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ITS835_Spring_1G_2019_Week5.pptxITS 835 Enterprise Risk Management
Week 5: More Risk Management Special Cases
1
Week 5 – ITS 835
Read the following chapters
Chapter 22, “JAA Inc.—A Case Study in Creating Value from Uncertainty: Best Practices in Managing Risk”
Chapter 25, “Uses of Efficient Frontier Analysis in Strategic Risk Management: A Technical Examination”
Complete the following no later than end of day Monday Feb. 11
Post to week 5 discussion
Submit Risk Management Assignment 3
Chapter 22, “JAA Inc.—A Case Study in Creating Value from Uncertainty: Best Practices in Managing Risk”
Details about ERM implementation in a fictional international organization
Governance structure, the processes and tools used
Built on the principles and guidance of ISO 31000 and The Australian and New Zealand Hand Book HB 436
Roles of heads of internal audit function and risk management function
Context of case study
Five years ago company embarked in ERM implementation
CIA (Chief internal auditor) and CRO (Chief Risk Officer) actively involved in the ERM initiative
Five years ago company undergoing regulatory audits and employee morale was low
At present the company has been able to satisfactorily address these issues and won numerous awards and recognition for its risk management program
JAA Inc- Background
Commenced as a private company in 1972
Company went public in 1988
Listed on major stock exchanges and headquartered in Chicago
Three operating segments (Wholesale, retail and international)
57 retail stores in 10 different countries
Strong executive and senior management teams
Purchase of fabric from 50 key suppliers
Effective management of risk was identified by the management as being critical to JAA’s success
JAA- Strategic Objectives
JAA- Governance Structure
Evolution of ERM
ERM throughout the company
Identifying the source of the problems
Risk Management effort based on guidelines from ISO 31000 and HB 436
Detailed gap analysis
Training for employees catered to their role
Establish a new corporate culture
Risk Management policy developed
Risk Management policy became the foundation of the company’s risk management framework
Context for Risk Criteria
Defining Risk Criteria
Scales for each consequence type addressing both quantitative and qualitative
The likelihood and probabilities
Rules for evaluating risks based on risk management policy
Risk Profile
Risk Map
Lessons Learned
Senior management support and involvement
Guidelines based on ISO 31000 and HB 436
Governance structure
Improved financial performance
Risk Management policy
Comprehensive approach integrated in to the strategic objectives
Chapter 25, “Uses of Efficient Frontier Analysis in Strategic Risk Management: A Technical Examination”
Covers an advanced analytical technique
Efficient frontier Analysis (EFA)
Risk Portfolio volatility, pricing and insurance layering efficiency
RIMS
Risk and Insurance Management Society (RIMS)
Strategic Risk Management- sustainably deliver a robust fact-based strategic dialog across the entire organization
Efficient frontier analysis (EFA)
Strategic Risk Management Diagram
Modern Portfolio Theory (MPT)
Foundation for efficient frontier analysis
MPT is a mathematical method developed in 1950s
Maximization of portfolio return while minimizing the risk for a given amount
Case Study
Large Corporation
Three basic insurance risks- Earthquake, workers compensation and general liability insurance
Seek to optimize the portfolio and insurance purchase
Case Study findings – example- Earthquake options
Case Study- Findings- Combined Portfolio Options
Applicability based on Lam (2003)
Managing risk is management’s job
Managing risk can reduce earnings volatility
Managing risk can maximize shareholders value
Risk management promotes job and financial security
Limitations
Asset returns are normally distributed random variable
Correlations between assets are fixed and constant forever
All investors have access to the same information at the same time
Risk and volatility of an asset are known in advance and are constant
Behavioral concerns with market participants
Conclusions- EFA
Risk framework and quantitative methods
Establish risk profile
Estimate financial proximity between risk elements and risk mitigation effectiveness
Volatility producing properties
Need to consider the challenging quantitative questions as well
This week
Complete week 5 discussion
Complete the Risk Management Assignment 3
