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Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
Enterprise risk management
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Enterprise risk management

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  • 1. Enterprise Risk Management: Operational Risk and COSO Prepared and Presented by: Group 1 Group Members: Manu Link to Glossary Prakaash, Rashi Saxena, Saurabh12/19/2012 1 Saha, Urvi Gulati TERI University, New
  • 2. COSO Framework for Operational Risk Management ERM INTEGRATED FRAMEWORK Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 2 TERI University, New Delhi
  • 3. COSO• Acronym for Committee for Sponsoring Organizations• Enterprise Risk Management- Integrated Framework by COSO: Aims to provide for the need for an enterprise risk management framework, providing key principles and concepts, a common language, and clear direction and guidance Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 3 TERI University, New Delhi
  • 4. Operational Risk-COSO re-examined• Written by Peyman Mestchian, Mikhail Makarov and Bahram Mirzai• An analytical build-up as an answer to the criticisms given by Ali Samad-Khan (President, OpRisk Adisory) against the application of COSO framework to operational risk Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 4 Saha, Urvi Gulati TERI University, New
  • 5. Criticisms offered by Ali Samad-Khan• The definition of risk used by COSO is flawed• Likelihood-Impact Risk Assessment is flawed• Methods prescribed by COSO are highly subjective, and only risk assessment based on historic losses is valid• Risk assessment using COSO approach is too complex and resource intense Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 5 Saha, Urvi Gulati TERI University, New
  • 6. Justifications or Counter-Criticisms!• The criticism about Operational Risk’s definition (criticisms 1 and 2) is based on:Risk=Likelihood x Impact• There is no reference in COSO for using this formula to measure risk• COSO uses Value at Risk or Capital at Risk concepts as measures of risk:Cost of Risk=Expected Loss + Cost of Capital Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 6 Saha, Urvi Gulati TERI University, New
  • 7. Importance of Evaluated CoR• Crucial to perform cost-benefit analysis within an integrated operational risk management framework Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 7 Saha, Urvi Gulati TERI University, New
  • 8. Likelihood-Impact Based Risk Assessment• Introduced in MIL-STD-882A Military safety standard, by USDepartment of Defense• According to this approach, for each risk the frequency ofoccurrence (likelihood) & the worst credible outcome(impact) areassessed & captured into a likelihood- impact matrix. Allows anentity to understand the extent to which potential events mightimpact objectives• Integrating qualitative and quantitative approaches.• E.g.- CRISIL Ratings provides the most reliable opinions on risk bycombining its understanding of risk and the science of building riskframeworks, with a contextual understanding of business. It followsthe Basel II guidelines to guard against the types of financial andoperational risks banks face. Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 8 TERI University, New Delhi
  • 9. Risk AnalysisRisk Risk RiskAssessment Management Monitoring Process Identification Control It Level Share or Activity Measurement Transfer It Level Diversify or Prioritization Entity Level Avoid It Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 9 TERI University, New Delhi
  • 10. Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 10 TERI University, New Delhi
  • 11. Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 11 TERI University, New Delhi
  • 12. Example: Call Center Risk Assessment Group Members: Manu Prakaash, Rashi Saxena, Saurabh 12/19/2012 12 Saha, Urvi Gulati TERI University, New
  • 13. Causes of Operational Risk Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 13 TERI University, New Delhi
  • 14. Operational Risk Failures• On February 6, 2002, Allied Irish Banks (read more) reported a fraud in its Baltimore-based subsidiary Allfirst. According to the report, around 1997 John Rusnak, one of their internal traders, lost a large amount of money. For five years, Mr. Rusnak covered his tracks by writing non-existent options and booking their equally non-existent profits as income. Compound interest being what it is, Mr. Rusnak’s problems and, hence, the bank’s, eventually grew to $700 million dollars. One Monday morning, Mr. Rusnak failed to show up for work and the entire fraud collapsed.• Barings Bank (read more) had collapsed ten years previously and Allied Irish Bank was, at that time, Ireland’s second largest. The story of the Barings is one of a rogue trader that alone caused the bankruptcy of a supposed solid bank. Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 14 TERI University, New Delhi
  • 15. Case-Study Enterprise Risk Management: Managing Risk to better exploit risk opportunities ERM AT ALLSTATE Group Members: Manu Prakaash, Rashi Saxena, Saurabh 12/19/2012 15 Saha, Urvi Gulati TERI University, New
  • 16. Brief Company Profile• Allstate was founded in 1931 as part of Sears, Roebuck & Co., and became a publicly traded company in 1993• It is the nation’s largest publicly held personal lines insurer• A Fortune 100 company, with $130 billion in total assets, Allstate sells 13 major lines of insurance, including auto, property, life and commercial Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 16 TERI University, New Delhi
  • 17. A Novel Approach in the Industry• Allstate combined its scholastic modeling and operational governance to produce an ERM for the organization• Over time, Allstate worked to align its analytics with corporate governance and decision making activities Group Members: Manu Prakaash,12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 17 TERI University, New Delhi
  • 18. Allstate’s ERM Framework: Culture/Code of Ethics Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 18 Saha, Urvi Gulati TERI University, New
  • 19. Allstate’s ERM Approach: Advantages1. It allows the company to set a quantitatively based risk/reward threshold across its businesses2. Management can evaluate how lines of business compare to each other vis-à-vis capital consumption3. Provides solid new measurements to inform business decision making Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 19 Saha, Urvi Gulati TERI University, New
  • 20. Allstate’s Successful ERM: Benefits• Helps managers take risk- and capital- related decisions, such as reinsurance purchasing, asset/liability management, risk limit setting and monitoring, and capital allocation and pricing• Starts small, focuses on key issues first and consistently build value Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 20 Saha, Urvi Gulati TERI University, New
  • 21. ERM Process1. Identify top risks2. Build a consensus between risk “owners” and management on the risk limit for the quantifiable risks• Allstate uses its own metrics, rather than relying solely on rating agencies to determine overall capital needs as well as capital allocations and levels within the various businesses Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 21 Saha, Urvi Gulati TERI University, New
  • 22. Growing with ERM• Initially, ERM was used only for Allstate Protection, its property/casualty business• Now implemented in Allstate Investment and others• Allstate now operates a Risk Opportunity Forum-members analyze suggestions for greatest potential• Repeats risk assessment every 2 years Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 22 Saha, Urvi Gulati TERI University, New
  • 23. References• COSO Executive Summary: http://www.coso.org/Publications/ERM/COSO_ERM_E xecutiveSummary.pdf• Basel Standards: http://www.bis.org/publ/bcbsca.htm• Case Study: http://www.towersperrin.com/tp/getwebcachedoc?we bc=TILL/USA/2006/200608/Allstate.pdf• Allstate website: http://www.allstatenewsroom.com• CRISIL Rating: www.crisil.com• Other references: www.wikipedia.org Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 23 Saha, Urvi Gulati TERI University, New
  • 24. Thank You! Questions? Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 24 Saha, Urvi Gulati TERI University, New
  • 25. Glossary1. Operational Risk: The risk of loss resulting from inadequate or failed business, people and systems or from external events (As defined by the Basel Committee)2. Risk Tolerance: A measure of the degree of uncertainty that an investor is willing to accept in respect of the negative changes to its business or assets Group Members: Manu Prakaash, Rashi Saxena, Saurabh12/19/2012 25 Saha, Urvi Gulati TERI University, New

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