The document discusses enterprise risk management and the COSO framework for operational risk management. It provides an overview of a presentation by Group 1 on this topic. The presentation covers COSO and its integrated framework for enterprise risk management. It also summarizes criticisms of applying the COSO framework to operational risk and counterarguments to those criticisms.

1. Enterprise Risk Management:
Operational Risk and COSO
Prepared and Presented by:
Group 1
Group Members: Manu Link to Glossary
Prakaash, Rashi Saxena, Saurabh
12/19/2012 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, Saurabh
12/19/2012 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, Saurabh
12/19/2012 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, Saurabh
12/19/2012 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, Saurabh
12/19/2012 7
Saha, Urvi Gulati TERI University, New

8. Likelihood-Impact Based Risk Assessment
• Introduced in MIL-STD-882A Military safety standard, by US
Department of Defense
• According to this approach, for each risk the frequency of
occurrence (likelihood) & the worst credible outcome(impact) are
assessed & captured into a likelihood- impact matrix. Allows an
entity to understand the extent to which potential events might
impact objectives
• Integrating qualitative and quantitative approaches.
• E.g.- CRISIL Ratings provides the most reliable opinions on risk by
combining its understanding of risk and the science of building risk
frameworks, with a contextual understanding of business. It follows
the Basel II guidelines to guard against the types of financial and
operational risks banks face.
Group Members: Manu Prakaash,
12/19/2012 Rashi Saxena, Saurabh Saha, Urvi Gulati 8
TERI University, New Delhi

9. Risk Analysis
Risk Risk Risk
Assessment 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, Saurabh
12/19/2012 18
Saha, Urvi Gulati TERI University, New

19. Allstate’s ERM Approach: Advantages
1. It allows the company to set a quantitatively
based risk/reward threshold across its
businesses
2. Management can evaluate how lines of
business compare to each other vis-à-vis
capital consumption
3. Provides solid new measurements to inform
business decision making
Group Members: Manu
Prakaash, Rashi Saxena, Saurabh
12/19/2012 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, Saurabh
12/19/2012 20
Saha, Urvi Gulati TERI University, New

21. ERM Process
1. Identify top risks
2. 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, Saurabh
12/19/2012 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, Saurabh
12/19/2012 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, Saurabh
12/19/2012 23
Saha, Urvi Gulati TERI University, New

24. Thank You!
Questions?
Group Members: Manu
Prakaash, Rashi Saxena, Saurabh
12/19/2012 24
Saha, Urvi Gulati TERI University, New

25. Glossary
1. 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, Saurabh
12/19/2012 25
Saha, Urvi Gulati TERI University, New