DFA Capital Management Inc. DFA vs. ERM Is There A Difference? CAS Special Interest Seminar...
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Transcript of DFA Capital Management Inc. DFA vs. ERM Is There A Difference? CAS Special Interest Seminar...
DFA Capital Management Inc.
DFA vs. ERMIs There A Difference?
CAS Special Interest SeminarUnderstanding the Enterprise Risk Management ProcessSan Francisco, CAApril 2-3, 2001
André Lefebvre, FCAS, MAAA
DFA Capital Management Inc.
Changes in the Business World In the new economy, CEOs are facing
unrelenting pressure to lead and improve their company’s performance
At the same time, the rules are changing:• Increasing complexity of the global economy• Higher customer expectations• Intense competition• Rapid changes in technology
DFA Capital Management Inc.
Master Risk Create Value Organizations are searching for and
developing more comprehensive approaches to monitor and manage business risks
Business Risk: The threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully1
1 Managing Business Risk: An Integrated Approach, The Economist Intelligence Unit, 1995
DFA Capital Management Inc.
Enterprise Risk Management
ERM is an interactive process of well-defined steps which, taken in sequence, support better decision-making by contributing a greater insight into business risks and their impacts
DFA Capital Management Inc.
Elements of ERM Process
Establish Context
Identify Risks
Analyze/Quantify Risks
Assess/Prioritize Risks
Treat/Exploit Risks
Monitor
&
Review
Communication
Integrate Risks
DFA Capital Management Inc.
Establish Context Understand the:
• strategic (external) context• organizational (internal) context• risk management context
Develop the risk evaluation criteria Define the structure
DFA Capital Management Inc.
Identify Risks
Document the conditions and events that represent material threats to the organization’s achievement of its strategic objectives or represent areas to exploit for competitive advantage
DFA Capital Management Inc.
Types of Risks Strategic
• e.g., competitor risk, shareholder relations risk
Operational• e.g., customer satisfaction risk, authority/limit risk
Financial• e.g., price risk, liquidity risk, credit risk
Hazard• e.g., catastrophic loss risk, health & safety risk
DFA Capital Management Inc.
Analyze/Quantify Risks Analyze risks in terms of
consequence and likelihood in the context of existing controls
Quantify the consequence and likelihood using qualitative, semi-quantitative, or quantitative (or a combination of these) analyses
DFA Capital Management Inc.
Integrate Risks
Aggregating all risk distributions, reflecting correlations and portfolio effects
DFA Capital Management Inc.
Assess/Prioritize Risks Evaluate the risk Prioritize list of risks
DFA Capital Management Inc.
Treat/Exploit Risks Identify options for risk treatment Assess the options Prepare risk treatment plans Implement treatment plans
DFA Capital Management Inc.
Monitor & Review It is necessary to monitor the risks,
the effectiveness of the risk treatment plan, the strategies, and the management system that is set up to control the implementation
Ongoing review is essential to ensure that the management plan remains relevant
DFA Capital Management Inc.
Communicate
Important to develop a communication plan for both internal and external stakeholders at the earlier stage of the process