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1. Risk, Terminology, ERM

1. Risk, Terminology, ERM. Bus 200 Introduction to Risk Management and Insurance Fall 2008 Prof. Jin Park. Based on “Uncertainty” Uncertainty concerning the occurrence of a loss Based on “Expected Value” Deviation from expectation. Pure vs. Speculative Risk. Objective vs. Subjective Risk.

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1. Risk, Terminology, ERM

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  1. 1. Risk, Terminology, ERM Bus 200 Introduction to Risk Management and Insurance Fall 2008 Prof. Jin Park

  2. Based on “Uncertainty” • Uncertainty concerning the occurrence of a loss • Based on “Expected Value” • Deviation from expectation

  3. Pure vs. Speculative Risk

  4. Objective vs. Subjective Risk

  5. Fundamental vs. Particular Risk

  6. 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

  7. Hazard • A condition that creates or increases the chance of losses, their severity, or both. • Physical hazard • Moral hazard • Morale hazard • Legal hazard

  8. Types of Pure Risk • Personal Risk • Property Risk • Direct Loss • Indirect Loss • Liability Risk

  9. 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.

  10. 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 10

  11. Key Implementation Requirements 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 11

  12. Enterprise Risk Management Organizational Business Operations Financial Risk Management Market Insurance Credit Credit Insurance Insurance Insurance 1970s 1980s 1990s (Deregulation) Example: Energy Industry 12

  13. In the Financial Markets Within a Company Enterprise Risk Management Insurance Products Risk Managers ART (Alternative Risk Transfer) Chief Risk Officer Treasurer/ Insurance Derivative Products Audit/Compliance Credit Risk Loan default Counterparty exposure Vendor risk Market Risk FX Interest rates Commodities Liquidity risk Operational Risk Process risk Technology risk Regulatory risk Reputational risk Risk Management and Insurance & the CRO 13

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