IMPLEMENTING RISK MANAGEMENT

Why Why Implementing Risk Management 1.Performance of Formal Process RM process: RM Plan, Identification, Analysis, Treatment, Monitoring, and Control (Lemos et al -2001, Roth and Espersen –2004) 2.Risk Appetite, Involvement of Board, Centrilized ERM, Proper Communication, and Culture (McDonald-2004) 3.Communication and promotion of behavioral change (Coccia -2005) 4.The Transparaency linkage between Risk mitigation Plan and Corporate Objectives (Woods-2005) 5.Knowledge, Relationships and Sharing Best Pratices (Hampton-2006) Research Findings On Success Factors on Implementing Risk Management

Research Critical Success Factors (CSFs) are defined from three (3) different perspectives: (1)The factors that have influence on the inclination and readiness of a corporation for implementing RM; (2)The factors that are important during the design and implementation of RM in a corporation and can significantly affect the success of RM design and implementation; and (3)The factors that are crucially important to successfully run, maintain, and administrate RM after the closure of the project of RM design and implementation. Why Why Implementing Risk Management Research Findings On Success Factors on Implementing Risk Management

Where The RISKs Begin??? Overview of Corporate Finance

What is RISK ? a definition An interactive processconsisting of well defined steps which, taken in sequence, support better decision makingby contributing a greater insightinto risk and their impacts. Risk equals to uncertainty. The higher the uncertainty is, the risk of doing business is greater. A logical and systematic method of identifying, analyzing, assessing, treating, monitoring and communicatingrisks associated with any activity, function or process in a way that will enable organization to minimize lossesand maximize opportunities.

What is RISK ? Consequences & Likelihood Risk Consequences Risk Likelihood 1.Certain 2.Likely 3.Moderate 4.Unlikely 5.Rare 1.Catastrophic 2.Major 3.Moderate 4.Minor 5.Insignificant

What is ENTERPRISE RISK MANAGEMENT? ERM definition An interactive processconsisting of well defined steps which, taken in sequence, support better decision makingby contributing a greater insightinto risk and their impacts. A logical and systematic method of identifying, analyzing, assessing, treating, monitoring and communicatingrisks associated with any activity, function or process in a way that will enable organization to minimize lossesand maximize opportunities. An interactive processconsisting of well defined steps which, taken in sequence, support better decision makingby contributing a greater insightinto risk and their impacts. A logical and systematic method of identifying, analyzing, assessing, treating, monitoring and communicatingrisks associated with any activity, function or process in a way that will enable organization to minimize lossesand maximize opportunities.

Evolution of industry practices*) Credit Market Business Operation Credit Market Organizational Credit Risk Management Financial Risk Management Enterprise Risk Management 1970s1980s1990s *) James Lam, PRMIA Inaugural Conference in Montreal

Traditionally risk was managed within “silos” Credit Risk Chief Credit Officer Exposure Limits Portfolio Measurement Securitization/ Derivatives Market Risk CFO Business Managers Investment Limits Portfolio Return Growth Limits A/LM Risk Treasurer Asset/Liability Manager Trading and A/LM Limits Value at Risk Management Financial Derivatives Operational Risk Internal Audit Corporate Actuarial Controls Audit Review Insurance Who How

Enterprise Risk Management Approach Enterprise Risk Management Chief Risk Officer/Chief Financial Officer Credit Risk Chief Credit Officer Market Risk Treasurer Asset/ Liability Manager Business Risk Business Managers Operational Risk Internal Audit Corporate Actuarial Benefit Broadens risk awareness Aligns risk profile and strategy Minimizes surprises and losses Rationalizes capital requirements Assures regulatory compliance Improves ROE and shareholder value

What is ENTERPRISE RISK MANAGEMENT? ERM Process IAATMC 1.Identifying 2.Analyzing 3.Assessing 4.Treating 5.Monitoring 6.Communicating Source: Australian and New Zealand Standards of Risk Management, 1995

STEP 3 : Risks Assessment What are the Risk Management Process? STEP 3 : Risks Assessment Risk Exposures

Implementing Risk Management

How to Prepare for ERM Implementation Process? Establish the strategic, organizational and risk management context, the criteria against which risk will be assessed, and the structure of the analysis.

HOW to do The Implementation ? 1. Corporate Governance Establish top-down risk management 1. Corporate Governance Establish top-down risk management 2. Line Management Business Strategy Aligment 2. Line Management Business Strategy Aligment 3. Portofolio Management Think and act like a “fund manager” 3. Portofolio Management Think and act like a “fund manager” 4. Risk Transfer Transfer out concentrated or inefficient risks 4. Risk Transfer Transfer out concentrated or inefficient risks 5. Risk Analytics Develop advanced analytical tools 5. Risk Analytics Develop advanced analytical tools 6. Data and Technology Resources Integrate data and system capabilities 6. Data and Technology Resources Integrate data and system capabilities 7. Stakeholders Management Improve Risk transparancy for key stakeholders 7. Stakeholders Management Improve Risk transparancy for key stakeholders ERM Framework

STEP 3 : Risks Assessment What are the Risk Management Process? STEP 3 : Risks Assessment

1.Avoid: By not doing the business initiative 2. Retain: by accepting the risk 3. Transferred: through insurance & cooperative 4. Shared: through insurance & cooperative 5. Reduced: through risk mitigation & internal control mechanism 6. Accept 1.Avoid: By not doing the business initiative 2. Retain: by accepting the risk 3. Transferred: through insurance & cooperative 4. Shared: through insurance & cooperative 5. Reduced: through risk mitigation & internal control mechanism 6. Accept What are the Risk Management Process? STEP 4 : Risks Treated & Managed Risk Traet Monitoring & Communicating

What are the Risk Management Process? STEP 4 : Risks Treated & Managed Risk Traet Monitoring & Communicating Examples of Action to reduce Risk Likelihood 1.Compliance Program 2. Review on Contracts 3. Review on Organization 4. Review on Business Process and Model 5. Training 6. Supervision 7. Quality Management 8. Process Control 9. Maintenance 10. R&D

What are the Risk Management Process? STEP 4 : Risks Treated & Managed Risk Traet Monitoring & Communicating Examples of Action to reduce Risk Consequences 1.Contingency planning 2.Disaster recover plans 3.Public relations 4.Pricing policy 5.Activity relocation 6.Insurance 7.Outsourcing 8.Strategic alliances

What are the Risk Management Process? STEP 4 : Risks Treated & Managed Risk Traet Monitoring & Communicating How to Prioritize ….???

What are the Risk Management Process? STEP 4 : Risks Treated & Managed Risk Traet Monitoring & Communicating How to Manage and Treat Risk ….??? Risk-based internal control mechanism: It focuses on auditable areas of greatest risks It is future oriented It tests the way management mitigate risks COSO’s internal control framework: The Committee of Sponsoring Organizations of the Treadway Commission

What are the Risk Management Process? Why do we NEED Risk Monitoring & Communicating ? STEP 5 : Risks Monitored 1. To ensure the effectiveness of risk management 2. Risks do change overtime 3. Risk priority may change overtime STEP 6 : Risks Communicated There is a possibility to have difference perception on risk because difference in 1.Assumptions 2.Concepts 3.Experience 4.InterestsWhat

Three Pillars of ERM 1.Best-Practice Policies 2.The Framework 3.Approaches to ERM 1.Best-Practice Policies 2.The Framework 3.Approaches to ERM

What are the Risk Management Tools ? 1.Ex-ante risk management. Tools such as:Preventive controls; Preventive actions; Information seeking, statistical analysis andforecasting; Design for reliability; Insurance and Financial Risk Management etc. 2.Ex-post risk management. It involves: control audits and thedesign of flexible-reactive schemes that can deal with problems once they have occurredto limit their consequences. 1.Ex-ante risk management. Tools such as:Preventive controls; Preventive actions; Information seeking, statistical analysis andforecasting; Design for reliability; Insurance and Financial Risk Management etc. 2.Ex-post risk management. It involves: control audits and thedesign of flexible-reactive schemes that can deal with problems once they have occurredto limit their consequences.

Types of Tools Used to Implement ERM Procedures 1.Risk mapping of individual risks 2.Risk assessment workshop 3.Proforma financial modelling 4.Scenario planning 5.Monte carlo simulation 6.Stochastic simulation 7.Economic scenario generation 8.Behavior modification performance incentives 9.Catastrophe modelling 10.Optimization software 1.Risk mapping of individual risks 2.Risk assessment workshop 3.Proforma financial modelling 4.Scenario planning 5.Monte carlo simulation 6.Stochastic simulation 7.Economic scenario generation 8.Behavior modification performance incentives 9.Catastrophe modelling 10.Optimization software