RISK

MANAGEMENT
(CABRERA 2021-2022)
TOPICS (Chapter 11)
• Basic Principles of Risk Management (165)
• Process of Risk Management (165 -166)
• E lements of Risk Management (166)
• Relevant Risk Terminologies (167 -171)
• Potential Risk Treatments (172)
• Areas of Risk Management (173 -174)
• Risk Management Framework (174 -175)
• Steps in Risk Management Process (175 -177)
TOPICS (Chapter 12)
• Identify and Prioritize Risks (181-182)

• Controlling and Monitoring Enterprise-

Wide Risk (187-188)

• Practical Considerations in Managing and

Reducing Financial Risk (188-190)

• Avoiding Pitfalls (192-193)

CHAPTER 11
Risk Management

RISK MANAGEMENT Defined

• T he p ro c ess o f me asuring o r asse ssing r isk

• And d evelo p ing s trateg ies to manage it.

• A s ys tem atic ap p ro ac h in ide ntify ing, analy zing

and c ontr olling areas o r events w ith a p o tential
f o r c aus ing unwanted c hang e.
WHAT IS RISK
MANAGEMENT?

Anyone who wants to take

the risk to answer?
Risk Management
(as define under ISO *
31000)

Identification, assessment, and prioritization of

risks followed by coordinated and economical
application of resources to minimize, monitor
and control the probability and /or impact of
unfortunate events and to maximize the
realization of opportunities.

* I n t e r n a t i o n a l O r g a n i z a t i o n fo r S t a n d a r d iz a t i o n
BASIC PRINCIPLES
of Risk Management
(based on ISO 31000)

Risk Management should:​

01 Create value

02 Address uncertainty & assumptions

03 Be an integral part of organizational processes & decision-making

04 Be dynamic, iterative, transparent, tailorable & responsive

05 Create capability of continual improvement and enhancement

06 Be systematic, structures and continually/periodically reassessed

PROCESS OF RISK MANAGEMENT

01 Establish the Context

02 Identify the potential risks

03 Assess the risk

 01 Establishing the Context

Developing an
Planning the Defining Mitigation or
Identification analysis of
remainder of Mapping out framework & solution of
of risk risks involved
the process agenda risks
in the process

❑ Framework for activity

❑ Agenda for ❑ Use available
❑ Selected domain area identification technological,
human and
❑ Social scope or RM ❑ Framework for organizational
❑ Identity & objectives of activity resources.
SH ❑ Agenda for
❑ Basis upon which risks identification
will be evaluation,
constraints
02 Identification of Potential Risks
(Common Risk Identification Methods)

Objective-based risk What may endanger achieving an objective?

Scenario-based risk What event may trigger an undesired scenario?

Taxonomy-based risk Based on best practices, questionnaires reveal risks

Common-risk checking List with known risks are available

Risk charting Combine methods (list resources@ risk, threats, factors, consequences)
03 Risk Assessment

Identified
risks
Result: Best educated decision
(prioritizing risks & implementing
ASSESS risk management plan)
Probability
Severity of
of
impact
occurrence
ELEMENTS OF RISK
MANAGEMENT
1. Identification, characterization, and
assessment of threats.
2. Assessment of the vulnerability of critical
assets to specific threats.
3. Determination of the risk (expected likelihood
and consequences).
4. Identification of ways to reduce those risks.
5. Prioritization of risk reduction measures.
RELEVANT RISK
TERMINOLOGIES

Risk associated with:

I. Investments

II. Manufacturing, Trading &

Service Concerns

III. Financial Institutions

I. Risk Associated with Investments

Business Risk Uncertainty about rate of return due to nature of business

Probability the some/all of initial investments will not be
Default Risk
returned.

Financial Risk Related to entity’s capital structure or sources of financing.

Interest Rate
Risk Fluctuations in interest rates.

Liquidity Risk Inability to sell investments quickly for cash.

Management
Risk Decisions by management/BOD

Purchasing
Power Risk Inflation which increases investor risk.
II. Risk Associated with Manufacturing,
Trading & Service Concerns
Market Risk

Financial Risk
Operational Risk
• Product Risk • Process Stoppage • Interest Rates Volatility

• Complexity, • Health & Safety • Foreign Currency

Obsolescence, R & D, • After Sales Service • Liquidity
Packaging, Delivery of Failure • Derivative
Warranties
• Environmental • Viability
• Competitor Risk
• Technological
• Pricing Strategy Obsolescence
• Market Share • Integrity
• Market Strategy
 III. Risk Associated with Financial
Institutions
Financial Non-Financial
• Liquidity Risk • Operational Risk
• Market Risk • Systems
• Currency • Information Processing
• Equity • Technology
• Commodity • Customer Satisfaction
• Credit Risk • Human Resources
• Counterparty • Fraud and illegal acts
• Trading • Bankruptcy
• Commercial (Loans, Guarantees) • Regulatory Risk
• Market Liquidity Risk • Capital Adequacy
• Currency Rates • Compliance
• Interest Rates • Taxation
• Bond and Equity Prices • Changing laws and policies
 III. Risk Associated with Financial
Institutions
Financial Non-Financial
• Hedged Positions Risk • Environment Risk
• Portfolio Exposure Risk • Politics
• Derivative Risks • Natural disasters
• Accounting Information Risk • War
• Completeness • Terrorism
• Accuracy • Integrity Risk
• Financial Reporting Risk • Reputation
• Adequacy • Leadership Risk
• Completeness • Turnover
• Succession
POTENTIAL RISK TREATMENTS (TECHNIQUES)

Avoidance

Reduction

Sharing

Retention
Group yourselves based on
your Reporting Groups

In the context of a business

enterprise, identify three (2)
threats, their related risk /s and
your group’s proposed potential Let’s take a
risk treatment . Risk before we
proceed…
(Write you answers in 1 whole
yellow pad and submit next
meeting)
1. RISK AVOIDANCE
2. RISK REDUCTION (OPTIMIZATION)
3. RISK SHARING
4. RISK RETENTION
(ACCEPTANCE)
AREAS OF RISK MANAGEMENT

1. Enterprise Risk Management (ERM)

2. Risk management activities as applied to

project management

3. Risk management for megaprojects

4. Risk management of information

technology

5. Risk management techniques in

petroleum and natural gas
 Simplified Framework for Enterprise-
Wide Risk Management Process
TOP MANAGEMENT’S
RISK MANAGEMENT SYSTEM
INVOLVEMENT

OVERSIGHT ACTIVITIES:

Define goals & objectives, roles and

Set management policy, establish
responsibilities, common language &
context, set limits & tolerances, etc.
oversight structure.

RISK MANAGEMENT PROCESS:

Simplified Framework for Enterprise -Wide Risk Management
Process (continued)

TOP MANAGEMENT’S
RISK MANAGEMENT SYSTEM
INVOLVEMENT

RISK MANAGEMENT PROCESS:

Step 1: Assess Risks Ensure that process captures all

Identify, source, measure business risks.

Step 2: Develop/Design
Ensure that all available tools and
Action Plans: Reduce, avoid, retain,
methodologies are used.
transfer, exploit

Review effectiveness of plans. Check

Step 3: Implement Action Plans
capabilities.

Step 4: Monitor and report risk Review and evaluate regular reports
management performance on performance.

Step 5: Continuously improve risk Evaluate recommendations for

management capabilities improvement.
Simplified Framework for Enterprise-
Wide Risk Management Process

5 Ke y P r i n c i p l e s ( h t t p s : / /w w w. t e c h no - p m. c o m / b l o g s / ra i d / e nt e r p ri s e - ri s k - ma n a g e m e nt )
RISK MANAGEMENT FRAMEWORK

• Should guide the Board in identifying

units /business lines and enterprise -level risk
exposures, as well as the effectiveness of risk
management strategies

• Board Risk Oversight Committee (BROC) is responsible

for the oversight of the company ’s ERM system.

• BROC consists of at least 3 Board members , majority

are independent directors .

• At least one member of the BROC must have relevant

thorough knowledge and experience on risk and risk
management.
STEPS IN RISK MANAGEMENT PROCESS
1. Set up a separate risk management committee.

2. Ensure that a formal comprehensive risk management system is in place.

3. Assess whether the formal system possess the necessary elements.

a) Goals & objectives

b) Risk language identification

c) Organization structure

d) Risk management process documentation.

Monitor, report Continuous

Develop – Implement –
Assess - risks – RM improvement –
action plans action plans
performance RM capabilities
STEPS IN RISK MANAGEMENT PROCESS (continued)

4. Evaluate the ef fectiveness of various steps in assessing risks.

5. Assess if management has developed and implemented the suitable risk

management strategies and evaluate ef fectiveness.

6. Evaluate if management has designed and implemented risk management

capabilities.

7. Assess management’s ef for ts to monitor overall company risk management

per formance and to improve continuously the f irm’s capabilities.

8. See to it that best practices as well as mistakes are shared by all.

9. Assess regularly the level of sophistication of the f irm’s risk management system.

10.Hire exper ts when needed.

End of Chapter 11
THE WAY TO
GET STARTED
IS TO QUIT
TALKING AND
BEGIN DOING.

Walt Disney