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RISK MANAGEMENT
What is a Risk?
Next 1 hr…..????Next 1 hr…..????
Why do companies need to bother about Risk?What is Risk?Active risk management Model
Starting Point
Profit = sales – costsProfit = sales – costs
Insurance procurement = costInsurance procurement = cost
Risk to balance sheet?Risk to balance sheet?
Common Misconceptions
• Risk Management is nothing but insurance
•Cost/benefit = Premium (cost) vs. claims paid (benefit) (i.e. loss ratio)
• Insurance will cover the risks associated with the risks ‘listed’ as insured
• Insurance buying is a simple procurementexercise
The Risk Rainbow was used to identify critical risks
Business Faces Many RisksBusiness Faces Many Risks
Fire
Natural disaster and third partySecurity
Motor fleet
Environment
Health and safety
Key personnel
Business interruption
Reg
ula
tory
co
mp
lian
ce
Lega
l lia
bilit
y
Project risk
IT and comm
unicationsP
roduct liability
Catastrophe recovery
Indu
stry
ris
ks
Fin
anci
al r
isk
Pol
itica
l ris
kEx
chan
ge ra
te ri
sk
Corpo
rate
repu
tatio
n
Self financin
g
Retro plans
Cellular and captive
Risk transfer
New products
Derivatives etc
What is risk?
Risk : “Variation from desired outcomes” Inherent in any activity A day-to-day occurrence Exists whenever the future is unknown
Acquisition turn sour- Sell off within a week
“CEO of Software major arrested-Client complains of breach in contract”
“Scandal over New Airport project
WHY MANAGE RISK?WHY MANAGE RISK?
Fire in
Tex
tile
Fire in
Tex
tile
Mill
drives
Mill
drives
shar
esh
are pric
es dow
n
prices
down
Milk
Pro
ducts co
ntain
s
Milk
Pro
ducts co
ntain
s
Dioxin
s
Dioxin
s
Supplier Fire puts off
Supplier Fire puts off
production
production
In Car plant near
In Car plant near
Bangalore
Bangalore
Major fire in
Major fire in
Warehouse
Warehouse
Future headlines to avoidFuture headlines to avoid
Why do organizations need to Why do organizations need to bother about Managing Risk?bother about Managing Risk? Higher accountability standards for Higher accountability standards for
boards of directors and senior executives boards of directors and senior executives
The pervasive nature of information The pervasive nature of information
technologies technologies
The Network Economy and the emerging The Network Economy and the emerging
risks of e Business from online security to risks of e Business from online security to
customer privacycustomer privacy
Managing risk has become Managing risk has become increasingly complex due toincreasingly complex due to
The increasing need for knowledge of local laws and The increasing need for knowledge of local laws and
customscustoms
Unprecedented complexity of the regulatory Unprecedented complexity of the regulatory
environment, pressing firms for better risk reporting environment, pressing firms for better risk reporting
and more integrated and comprehensive risk and more integrated and comprehensive risk
managementmanagement
Shortage of skilledShortage of skilled personnel.personnel.
Every 24 hours there are three Every 24 hours there are three major losses of more than Rs.50 major losses of more than Rs.50 lakhs due to firelakhs due to fire
GIC Annual report
Operational Risk
On March 17, 2000, A Lightning Bolt Ignited A Fire In Albuquerque, New Mexico, Destroying A Philips Semiconductor Plant. Across The Globe In Scandinavia, Both Nokia And Ericsson Depended On The Factory For Key Chips In Their Cellular Phones, And This Chance Disaster Threatened To Choke Off Their Production. Nokia Responded Fast And Flexibly, Recognizing The Problem Thanks To Its Dynamic Monitoring.
Even Before It Was Told Of The Plant Shutdown, The Company Quickly Patched Together A Solution. Ericsson, However, Was Less Well Prepared And Moved Slowly, Losing An Estimated $400 Million In Potential Revenue, Contributing To A Corporate Operating Loss Of About $1.86 Billion In 2000 And Ceding An Increasing Share Of The Global Mobile Phone Market To Nokia.
As Jan Ahrenbring, Ericsson's Marketing Director For As Jan Ahrenbring, Ericsson's Marketing Director For Consumer Goods, Told Consumer Goods, Told The Wall Street Journal,The Wall Street Journal, "We Did "We Did Not Have A Plan B.Not Have A Plan B.
Flooding of a Power plantFlooding of a Power plant
A major power blackout in an American Airport- Can happen any where!!
“One of the ironies in life is that often, we know what we want and we also know what
is good for us. Yet, our actions or behaviors do not always reflect these.”
Companies that are not prepared….
Resumeoperations (30%)
Never make it back (70%)
Don’t you think you should Manage your risks?
The current approach to Risk The current approach to Risk Management is fragmented Management is fragmented and inconsistentand inconsistent
Internal Audit
Treasury
LegalServices Compliance
Control Procedures
BCP / Security
Health&Safety
Holding company Listing requirements
You may need a Vision
Common Risk Viewled by the Board
Info
rmat
ion/
mea
sure
men
t
Clear processes
Ris
k ap
petit
e /
polic
y
Why Risk Management ?
Risk management is concerned with achieving business plans
Why manage any risk?Why manage any risk?
Vision
Financial PlansBusiness
PlansStrategic
Plans
Change Plans
Plans can be “blown off course”
Why manage any risk?
Vision
Financial Plans
Business
Plans
Strategic
Plans
Change Plans
Active Risk Management
Active Risk Management
Risk Management provides the stability to avoid as many surprises as possible
Why manage any risk?
Active Risk Management
Active Risk Management
Vision
Financial PlansBusiness
PlansStrategic
Plans
Change Plans
Why should companies adopt Risk Management
Reduce management time wasted in fire fighting and dealing with surprises;
are able to withstand volatility in their operating environment;
have a clear source of competitive advantage; have access to capital at reduced rates; find insurance easier to come by and premiums
cheaper; are increasingly attractive to investors in turbulent
markets; and ultimately achieve higher share values which are
sustainable.
The objective of Risk Management is to maintain risks at a tolerable level
A simple definition of risk is: Risk = Likelihood x Consequences
of an accident if accident occurs
A risk can be tolerated if:The likelihood is sufficiently remote and/orThe consequences can be tolerated
Risk can be eliminated or reduced by:Changes in the design or operationTransferring all or part of the risk (risk financing)
Risk Management Model Introduction
)(
RISK MANAGEMENT PROCESSRISK MANAGEMENT PROCESS
ReportingReporting
MonitoringMonitoring
ControlControlEvaluationEvaluation
RiskRiskResponseResponse
RiskRiskEvaluationEvaluation
RiskRiskIdentificationIdentification
AssuranceAssuranceProgrammesProgrammes
ControlControlPerformancePerformance
START
Continuous and evolving activity
Risk Identification – Know what is above you???
Assessment Matrix
0
VH -
H -
M -
L -
Z -
Impact Axis
Probability of Occurrence Axis
Highest Risk
Lowest Risk
Very High Impact, Low Probability
Low Impact, Very High Probability
Probability
Impact
-VH -H - M- L
- Z
Assessment Matrix
0
VH -
H -
M -
L -
Z -
Probability
Impact
High Impact & High Probability
- Needs critical attention
Low Impact & Low Probability- May not Need
immediateattention
High Impact & Low Probability
- Needsattention
Low Impact & High Probability
- Needsattention
-VH -H - M- L
- Z
RISK RESPONSERISK RESPONSE
Risk drivers lead to the Gross risk; Risk drivers lead to the Gross risk; Risk strategies achieve an Acceptable level of riskRisk strategies achieve an Acceptable level of risk
““Risk appetite”Risk appetite”
Impact
Likelihood
GrossRisk
AcceptableRisk
Accept
NetRisk
Controls
Minimise
Mitigate
Transfer
Insurance & Risk Management Insurance could be part of a comprehensive RM
(Risk Financing) plan A good risk means a healthy bottom line to both the
insured and the insurer It is logical that the insurer promote loss control
programme for insured as part of their BCP (Business Continuity Plan)
LOSS ICE BERG
•BusinessInterruption
•ReputationRisk
•Professionalliabilities
•RegulatoryFines
•EmergencyPurchases
•CrisisManagement
•Start-Up, Set-Up & Clean-Up
•WasteDisposal
•Loss of life
•Damage toproperty
INDIRECT DIRECT
It can be more efficient to finance some risk out of your own resources
• If you are managing your risks it makes sense to finance some risk yourself–This will reduce the ‘total cost of risk’
Rs
Time
Insured
Financed
Risk Management
Risk Management
Why? RM is an important
mission of CFO . e.g. one part of PAKT
Establishment of the RM Committee would be a natural conclusion.
CFO needs serious advice without which the committee will not function.
RM Strategy Committee
Did Risk Management benefit any Did Risk Management benefit any business?business?
Hurricane Kartrina: Companies that have implemented engineering recommendations sustained eight times less damage than the ones that chose not to do so
Procedures for identification of risks and implementing risk reduction measures
Emergency measures for containing risk
Transfer risk
How do Insurance companies How do Insurance companies evaluate RISK in a free pricing evaluate RISK in a free pricing scenario?scenario?
How do Insurance engineer How do Insurance engineer perceive Riskperceive Risk
Loss Prevention ProgramsLoss Prevention ProgramsPhysical Protections Automatic Fire Protection
Systems Manual Fire Protection
Systems Building Construction Fire Brigade Capability External Exposure Special Hazards
Protection Natural Hazard Exposure
Human Element Programs Housekeeping Smoking Control Hot Work Control Emergency Response Safety Rules Maintenance Operations Security Information Technology
RM for insurance rating RM for insurance rating Factors to be considered for rating
identified Good & Adverse features for each
factor defined The extent of features objectively
assessed Weightage for each factor considering
the relative importance is fixed Objective value of risk is determined
at the end considering the various factors
The risk quantified is converted in terms of premium and coverage
Quantitative Risk AnalysisHAZOP StudiesLayer of Protection AnalysisFire Safety Audit / Fire Risk Assessment
Assets- Safety and Risk Management
Safety AuditSafety Perception SurveyDisaster Management PlanningLogistics Risk ManagementConstruction Safety Audit
Safety Process and Fire Safety
Thermography StudiesHazardous Area Classification ReviewLightning Protection Risk AssessmentComprehensive Electrical Safety Audit
Electrical Risk Management
Liability Risk ControlLiability Risk Control - Environment Risk Management
Environmental AuditEnvironmental AuditEnvironmental Due DiligenceEnvironmental Due DiligenceEnvironment Impact Assessment and Environment Environment Impact Assessment and Environment
Management PlanManagement PlanEnvironment Management System as per IS0 Environment Management System as per IS0
1400114001Corporate Sustainability ReportingCorporate Sustainability ReportingClimate ChangeClimate Change
Environmental ConsultingEnvironmental Consulting
- Insurance Support Services
Risk Management and Insurance Planning StudyRisk Inspection SurveySafety ReviewsMachinery Breakdown and Loss of Profit Studies
(MLOP)
Specialized Risk Management
Services Introduced in Indian
Market
Logistics Risk Management Route Analysis-Transportation of Over Dimensional Cargo
Culvert 1: Structural strength unknown
Culvert 2: Structural strength unknown
Height gauges to be
removed
Power Blocked
Risk Management Made Simple
‘The crocodile principle’
The Crocodile Principle # 1
Identify the risk
The Crocodile Principle # 2
Evaluate the risk
The Crocodile Principle # 3
Eliminate the risk Terminate
Find an alternative
The Crocodile Principle # 4
Treat
The Crocodile Principle # 5
Isolate the risk Control
The Crocodile Principle # 7
If nothing works …
Transfer
•get the .. out of there
Personal protective clothing
The Crocodile Principle # 6
Tolerate
Risk Management
BENEFIT
“The treatment of risk to the best economic advantage of the business organization”.
“Success of business is attaining your tricky balance by
naging your risks”
Insurance
cost Benefit
Loss prevention
MAJOR DISASTERS …..
Union Carbide:
Methyl Isocyanate tank blew up on Dec. 3, 1984 2000 killed + 200000 injured Similar plant in another thickly populated area in West
Virginia, US. A takeover bid : The incumbent Board had not done
enough to maximise shareholder value Criminal negligence and environmental racism charges
MAJOR DISASTERS …
Sony: Recall of 9.6 million Laptop batteries Loss: USD 750 million. Recalls of Digital cameras. Erosion of public trust.
Whom will you save
Question: Why do risk managers have such clear vision and foresight? Answer: From the ivory tower, you can see forever.
Thank You
