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BTF > Chapter 5 - Introduction to Risk Management > Flashcards

Chapter 5 - Introduction to Risk Management Flashcards

1
Q

What is Risk?

A

Proportion variation in an outcome from what is expected to happen

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2
Q

What does variability mean?

A

Range of possible outcomes

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3
Q

What does expectation mean?

A

What we expect to happen (not what we hope will happen)

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4
Q

What does outcome mean?

A

What actually does happen

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5
Q

What is uncertainty?

A

Inability to predict outcomes because of a lack of information

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6
Q

What does Risk averse attitude mean?

A

An investment would be chosen if it has if it has more certainty but possibly a lower return than an alternative less certain, potentially higher return investment

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7
Q

What does Risk neutral attitude mean?

A

An investment would be chosen according to its expected return, irrespective of the risk.

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8
Q

What is the Risk seeker attitude

A

An investment would be chosen on the basis of it offering higher levels of risk, even if its expected return is lower than an alternative no-risk investment with a higher expected return.

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9
Q

What are the three types of risk?

A
  • Business Risk?
  • Financial Risk?
  • Operational Risk?
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10
Q

What does business risk include?

A
  • Strategy
  • Enterprise
  • Product
  • Financial
  • Sustainability
  • and Climate*
  • Operational
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11
Q

What does financial risk include

A
  • Controllable
  • Uncontrollable
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12
Q

What are the types of operational risk?

A
  • Process
  • People
  • System
  • Event*
  • Cyber
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13
Q

What does sustainability and climate risk include?

A
  • Increased occurrence of drought and/or flooding, extremes of temperature that cause damage to the supply chain and property
  • Impact on reputation of business that is seen not to be acting sustainability or is damaging the environment
  • If sustainability is not included in the strategic decisions making process
  • The risk of not meeting regulations regarding emission and other climate related regulation
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14
Q

What is Event Risk?

A
  1. Disaster: catastrophe occurs such as a fire, flood etc
  2. Regulatory: New laws or regulations are introduced
  3. Reputation: Risk of damage to the business’s reputation
  4. Systemic: Failure by a participant in the business’s supply chain
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15
Q

What does Risk Measurement mean?

A

Identifies the probability of the risk occurring and quantifies the resultant impact and calculating the amount of potential loss using expected values for gross risks

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16
Q

What does probability mean

A
  • Measures likelihoodW
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17
Q

What does impact mean?

A
  • Measures the size of loss
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18
Q

What does exposure mean?

A

Measure of the way in which business is faced by risks

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19
Q

What does volatility

A

Measurement of the variability of a risk factor

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20
Q

What are descriptive statistics?

A

Used to describe a set of data. A set of data could be a whole population i.e. representative number of items of data.

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21
Q

What are the measures of central tendency

A
  1. Mean - Average
  2. Median - Middle
  3. Mode - Most common
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22
Q

What are the expected values?

A

An expected value is a long run average

Formula for expected value is EV = Sum of PX

P = Probability
X = Occurring

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23
Q

What are the three measures of dispersion or spread?

A
  1. Range - difference between high and low
  2. Deviation - How far from the mean (x-x̄)
  3. What does variance mean? average of the squared deviations of all the values in a data set.
24
Q

What is the standard deviation?

A

Square root of the variance

25
Q

What does the Coefficient of variation?

A

What does standard deviation divided by the mean

26
Q

What is Risk management?

A

Identification, analysis and economic control of risks which threaten the assets or earning

27
Q

What is the Risk management process?

A
  1. Risk awareness and identification
  2. Risk assessment and measurements
  3. Risk response and control
  4. Risk monitoring and reporting
28
Q

What are the techniques of identifying risks?

A
  1. PEST/SWOT analysis
  2. External advisors
  3. Interviews/questionnaires
  4. Internal Audit
  5. Brainstorming
29
Q

What are the five different categories of loss which can be considered?

A
  1. Property loss - property
  2. Liability loss - Loss occurring from legal liability to third parties
  3. Personnel loss - Due to injury, sickness and death of employees
  4. Pecuniary loss - as a result of defaulting debtors
  5. Interruption loss - being unable to operate.
30
Q

What is the Risk Assessment

A

Considers the nature of each risk and the implication it might have for the business achieving its objectives

31
Q

What is risk measurement

A

Identifies the probability of the risk occurring and quantifying the resultant impact consequences and calculating the amount of the potential loss using expected values for gross risk

32
Q

What is gross risk

A

Potential loss associated with risk, calculated by combining the impact and the probability of the risk before taking any control measures into account.

33
Q

What is the equation for gross risk?

A

Gross Risk = Probability x Impact

34
Q

What is the Impact and Probability of Sharing Reduction

A
  • High impact
  • Low probability
35
Q

What is the Impact and Probability of Accepted?

A
  • Low impact
  • Low probability
36
Q

What is the Impact and Probability of Avoidance Reduction Share

A
  • High impact
  • High probability
37
Q

What is the Impact and Probability of Reduction

A
  • Low impact
  • High probability
38
Q

What is a risk management map?

A

Used to assess risk

39
Q

What is the TARA model?

A

Provides an outline of general risk responses

  1. Transfer (Sharing)
    - Transfer risk to a third party
    - E.g. insurance, hedging
  2. Acceptance (retention)
    - Tolerating losses when they arise
    - For small risks could be cheaper than insurance (self-insurance)
  3. Reduction
    - Retain the activity but take action to limit risk to acceptable levels

Mitigating controls:
- Preventative
- Corrective
- Directive
- Detective

  1. Avoidance
    - Avoid downside by not undertaking/terminating risky activities
    - Usually lose upside potential as well.
40
Q

What does ALARP mean in Risk Responses

A

ALARP - All low as reasonably practicable

Employers are expected to take action to reduce risk faced by employees to a level that is reasonably practical

41
Q

What does reasonably practical mean?

A

Risk of the event occurring reducing to a level that is proportional to cost required to reduce the risk any further. Which will outweigh the benefit

42
Q

Why should we monitor risk?

A
  1. Measure effectiveness of current risk management process
  2. Whether risk profile is changing
43
Q

What does the Corporate Governance Code required listed companies

A
  • Determine the nature and extent of any risks the company is willing to take in order to achieve its objective
  • Report risk management issues
44
Q

What is a crisis

A

Unexpected event that threatens the wellbeing of a business, or a significant disruption to the business

45
Q

What are the different types of crisis?

A
  • Nature event e.g. earthquake causing physical disruption
  • Industrial accident e.g. building collapse or fire
  • Product or service failure e.g. produce recall or health scare
  • Public relations disaster e.g. unwelcome media attention or adverse publicity
  • Business crisis e.g. loss of key supplier or customer
  • Management crisis e.g. hostile takeover bid or loss key management
  • Legal/regulatory e.g. new regulation increases costs
46
Q

What does crisis management involve?

A

Identifying a crisis, planning a response to crisis and confronting and resolving the crisis

47
Q

What is business resilience?

A
  • Considers an organisations ability to manage and survive
48
Q

What are the two axes for understanding an organisations resilience

A

Axes 1: Processes and functions to protect the organisation

  • Risk management
  • Business continuity planning
  • Security
  • IT disaster recovery
  • Health and safety
  • Crisis management
  • Internal audit
  • Governance

Axes 2: General organisational characteristics driving resilience

  • Employee trust in management
  • Customers trust in the organisation
  • Ability to innovate
  • Clear values
  • Values linked to behaviour
  • Effective risk management
  • Morale
  • Leadership involvement
49
Q

What are external changes?

A

Strict new laws, severe economic recession, politically uncertainties and disruptive technologies

50
Q

What are planned changes?

A

Major overseas investment, closure of significant operation, launch of new strategic direction

51
Q

What are common features of resilient organisations?

A
  • Diversified resources to facilitate adaptability to deal with changes
  • Strong internal and external network of relationships
  • Rapid and decisive response to emerging crisis
  • Self-review and adaptation to meeting changing circumstances
52
Q

How can resilience measuring

A
  • Compliance e.g. own internal policies and standards
  • Completeness e.g. the breadth of their readiness
  • Value e.g. qualitative and quantitative measures
  • Comparability/capability e.g. testing and reviewing processes and procedures response to potential shocks
53
Q

What is disaster?

A

When a business operation, or significant part of them, break down for some reason leading to potential losses of equipment, data or funds.

54
Q

What are the types of disasters?

A
  • Major crisis causing a breakdown in operations and resultant losses
  • Event which results in serious consequences
55
Q

What are disaster recovery plan?

A
  • Define responsibilities
  • Prioritise actions
  • Establish back-up and standby arrangement
  • Communicate with staff
  • Establish PR
  • Risk assessment

BTF (13 decks)

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