Top Risk Management Concerns

This was apparently a survey done by the Conference Board that highlights the top 5 concerns among executives world-wide and I find similarities in listing our top concerns as we assessed the impact of the financial crisis to this organization culminating in our common concerns across all businesses :

1. Economic slowdown


2. Project/CAPEX spending


3. Customer


4. Supplier


5. Financial (which includes liquidity, counter-party, FX and interest rate risks)

The Year 2008 for FRM

It has been a busy year for all of us here in this division and nonetheless, for the FRM team. The FRM team has, against all odds,

• multitasked
• managed projects
• coordinating cross-departmental analysis
• responding quickly to demanding clients
• responding to the financial crisis
• co-operated in divisional initiatives in good spirits
• asserting their opinions where they have to, having a firm stand on principles, taking the lead in initiatives and tasks, taking the lead in discussions

achieving many incremental steps and giant leaps that makes me proud to have had the opportunity to work with you and learn from you in that process.

The year 2008 is also the year where we welcomed new members to FRM : Ghaf, Fiza, Nabil, Emylia, Eyna and Maheran. Your learning curve has been steep, I know, but you are all achievers and you bravely responded to all the challenges that a new organization brings about.

This year we also saw team members leave for the better : Wis2 to TBS, Idah to A&O, Tris to FI and Rita to Group Risk. I thank you for your contributions to FRM and I hope the FRM experience will be of value to you throughout your career, wherever that may be in future.

Which leaves the old timers, Haslina, Ray2, and Seed (even though Ray2 and Seed to their benefit is not as old a timer as Haslina) : How can I describe you? Steadfast, guardian, mentor, guiding and coaching, persistent, challenge the conventional, thought partners to your colleagues, you have been there for the new team members and you held your own, too, with the work stuff that lands on your desk from within and externally.

Thank you to Elie for your unwavering support to me and the team. Thank you.

So with that I leave you these quotes :

For new team members :

Coming together is a beginning. Keeping together is progress. Working together is success.

For those who have left us :

You are what you think. You are what you go for. You are what you do!

And for Haslina, Ray2 and Seed :

A difficult time can be more readily endured if we retain the conviction that our existence holds a purpose - a cause to pursue, a person to love, a goal to achieve.

And to all,

A true measure of your worth includes all the benefits others have gained from your success.

I certainly have gained experience and knowledge from the FRM team's achievements especially this year where it has been challenging for all of us!

Happy New Year and happy year end holidays to all!

Looking beyond models

This article serves my point that fixation with risk models and complacency with having these models is dangerous and the results from risk models must be applied in the right context and combined with good, common sense judgement.

From the CROForum

Excerpts from http://www.croforum.org/home.ecp

What has been learnt in the light of the crisis

A good deal of the pre-crisis discussion went around the details of risk modelling. If there is one thing the crisis reinforces, it is: Risk management is much more than models. The CRO Forum believes that risk models are indispensible for managing the business.
However the risk models must be – and in many cases are already – complemented with Internal Controls, such as risk concentration limits on a notional gross and net basis, Probable Maximum Loss (PML) limits, or stress and scenario testing. Finally, there is no substitute for a deep understanding of the risks involved in the business – and for common sense.

Every crisis of this dimension is associated with fundamental changes of business
models and hence implies changes of basic parameters. Parameter values, e.g. default
probabilities and equity market stresses, which have been estimated from pre-crisis times may no longer be adequate during and maybe even after the crisis. Risk management isjust as much about preparing for what has not happened as it is for understanding and preparing for what has been experienced in the past. Stress tests and scenario planning can address the problems related to system change.


Given the huge market value losses in certain financial institutions, the CRO Forum
believes that Risk Management must be viewed as an investment into the company's
future rather than simply as a cost factor. We expect to see management and regulators
seeking to further strengthen ERM functions, resulting in growing powers and
responsibilities of CROs and their teams. Given the role of risk management as second
line of defence after line management, it is important that risk teams have the freedom
and the capability to take an independent view from business management. A word of
caution here: independence does by no means imply ignorance. We are firmly convinced that both operating units and risk management functions need a deep understanding of the business. Independence has to be supplemented by mutual understanding and respect. Hence risk management will increasingly become an integral part of the business.

Managing in the Downturn : Boosting liquidity

Summary of the Economist article

Drivers

• Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations.
• Opinions differ as to how long and deep the global slowdown might be. But the combination of a battered banking system and shell-shocked consumers mired in debt suggests it could be particularly hard for many businesses, whatever the duration.
• For the foreseeable future, bank credit is likely to be harder to come by and will certainly be more expensive than when the financial crisis began.

Cash boosting strategy

• Companies have tapped new pools of capital, like sovereign-wealth funds, to bolster their finances. In July GE, an American conglomerate, set up an $8 billion, 50-50 joint venture with Mubadala, an investment arm of Abu Dhabi, to invest in areas such as clean energy and aviation.
• Sell businesses no longer central to a firm’s strategy. Although prices for corporate assets have been depressed by the downturn, this has not deterred some companies from putting them up for auction. This week, for instance, GM and Ford sold shares in Suzuki and Mazda respectively. By selling their stakes back to the Japanese firms, the American carmakers raised a total of $770m of badly needed liquidity.
• Letting less cash go out of the door. Several big companies including Alcoa, an American aluminium giant, Target, an American discount retailer, and AkzoNobel, a Dutch firm that makes paint and specialty chemicals, have recently cancelled plans to buy back shares using what was previously viewed as excess cash. Companies are starting to trim dividends too, though this will be unpopular with investors expecting a regular stream of income.
• Stretching out the payments on bank debt can also preserve cash. And firms should look out for opportunities to refinance existing loans early to give themselves greater financial flexibility.
• Put under the microscope a company's working capital, or the cash that gets tied up in day-to-day operations. “The first place to look for this money is in a firm’s inventory,” says Wayne Mincey, Hackett’s chief operating officer. All too often, poor sales forecasting and production planning mean that a lot of cash ends up trapped in a company’s warehouses in the form of unwanted products.

Oil and Gas News

Petrobras Bullish on Outlook for New Fields
http://www.ft.com/cms/s/0/00aa90ae-c7a6-11dd-b611-000077b07658.html

ExxonMobil to Invest in Refinery Expansion
http://www.ft.com/cms/s/0/27f2a81c-cb12-11dd-87d7-000077b07658.html

BP's Hopes for China Oil Growth
http://www.ft.com/cms/s/0/7646930e-c728-11dd-97a5-000077b07658.html

Reduced oil spending

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.

In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling.

But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.
Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.

The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle.

As familiar as the pattern may be, the changes this time are taking place at record speed. In June, some analysts were forecasting oil at $200 a barrel and companies were scouring the earth for new places to drill; now, no one knows how low prices may fall.

“It’s a classic — if extraordinarily dramatic — cycle,” said Daniel Yergin, chairman of Cambridge Energy Research Associates and author of “The Prize,” a history of the oil business. “Prices have come down so far and so fast, it’s become a shock to the supply system.”

The list of projects delayed is growing by the week. Wells are being shut down across the United States; new refineries have been postponed in Saudi Arabia, Kuwait and India; and ambitious plans for drilling off the coast of Africa are being reconsidered.

Investment in alternative energy sources like biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices.
These delays could curb future global fuel supplies by the equivalent of four million barrels a day within the next five years, according to Peter Jackson, an energy analyst at Cambridge Energy Research Associates. That is equal to 5 percent of current oil supplies.

One reason projects are being shut down so fast is that costs throughout the industry, which had surged in recent years, are still elevated despite the drop in oil prices. Many companies are waiting for those costs to come down before deciding whether to go forward with new projects.
“The global market has been turned upside down since the summer,” the International Energy Agency, a leading energy forecaster, said in a recent report.

In today’s uncertain environment, a slowdown in spending is inevitable, according to energy executives who are devising their budgets for next year. Last year, spending on exploration and production amounted to $329 billion, according to PFC Energy, a consulting firm. That figure is certain to fall.

“We’re in remission right now,” said Marvin E. Odum, the vice president for exploration and production for Royal Dutch Shell in the Americas. But once the economy picks up, he said, “the energy challenge will come back with a vengeance.”

Oil demand growth has weakened throughout the industrial world. The International Energy Agency projects that worldwide demand will actually fall this year, for the first time since 1983.
So much surplus oil is sloshing around the world right now that some companies, including Shell, are using oil tankers for storage.

Oil prices have declined by more than $100 a barrel since July, returning to levels last seen more than four years ago. They settled at $44.51 a barrel, down $1.77, on Monday in New York, as concerns about the economy outweighed efforts by oil producers to stem the slide in prices.
Prices could drop below $30 a barrel, according to Merrill Lynch and other forecasters, if the Chinese economy slows drastically next year, which looks increasingly likely.

Different companies have different price thresholds for going forward with drilling projects. But across the industry, a price drop this big has “a dampening effect,” according to Mr. Odum of Shell. “The big uncertainty is how long this economic environment is going to last.”

The biggest cutbacks so far have been in heavy oil projects in Canada, where some of the world’s highest-cost production is concentrated. Some operators there need oil prices above $90 a barrel to turn a profit.

StatoilHydro, a large Norwegian company, recently pulled out of a $12 billion project in Canada because of falling prices. Similarly, Shell, Nexen and Petro-Canada have all canceled or postponed new ventures in the province of Alberta in recent weeks.

Producers are bracing for a painful contraction, and the drop in prices could crimp investments even in places where production costs are low.

The Saudi monarch, King Abdullah, recently said he considered $75 a barrel to be a “fair price.” The kingdom, which has invested tens of billions of dollars in recent years to increase production, recently announced that two new refineries, with ConocoPhillips and Total of France, were being frozen until costs go down.

In neighboring Kuwait, the government recently shelved a $15 billion project to build the country’s fourth refinery because of concerns about slowing growth in oil demand.

The list goes on:

• South Africa’s national oil company, PetroSA, on Thursday dropped plans to build a plant that would have converted coal to liquid fuel.
• The British-Russian giant TNK-BP slashed its capital expenditure budget for next year by $1 billion, for a 25 percent reduction from this year.
• In North Dakota, oil drillers are scaling back exploration of the Bakken Shale, a geological formation recently seen as promising, where production is more expensive than in conventional fields.
  “People are dropping rigs up there in a pretty significant way already,” Mark G. Papa, the chief executive of EOG Resources, a small natural gas producer, recently told an energy conference.
• Another domestic producer, Callon Petroleum, suspended a major deepwater project in the Gulf of Mexico, called Entrada, weeks before completion because of what it described as a “serious decline in project economics.”
  According to research analysts at the brokerage firm Raymond James, domestic drilling could drop by 41 percent next year as companies scale back.

“We expect operators to significantly cut their activity in the coming weeks due to the holiday season, and many of these rigs will not come back to work,” the report said.

As scores of small wells are shut down, analysts at Bernstein Research have calculated that oil production in North America could decline by 1.3 million barrels a day through 2010, or 17 percent, to 6.14 million barrels a day. This decline, rather than cuts by members of the Organization of the Petroleum Exporting Countries, “will be the catalyst needed for oil prices to rebound,” Neil McMahon, an analyst at Bernstein Research, said in a conference call this month. The United States remains the world’s largest oil consumer.

The drop in energy consumption could afford some breathing room for producers, which had been straining in recent years to match fast-rising demand. But analysts warn the world can ill afford a lengthy drop in investment in energy supplies. To meet the growth in global population and the rising affluence expected in the future, the world will need to invest $12 trillion in order to increase its oil and natural gas supplies, according to the International Energy Agency.
“If we cut back dramatically on investments, we could end up in a situation where supply growth goes flat when the economy starts to recover,” said Mr. Jackson, the analyst. “The steeper the decline, the steeper the response.”

Risk Roundtable : Rethinking Risk Management

The success (or even failure) of risk management in this organization really does depend on the specific situations in the company with its specific histories, cultures and management.

Being involved in numerous risk management efforts, discussions and debates throughout the organization, in a an advisory capacity or as a risk management practitioner, there seems to be a continuing gap in major areas of :

• what expectations are on the promise of risk management (integrated or ERM)


• the understanding of what risk management is all about


• the spectrum of risks that an organization faces


• the guidance amd directives in managing risks


• the roles and responsibilities in risk management


• the tools that are used to identify, assess and control risks
  

I am sure there are more areas than those that I have listed above. I believe these are the broad areas and anything else would probably form as a sub-category under any one of the above.

This gap has been evident through the feedback from our clients (subsidiaries), the satisfaction (or dissatisfaction) levels on expectations of risk management, risk management practitioners sense of what people's perception risk management is and what is actually happening on the ground, and more importantly in my view, the ability (or inability) to respond quickly, decisively to situations triggered by events that adversely impacts the organization.

To be able to close this gap, in considering the legacy of risk management in this organization, I believe the following steps are imperative :

• Being honest with ourselves on the state of risk management in the organization today and where we want it to be
  
  What were the successes and failures of the past? Leverage on successes, do not repeat the mistakes that led to failures.
  

What is the greatest complaint on risk management? This is to get the change perspective in risk management

What does strong risk management look like? Is there anywhere in the organization that we can see strong risk management already in existence? Can we leverage on that strength rather than re-inventing the risk management wheel? What measures do we use to define success in risk management?

How strong do you want risk management to be? Which relates to what is the tone from the top on risk management? How much weight and importance should risk management have in this organization?

What is risk management now? Is risk management a defense, or both offense and defense, compliance or coordination and integration?

• The answer to all of the above should help in setting a clear vision of what risk management should be in this organization. Without going into specifics, the vision for risk management should be "Integration of Risk in Decision-Making" with the mission being "Changing the Perpectives of Risk Management in the Organization"




• How should risk management change?

1

From Risk management treated as a check in the box i.e. completed list of things to do, risk management seen as a compliance againts rules
To Risk management is about understanding key risk drivers in decision-making and evaluating the impact of market risks onto these drivers and how this will change business decision
Risk helps robust decision-making
2
From Risk management is about reporting
To Ability to see the totality of risks will enable risk return trade off, assess marginal impact of risk decision-making, and direct targeted risk intervention by top level risk oversight function
“Risk of the whole is greater than sum of the parts”
3
From Risk assessment or risk profiling
To Risk management is excellence in execution, controls and the speed, flexibility and adaptability to change.
Confidence in risk exposures and the extent of mitigation in place
4
From Risk management is the job of risk managers
To Risk management is no different than any other business activity
Risk management and business strategy is inextricably linked and integrated in the business value chain.

To be continued

Oil Outlook : From USD200/bbl to USD30/bbl

Remember this piece of news? Where is the prespoterousness in this report now?

Now Goldman is predicting oil price to fall to USD30/bbl in the next three months.

Analyst warns of $200 crude oil
By Javier Blas and Chris Flood in London
Published: May 7 2008 03:00 Last updated: May 7 2008 03:00

Crude oil prices could surge to $200 a barrel in the next two years, according to theGoldman Sachs analyst who three years ago correctly predicted a price "super-spike" above $100 a barrel.

The warning by Arjun Murti came as oil prices hit a fresh record high above $122 a barrel, boosted by supply disruptions in Nigeria, lower output in Russia and continued robust demand in China ahead of the Olympics.

Mr Murti said the energy crisis could be coming to a head as a lack of adequate supply growth was becoming apparent.

"The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months," he added, warning also the spare capacity of the Organisation of the Petroleum Exporting Countries to cushion against unexpected supply shocks was low.

Last month, Chakib Khelil, president of Opec, also warned oil could reach $200 a barrel. The number of oil option contracts betting on oil hitting $200 a barrel in December have tripled since the beginning of the year.

Mr Murti's warnings carry weight in the oil market after he correctly predicted in March 2005 when oil traded at about $55 a barrel that prices could suffer a "super-spike" to $105 a barrel.
The warning in 2005 was criticised as "self-serving" because Goldman Sachs is one of the largest Wall Street investment banks trading oil and it could profit from an increase in prices.

The criticism forced the bank's chief executive at that time - Henry Paulson - to defend the bullish report. Mr Paulson is now US Treasury secretary.

Nauman Barakat, of Macquarie in New York, said: "The report should not be dismissed out of hand as preposterous as Goldman hit it on the head with its original super-spike story."

In New York, West Texas Intermediate crude futures yesterday jumped to a record $122.49 a barrel before settling at $121.84 while, in London, Brent crude futures closed at $120.31 a barrel.

The crude oil futures market signalled a growing belief that $100 a barrel is here to stay, with prices for oil to be delivered up to December 2016 trading above $110 a barrel. Kevin Norrish, of Barclays Capital, said the market was undertaking a "recalibration higher of expectations for long-term equilibrium oil prices".

Goldman said the unrelenting rise in long-dated oil prices was consistent with constrained supply driving demand rationing.

The role of CRO

The Chief Risk Officer (CRO) or Risk Management Director is now an established position in Finnish companies and is responsible for a wide range of tasks, the emphasis of which is moving from property risks to business risks.

The most significant challenge for these professionals is considered to be establishing risk management as an integrated part of the management system and business process. In order to be successful, the CRO must first convince line managers of the importance of risk management. This has to be our mantra.

At the same time as enterprise wide risk management (ERM) has become more common, a new group of professionals – the CRO:s – has evolved. The views and opinions of these professionals and the challenges they have experienced were studied in a research project during the spring of 2007. The research was organized by Ernst & Young in co-operation with the Finnish Risk Management Association. The target group was the risk management professionals working in Finnish companies and associations.The professional background of individual CRO:s varies a lot (figure 1).

This may be due to the relative newness of the position and that risk management in its entirety is quite an extensive area, covering many different sectors.

The risk management professionals who answered the questionnaire represented 15 different educational and experience backgrounds in total. When asked, only 17 % of those who answered stated that their education and experience were specifically connected to risk management. The vast majority, i.e. over 80%, have therefore moved to risk management work from another sector, the most common of which is insurance. The other common backgrounds are corporate safety, accounting and financing.

Risk management seeks security


The objectives that an organisation sets for risk management form an important starting point for the work of a CRO (figure 2). The most common objective that the organisations participating in the research work identified for risk management is “ensuring the achievement of targets”. Three-quarters of those who answered the questionnaire stated that they had set this objective.

Setting objectives is a fundamental part of ERM. According to this, hazards are all those factors that can put the achieving of business targets at risk – no matter which risk class they represent. Other objectives, which have been most commonly set are connected with improving risk awareness and the risk management function within the organisation, loss prevention and securing continuity of business operations.In contrast, the objectives connected to economy and financing, such as reducing the fluctuations in profits or cash flow, or ensuring the achievement of the forecasted profit are only rarely set. Thus the dogmas of business economics and financing do not seem to be applied to any significant degree in practical risk management work.

This is despite the fact that business economics and financing are well represented in the backgrounds of risk management professionals and that risk management directors or CRO:s very often report to the Chief Finance Officer.Chief Risk Officers participate in many activities and must work in several areas of risk in order to meet the objectives. Typical areas of work cover physical as well as intangible risks, technical as well as commercial risks, together with risks that are internal as well as external to the organisation. However, this does not mean that the CRO would be responsible for all of these risks; according to an established model, the Group Risk Management operates primarily as a coordinator and internal consultant for the managers of the business units, who in practise are responsible for the line risk management.Based on the research results, it is clearly more common for the CRO to participate in developing and co-ordinating risk management activities rather than to be completely responsible for the work. According to the survey, property risk management is the area for which the CRO bears most responsibility for developing risk management strategies.

It has been estimated that nowadays property risks occupy most of the time of the CRO (figure 3). Property risks represent the traditional area of risk management, as do health and safety risks, which also demand a substantial portion of the CRO’s time. Furthermore risks related to marketing, client contact, competitors and supply chain management have recently emerged, to broaden the scope of CRO’s area of responsibility.

In the future the emphasis will be on strategic risks. The results of the survey suggest that this trend will be further strengthened in the future. When asking the question; which types of risk the CRO:s will put the most effort into during the next three years, it is clear that the risks connected with marketing, clients contact, competitors, partners and networks are clearly expected to rise above the others.It seems that the focus for risk management work in the future will be concentrated towards the strategic risks of business operations. This is an area in which the CRO:s have not traditionally been involved.

Only a few of those who answered the questionnaire were of the opinion that in the future the focus should be on property risks. It was also considered that the risks connected to health & safety and economic reporting will demand less consideration in the future than is currently the case. However, this does not mean that these risks will disappear. But so much effort has already been put into these risks, that in the future it is anticipated they will demand less consideration, relative to the newly emerging areas of risk.

The main risk management activities for which the CRO:s are responsible include the development of risk management principles, reporting practices and tools and insurance (figure 4). However, only one in four of the CROs are responsible for identifying and assessing risks. The survey indicates that this task belongs primarily to those who are directly responsible for the risk, being typically found within the sphere of the specific business operations management.
However, it would be beneficial if those working in risk management, actually participate in the risk assessment and provide the necessary methods and tools to carry out the process. Thus it is alarming that almost 40 % of those who answered the questionnaire advised that the risk assessments of investments are carried out without the participation of the CRO, although, it is more common for the CRO to participate in due diligence processes.

The challenge is to take risk management to the business operation units. The biggest challenges for CRO:s are in connection with introducing risk management to the organisation (figure 5). As many as 80% of those who answered the questionnaire felt their main challenge was to integrate risk management into the management system and business processes. The second most important challenge the questionnaire highlighted was marketing risk management and proving its benefits to line management and business operation units. One third of those who answered also felt that the maintenance of defined operating methods in the organisation was a significant challenge. These three issues are closely connected to each other.To ensure that the organisation maintains the risk management processes, it is necessary that risk management is integrated into practical management and that the benefits it brings are clear for the business operation units. The selling of risk management to senior management in a company seems however, to be a lesser challenge, only stated by 25% of the participants. Using the words of one of those who answered the questionnaire: “Senior management has already begun to understand the significance of risk management, however, how do we increase the understanding of the next management levels”?

The most significant challenges when communicating with senior management are connected to understanding their expectations, clarifying their targets and meeting their targets, i.e. proving the operating ability of risk management to them and the board of directors.The operating environment of companies is constantly changing and developing and the new phenomena that are emerging in addition to familiar risks must be understood and managed. The world of risk is continuously expanding, so that the challenges facing the Chief Risk Officers will not decrease. On the other hand, the same development might ensure that the services of the CRO in greater and greater demand in the future.

Fredrik Åström, Manager, Advisory Services unit of Ernst & Young

Risk Roundtables : Risk Management of the Future Part 2

What capabilities makes a good risk manager?

Strengthening capabilities in risk management presents us with the

• challenge of determining the risk management skills demanded by the organization now and,
• whether capability development can cope with the new demands of the organization, especially with the globalization of operations and therefore the global nature of risks
  
  Hard skills
  
  
  
• Interpretation of governing policies, regulations and guidelines across all context of risk and business in the organization
• Able to see the bigger picture in risk to the business, having a strategic vision and holistic approach in risk management
• Analytical capabilities and risk quantificationmethodology such as statistical foundation of risk, portfolio management of risks, applying the results of risk quantification in the context of decision-making, developing risk management and mitigation strategies, apply the risk return trade off in assessing and mitigating risks, assessing risks and determining impact across a wide range of businesses in this organization : in summary good understanding of risk concepts, principles and processes
• Able to define risk indicators and report risks
• Enterprise wide and integration risk framework, risk governance and control
• Risk management procedures, assessing risk controls, determining risk control weaknesses and prescribing risk control solutions
• Able to enforce risk management

Soft skills

• Able to communicate on a variety of risk management matters defined in hard skills
• Able to lead discussions on risk, focussing on current risk management matters and providing thought leadership on emerging risk
• Passionate about role in risk management
• Able to demonstrate risk management value proposition in partnering with the business i.e. marketing risk management

To be continued

Risk Roundtables : Risk Management of the Future Part 1

My team and I had the opportunity in participating in a Risk Roundtable Discussion (actual risk roundtable abbreviation not disclosed) recently.

What was really apparent from the 2 1/2 days session was :

• the fact that in a large organization such as this the management of risks is decentralized evidenced by expertise in financial risk, project risk, supply chain risk, plant and facilities risk etc. It is not only the management, it is also the framework, design, approach and implementation that to me seems inconsistent with one another. There were some commonalities, but the actual implementation varies.
• the levels of integration between risks and defining exactly what needs integration seems the proverbial challenge in risk management in this organization
• the focus of the roundtable was to think of what the roundtable could spearhead in progressing risk management in this organization and concluded in the following areas : risk integration, risk capability building, risk governance and risk information infrastructure
• which brings to mind given all of the above, what does enterprise-wide risk management stand for and the value proposition of enterprise-wide risk management

The risk management of the future for this organization has to take into consideration the current developments in risk management across companies and businesses, identify what would be the elements of enterprise risk management and therefore its value proposition and repeat this like a mantra. I know I am talking in circles here, but I know what it takes and what it is, question is, do you?

Risk Assessment Considerations

I found this and thought that this was a good way of depicting the totality in risk assessment that we shoud also have in place.

The burden of risk management

Weighing perils is a heavier burden
By Andrea Felsted

From the financial turmoil to spiralling commodity prices, companies have never faced so many perils. The past few months have seen unprecedented events in financial markets, with a specialist in managing risk through insurance, American International Group, finding itself in crisis because of the risks it had taken insuring complex financial products.

With poor risk management at the heart of many aspects of the financial crisis, what counts as risk is being reassessed. More than a year on from the start of the squeeze on credit, many financial institutions are still aligning their risk management programmes with the new reality.

“In the old world, risk management was potentially a second-order reporting issue. In the new world, it is very likely that [everyone from] the chief executive downwards has to have a greater level of understanding of the real risks and the potential risks that an institution faces,” says Stephen Christie, a partner at Ernst & Young, the professional services firm.

Global financial shocks were high on a list of the top 10 strategic risks for business, second only to regulatory and compliance risks, according to research from E&Y and Oxford Analytica, the strategic consultancy.

Many financial services organisations are still adapting their risk-management programmes to the lessons learned from the crisis. ”Risk management is about continuous learning, because every time there is a crisis you discover new things,” says Raj Singh, chief risk officer at Swiss Re, the reinsurer.

The lessons being learned include understanding and measuring the risks within increasingly complex financial instruments. “The crisis has shown that it is far more complicated to measure risk than we thought previously,” Mr Singh says.

According to Clare Thompson, financial services risk advisory leader at professional services firm PricewaterhouseCoopers, fully taking the lessons onboard could be a lengthy process.
“It is quite a long haul for some organisations to really go back and look, and really understand, the risks they face,” she says.

Werner Grub, a founding partner of Richmond Park Capital, an independent merchant bank that provides risk-management advice, suggests there is a danger of businesses being slowed by excessive caution because of the recent turmoil.

“It is like a stop and go policy. Now we are in the stop phase which leads to a negative attitude, such as banks’ reluctance to lend to each other. There must be a rethinking of risk management, not relying only on quantitative analysis, but also going back to the qualitative, which often people considered as too unsophisticated,” he says.

Outside financial institutions the crisis in credit markets is also being felt, particularly as it mutates into a broader economic downturn.

It is harder for companies to borrow, while they also risk succumbing to the tactics of other companies that may be experiencing strain, such as delaying payments for goods and services.
Many are concentrating on the management of their working capital – the cash a company needs to operate on a day-to-day basis.

“What we are seeing a lot of at the moment is companies focusing on working capital management. Whether that is the creditor/ debtor balance or managing inventory, the common denominator is that companies are applying this to the decisions they make,” says Hans-Kristian Bryn, a partner at Oliver Wyman, the consultancy.
Companies are also turning their attentions to the hazards from a broader economic downturn – from an increased risk of being the victim of theft or fraud, to the impact on their balance sheets or pension funds from wild swings in equity markets.

Corporations are also having to cope with escalating commodity prices, although there has been some respite from this over recent weeks.

Sean Mulhearn, global co-head of commodities at Standard Chartered, the bank, says: “Almost all commodities have seen dramatic price increases over the past several years. We have also seen significant increases in volatility, and this is raising the awareness and importance of managing commodity risk among corporate treasurers and asset managers.”

Techniques that companies can use to protect themselves against the risks of commodity prices include hedging through derivatives, or passing increased costs on to customers.

Broader inflationary pressures are also occupying risk managers’ minds.
Mario Vitale, deputy chief executive of global corporate at Zurich Financial Services, says inflation affects the amount of insurance cover on property and equipment, for example.

“Today’s risk-management programmes will be different even from a year ago. There will need to be a much closer analysis of what is the proper replacement value to insure for,” he says.
As companies expand outside their home markets and into new territories, life becomes even trickier.

Corporations are increasingly outsourcing non-core operations to third parties, often in offshore locations, or are shifting manufacturing to locations with a lower cost base. Cheaper locations may face an increased risk of natural catastrophe or political instability. Companies must also take the resilience of suppliers into account when they make decisions about sourcing.
“The further you go down the food chain, the more likely you are to have organisations that fall over,” says Mr Bryn.

Indeed, Charles Beach, a director in PwC’s risk and capital team, cautions that a focus on the financial crisis could blind companies to risks in other areas.

“One of the things we have been warning against is the tendency to always fight the last war,” he says. “Whilst people are looking at the subprime crisis, which emanated originally out of the US and has been a first world crisis, there has been continuing huge growth in emerging markets, in places such as Asia. One of the things we have been warning against is taking your eye off the ball there.”

But Julia Graham, chairman of the Association of Insurance and Risk Managers (Airmic), says: “It is a very good risk control being a global business. If you can spread your risk globally, that is actually, obliquely, a very nice risk-management control.”
She says some organisations are shifting emphasis, for example focusing on the Middle East, or parts of Asia, rather than the US.

Companies are under increasing pressure to manage their risk effectively. For example, Standard & Poor’s, the credit ratings agency, is now taking risk management into account when it decides on a company’s rating. But inevitably, in a harsher economic environment, there will be pressure to cut costs.

Richard Sharman, a partner in KPMG’s risk advisory services group, says: “Now really is the time to be looking at that investment and making sure it is adequate. It may be you need to spend less, but for many companies it means you need to spend more on risk management.”
Risk management not only protects against unwanted events – it also helps identify opportunities and deliver value for shareholders. In tougher times, both are more crucial than ever.
“If you do [risk management] better you are more likely to survive than the business next door to you,” says Airmic’s Ms Graham.
“Risk management is about looking over the hill. But a lot of boards look at the hill, not what is over it. One of our jobs is to make sure they keep looking beyond, and not just at what is in front of them.”