Transcript A Risk Management Methodology

Scenario Analysis
A Risk Management Methodology
Gert Cruywagen
What do the following have in
common
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Sail ship companies
Stage coach operators
Steam railroad companies
Beta VCR machines
Barings Bank
Nokia
Greek corner cafes
“Risk comes from not knowing
what you are doing”
Warren Buffet
Remember
 A risk is not only a bad thing happening,
 It is also a good thing NOT happening
Diversification/
Wrong strategy
Changes in demand/
demographics
Technology
change
Increased
competition
PROTECTION EFFICIENCY GROWTH
STRATEGIC
OPERATIONAL
Loss of
key staff
Supply
chain failure
Low employee
productivity
Employee
dishonesty
Legal/ Contractual
compliance
Major
customer
default
Loss of
suppliers
Exchange/ interest
rate fluctuation
Commodity price
fluctuation
FINANCIAL
GROWTH EFFICIENCY PROTECTION
GROWTH EFFICIENCY PROTECTION COMPLIANCE PROTECTION EFFICIENCYGROWTH
Pollution
IT security
breach
Major destruction
of assets
Physical security
breach
Employee
safety
Business interruption/
Lack of recovery plans
Product liability/ recall
HAZARD
False Expectation
• How can you expect Management to deal in a confident,
structured and planned manner with unexpected catastrophic
events or unexpected opportunities;
• if these events were not identified and assessed, if there are no
plans to deal with the events and if no provision is made to deal with
the effects of the events.
UNIVERSITY OF OXFORD STUDY SHOWED:
• During times of disaster, the performance of the
company’s share price is totally independent from the
presence or absence of insurance cover
• The share price was influenced by the market’s
perception of management’s ability to manage the
disaster (risk)
RISK ASSESSMENT
The systematic identification of undesired events
and their causes, as well as real and potential
opportunities, analysing their likelihood of
occurrence and potential consequences or upsides
in order to make a value judgement as to the
acceptability or tolerability of the risk.
Risk Evaluations
• Deliverable of risk assessment must be a risk
profile:
• Risks measured in terms of “deviation from business
objectives”
• Risks prioritised according to criticality to company
• Can only deal with 10-15 critical risks at any one time
• Both upside and downside of risks are identified and
measured (each with own identity)
• Each risk must show KPI’s
• Integral part of risk profile must be potential risk
responses to address the risk
Risk Integration and Planning
• Identify for each risk scenario interventions required
to reduce the probability of the risk occurring and /or
reduce the severity (impact) if the risk manifests:
• The Past
Today
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Treat
Transfer
Terminate
Tolerate
Avoid
Treat
Take / Exploit
Transfer
Tolerate
Terminate
Integrate
Spectrum of ERM Strategies
Compliance
Regulatory
Business
Imperative
Best
Practice
Strategic
Tool
Risk Management Business Plan:
Typical time frames for
implementing ERM
activities:
RISK GOVERNANCE
RISK ASSESSMENTS
RISK
QUANTIFICATION &
AGGREGATION
RISK REPORTING &
MONITORING
RISK & CONTROL
OPTIMISATION
PHASE 1
PHASE 2
PHASE 3
PHASE 4
PHASE 5
BOARD RISK
COMMITTEE
RISK MANAGEMENT
FRAMEWORK
RISK STRATEGY
ERM
MATURITY REVIEWS
RISK AWARENESS
CAMPAIGNS
WORKING RISK
COMMITTEES
RISK MANAGEMENT
STRUCTURES
RISK
TOLERANCE +
APPETITE
ALIGNMENT WITH
STRATEGY
PLANNING
CULTURE & CHANGE
MANAGEMENT
RISK
IDENTIFICATION
WORKSHOPS
BUSINESS
RESILIENCE
MODELLING
DATA ANALYSIS &
FORECASTING
RISK-BASED
SCENARIO
PLANNING
ADVANCED
TECHNICAL
TECHNIQUES
RISK CATEGORIES
TREND ANALYSIS
PORTFOLIO
ANALYSIS
CORPORATE
FAILURE MODELS
STAKEHOLDER
SURVEYS
SIMPLE RISK
RANKING
IMPACT &
PROBABILITY
CHARTS
MONETARY
QUANTIFICATION
PERFORMANCE
DRIVERS
IMPACT OF RISK ON
SHAREHOLDERS
RISK FACTORS AND
PRIORITISING
SIMULATION CHARTS
VALUE AT RISK
RISK-ADJUSTED
BUDGETING
RISK-ADJUSTED
RETURN ON CAPITAL
BASIC INTERNAL
REPORTING
BALANCE SHEET
TOLERANCE
RISK TOLERANCE
LIMITS
BALANCED
SCORECARD
REAL-TIME RISK
MONITORING
ANNUAL REPORT
DISCLOSURES
INCIDENT
REPORTING
PROTOCOLS
KEY RISK
INDICATORS
EMERGING RISK
WARNING SYSTEM
REAL-TIME RISK
REPORTING
CONTROL SELFASSESSMENTS
BUSINESS
CONTINUITY PLANS
RISK IMPROVEMENT
PROJECT PLANS
ERM CONTROL
STANDARDS
RISK APPETITE
MAXIMISATION
ACTION PLANS &
PROJECTS
INTEGRATED
ASSURANCE PLANS
ERM TRAINING &
SKILLS
ERM CONTROL
AUDITS
RISK-BASED
OPPORTUNITIES
Potential Risk Scenarios
A critical part of ERM is identifying all potential risk scenarios that may impact the organisation, to enable risk
mitigation planning and definition of Key Risk Indicators
SAMPLE
Frequency
Retained/
Captives
Workers'
Comp.
> 1 x per year
Interest
Rates
Clinical
Trials
> 1 x per 20 year
Employers'
Liability
Low
Negative
Publicity
R&D
Investment
Patent
Infringement Product
Recall
D&O
Environmental
Risk
Political Nat.
Cat.
Risk
Medium
Regulatory
Product Recall
Product
Liability
High
Severity
(% of Earnings Affected)
Risk Measurement
Choice reflects the data available and the view on the value of quantification
efforts
Degree of
Sophistication
HIGH
Key Factors Impacting
Selection of Risk
Measurement
Methodologies
 Statistical Analysis (Probabilistic
Models)/Bayesian Modeling
 Scenario Analysis/Simulation/Influence
 Sensitivity Analysis
 Severity or Volatility of Risk
 Complexity
Risk Measurement/
Analytical Techniques
MODERATE
 Position Reports (Exposure
Measurement/Volumetric Measurement)
 Risk Rating or Scoring
 Availability of Data
 Risk Indicator Analysis
 Desired Capability
 Group Facilitated Qualitative Prioritization
 Cost of Implementation
 Individual Qualitative Self-Assessment
LOW
Scenario planning for global economy
Hard Times
Forked lightning
30%
10%
20%
One World
Divided world (Ultra violet)
Old world
40%
Emerging economies
Scenario planning for global economy
Hard Times
30%
20%
One World
Below 5%
Drop in US unemployment
Forked lightning
Drop in debt to GDP ratio
Divided world (Ultra violet)
10%
40%
8-10%
US 10yr bond above 5%
OTHER EVENTS:
• War in ME (Iran)
• Major EU defaults
Old world
Emerging economies
Current SA Game Board
Internal Conflict
(Visible war)
Premier
League
Ruled
Out
60%
2006
37/55
2010
43/55
2009
48/55
2007
50/55
2008
53/55
10%
Failed Sate
(Afghanistan,
Somalia, etc)
40%
Second Division (Poor but peaceful)
Current SA Game Board
Internal Conflict
(Visible war)
Ruled
Out
60%
Premier
League
2006
37/55
2010
43/55
2009
48/55
2007
50/55
2008
53/55
Harmony
Conflict
Violence
Nationalisation
Inclusive leadership
Pockets of excellence
Balanced economy
Media tribunal
Second Division (Poor but peaceful)
Failed Sate
(Afghanistan,
Somalia, etc)
Land grabs /ownership
10%
40%
Closer to home
 Risk Scenarios
 Opportunity scenarios
Closer to home
 Risk Scenarios
 What is the worst thing that can happen?
 What do you wish never happens?
 How will it look?
 Best case
 Worst case
 Probable case
 What will cause it to happen?
 What do you do about it!!
Closer to home
• Opportunity scenarios
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What is the best that you can hope for?
When will your business fly?
How will it look?
What new opportunities are there?
What will cause it to happen?
What can you do to help this along?
Thank You