1. Risk, Terminology, ERM

Bus 200Introduction to Risk Management and Insurance

Fall 2008Prof. Jin Park

Based on “Uncertainty” Uncertainty

concerning the occurrence of a loss

Based on “Expected Value” Deviation from

expectation

Pure vs. Speculative Risk

Objective vs. Subjective Risk

Fundamental vs. Particular Risk

Perils (Immediate) Causes of loss

Natural perils Acts of God

Human perils Human acts, errors, and omissions, whether

intentional or unintentional, causing a loss Economic perils

Economic events or phenomenon causing a loss

Insurable and Uninsurable perils

Hazard A condition that creates or

increases the chance of losses, their severity, or both. Physical hazard Moral hazard Morale hazard Legal hazard

Types of Pure Risk Personal Risk Property Risk

Direct Loss Indirect Loss

Liability Risk

Enterprise Risk Management Traditional risk management? Enterprise risk

(Major) risks faced by an organization (or firm)

Enterprise risk management The process (or discipline) by which an

organization assess, controls, exploits, finances, and monitors risks from all sources for the purpose of minimizing the effects of risks on organization’s value.

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Key ERM Risk Terms

Strategic/Franchise Risk Legal/Compliance Risk Staffing/Organization Risk Credit Risk Market Risk Operational/Systems/Technology Risk Environmental Risk Sovereign Risk Financial/Documentation Reporting Risk Liquidity Risk

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Key Implementation Key Implementation RequirementsRequirements

1. Provide leadership and “set the tone from the top”

2. Allocate resources for enterprise risk management

3. Establish vision and overall plan

4. Set milestones and individual accountabilities

5. Establish risk measures and early warning indicators

6. Integrate ERM into business planning and operations

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Example: Energy Industry

Insurance

Credit

Market

Insurance

Credit

Operations

Insurance

Business

Organizational

Insurance

FinancialRisk Management

EnterpriseRisk Management

1970s 1980s 1990s(Deregulation)

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Market Risk

FXInterest ratesCommoditiesLiquidity risk

Operational Risk

Process riskTechnology riskRegulatory riskReputational risk

Credit Risk

Loan defaultCounterpartyexposureVendor risk

Risk Management and Risk Management and InsuranceInsurance& the CRO& the CRO

ChiefRisk Officer

ART(Alternative

Risk Transfer)

Enterprise Risk Management

DerivativeProducts

InsuranceProducts

Risk Managers

Treasurer/Insurance

Audit/Compliance

In theFinancialMarkets

Within aCompany