Managing the Risk
Joseph Anbarasu
Various Risks
Liability Business Operational
Market Risk Credit Risk
Risk Risk Risk
Default and
Equity Mortality Volume Operational
Downgrade
Credit
Property Morbidity Lapse
Spread
Interest Reinsurer
Catastrophe Expense
Rate Credit
Longevity Pricing
Market Risk
This captures the worst case
value change over the one-
year time period as a result of
changes in specified financial
risk factors for example,
equity and real estate returns,
and
yield curve shifts,
The changes are applied to
policyholder liabilities,
assets backing these liabilities
and
the assets not directly backing
these liabilities.
Credit Risk
This captures the worst
case value change over
the one-year time
period as a result of
credit defaults,
rating changes and
spread moves,
the changes are applied
to fixed interest
holdings and receivables
of the company.
Liability Risk
This captures the worst case value
For life insurance, this relates to
change over the one-year time the fluctuations in the incidence of
period as a result of fluctuations in mortality,
current insurance claims experience longevity,
and revisions to estimates of future morbidity and
insurance claims experience. insured accident and
disability events.
For general insurance, this relates
to the
adequacy of existing reserves to
meet claims arising from elapsed
exposure periods, and of
earned premiums over the scenario
period to meet claims arising from
that period of exposure (including
claims arising from catastrophes).
Business Risk
This is the fundamental
risk associated with 'being
in business'. It captures
the worst case value
change over the one-year
time period due to
fluctuations in volume,
margin,
expenses and
lapse experience (including
only non-market related
lapses).
Operational Risk
This captures the worst case value
change over the one-year time
period due to the occurrence of
unexpected one-off events
(internal or external) in relation
to people, processes or systems.
Examples include
systems failure,
process errors,
control failures,
fraud,
litigation,
staffing issues,
regulatory breach and external
disruption..
Risk Management
Meaning
Beneficiaries
Methods
Customs
What
What isis Risk
Risk Management?
Management?
Good management
practice
Process steps that
enable improvement in
decision making
A logical and systematic
approach
Identifying
opportunities
Avoiding or minimizing
losses
Meaning
The process of
identification,
analysis and
either acceptance
or mitigation of uncertainty
in investment decision-
making. Sub-Prime Large Scale
Failures
Borrowers Lending
Example
the recession that began in
2008 was largely caused by
the loose credit risk
management of financial
firms.
Risk Management
Risk Management is a
methodology that
helps managers make Analysis
best use of their Risk
• Quantitative
Identification • Qualitative
available resources
Risk Risk
Monitoring Response
and Control Planning
Beneficiaries
Risk Management
practices are widely used Finance and
in public and the private Insurance
Investment
Companies
sectors, covering a wide Companies
range of activities or
operations. Health Care Public
Companies Institutions
Government
Organisations
Who uses Risk Management?
It is a unique and
specialized skill.
Risk Management is an
emerging course in the
universities and colleges
in India
The Risk Management
process is well
established. (International
RM process standards.)
Risk and Management
Risk Management is
now an integral part
of business planning.
How is Risk Management used?
The Risk
Step Management process
2 steps are a generic
Step Step
1 3 guide for
any organisation,
regardless of the
Step Step type of business,
7 4
activity or function.
Step Step Risk Management
6 5 Process has Seven
Steps
Basic Process Steps
Lay
down the
context
Treat the Identify
Risk the Risk
Evaluate Analyse
the Risk the Risk
Additional Process
Risk is dynamic and
subject to constant
change.
Therefore, the process Laying,
continues. identifying,
Analysis,
Therefore, monitoring Evaluating &
Managing the
and communication are Risk
• Monitoring and
continuous functions Review
• Communicating
and Consultation
Lay Down the Risk Context
What does your organisation The Stockholders are individuals
do? Anything that poses a risk who may affect, of be affected by,
any of your decisions on risk
to what your organisation is
management. Stakeholders include
trying to do needs employees,
considering; this will include volunteers,
social, visitors,
economic, insurance organisations,
legal, government and suppliers.
technological or environmental Each stakeholder will have
factors. different needs, concerns and
opinions; it is important to
You may not be able to control
communicate with the
some of these factors but you stakeholders during the risk
can minimise the risk they management process.
might pose.
Identify the Risks
How do you identify the • Physical Assets
different types of risks? Physical • Env. And Weather Conditions
• Personal Injuries
Look at records of
previous activities, events • Fees, Insurance costs, Loss
or exhibitions Financial • Theft,
• Fraud,
Examine the results of
personal, local or • Local Govt.
overseas experiences Legal • State and
• Burden from Central Govt.
Interview/survey
stakeholders an Individual
Analyse specific scenarios.
Ethical or • Potential Harm to the belief of
Moral • Actual harm
Analysis of Risk
In analysing
decide on the
Extreme Risk High Risk
• Immediate • Action
relationship between the
Action
• Potential to
• Potential to
damage
likelihood of a risk
destroy occurring
the consequences of the
risk you have identified.
Moderate Low Risk
Risk • Manage with
define the level of risk and
• Allocate Specific routine
Responsibility procedure what it means in terms of
• Slow poison • Potential to be
High risk managing the risk.
Evaluation of Risk
Your evaluation will take into • It does not
account the following: So Low warrant spending
time and Money
the importance of the
Risk
activity you are risk
managing and its outcomes
the degree of control you • Benefit
overweigh the
have over the risk Low cost
the potential and actual
losses which may arise from
the risk • Opportunities out
the benefits and of bearing risk is
opportunities presented by Threat greater than the
threat
the risk.
Manage the Risks
The next step in the risk Avoid
management process is Choose Another Way
managing your identified
risks. You can do this by:
Control
Identifying options to Reducing the Likelihood
treat the risk
Selecting the best
treatment option Transfer
Preparing a risk treatment Shifting or sharing the risk
plan
Implementing a risk
Retain
treatment plan
Accept the risk if previous actions not possible
Treat the Risk
Document your risk
management plan and
describe the reasons
behind selecting the risk
and for the treatment
chosen.
Record allocated
responsibilities,
monitoring or evaluation
processes, and
assumptions on residual
risk.
Monitor and review
In identifying, Risk Managers must
prioritising and treating monitor activities and
risks, organisations processes to determine
make assumptions and the accuracy of planning
decisions based on assumptions and the
situations that are effectiveness of the
subject to change, (e.g., measures taken to treat
the risk.
the business
environment, trading
Methods can include data
patterns, or government evaluation, audit,
compliance
policies).
measurement.
The Risk Management process:
Lay down the Identify the Risk Analyse the Risk
context • Monitoring and • Monitoring and
• Monitoring and Controlling Controlling
Controlling
Treat the Risk Evaluate the Risk
• Monitoring and • Monitoring and
Controlling Controlling
