16.5 Enterprise Risk Model Process
Diagnose \(\Rightarrow\) Analyze \(\Rightarrow\) Implement \(\Rightarrow\) Monitor \(\Rightarrow\) Repeat
16.5.1 Diagnose
High level risk assessment
All risks are considered
Include preliminary development of thresholds for risk that will be considered material of significant (e.g. Key aspect 3) from above)
Table below 16.1 can serve as a structured way to analyze the pillars of the risk taxonomy
| General Environment | Industry | Firm Specific |
|---|---|---|
| Political uncertainties (e.g. democratic changes, war, revolution) | Input market (e.g. supply, quality) | Operating (e.g. labor, supply) |
| Government policy (e.g. fiscal, monetary changes, regulation) | Product market (e.g. demand) | Liability (e.g. products, employment, production) |
| Marcoeconomic environment (e.g. inflation, interest rates) | Competitive uncertainties (e.g. new entrants, rivalry) | R&D |
| Social (e.g. terrorism) | Credit | |
| Natural (e.g. cat events) | Behavioral |
16.5.2 Analyze
Analyze risk identified in step 1 for materiality and prioritize
Definition 16.2 (Critical Risk)
Risk with potential to exceed the company’s threshold
They should be modeled to the extent possible
- Preferably quantified with a probability distribution of outcomes
Correlations among risk factors must be recognized (distribution integrated across the various risk silos)
Risk metrics are calculated with the combined distribution to establish a measure of the degree of risk
Selected risk measures must be consistent with management’s view toward risk
Prioritize risk factors that contribute to adverse scenarios (or risk metrics) above the critical threshold
16.5.3 Implement
Focus on managing risks identified and analyzed as material
5 potential actions to manage risk:
Avoidance
Reduction in chance of occurrence
Mitigate effect given occurrence
Eliminate or transfer of the consequences
Retention (by design or by default) some or all of the risk
Speculative risk factor may provide an opportunity to capitalize on the risk, rather than manage it away
- Perform a cost/benefit or risk/return trade-off analysis
16.5.4 Monitor
Management need to monitor the process, compare to expectations
Need to update plans and model as company or market or competitors change (not a “project” to be completed)
New risk to address
New ways to control them
New options for treating or transferring risk