. However, each risk function varies in capability and how it coordinates with other risk functions. A central goal and challenge of ERM is improving this capability and coordination, while integrating the output to provide a unified picture of risk for stakeholders and improving the organization's ability to manage the risks effectively. Risk Managers and entrepreneurs, CROs, CEOs, CFOs, COOs, etc. are welcome to contribute, to ask question, to answer questions, to find solutions, etc. Lucas Wyrsch

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