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
do? Anything that poses a risk
to what your organisation is
trying to do needs
considering; this will include
 social,
 economic,
 legal,
 technological or environmental
factors.
 You may not be able to control
some of these factors but you
can minimise the risk they
might pose.
 The Stockholders are individuals
who may affect, of be affected by,
any of your decisions on risk
management. Stakeholders include
 employees,
 volunteers,
 visitors,
 insurance organisations,
 government and suppliers.
 Each stakeholder will have
different needs, concerns and
opinions; it is important to
communicate with the
stakeholders during the risk
management process.
 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