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1. Risk, Terminology, ERM
Bus 200Introduction to Risk Management and Insurance
Fall 2008Prof. Jin Park
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Based on “Uncertainty” Uncertainty
concerning the occurrence of a loss
Based on “Expected Value” Deviation from
expectation
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Pure vs. Speculative Risk
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Objective vs. Subjective Risk
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Fundamental vs. Particular Risk
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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
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Hazard A condition that creates or
increases the chance of losses, their severity, or both. Physical hazard Moral hazard Morale hazard Legal hazard
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Types of Pure Risk Personal Risk Property Risk
Direct Loss Indirect Loss
Liability Risk
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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