Risk Management

1. E L E M E N T S O F R I S K
M A N A G E M E N T
P R E P A R E D B Y J A M A I C A J O Z A S . G A S P A R

2. AGENDA SETTING
01 Elements of Risk Management
02
Introduction: Concept of Black Swan in
Risk Management
03
Factor Analysis of Information Risk
(FAIR)
05 Conclusions, References
04 Elements of Risk Management

3. Risk management experts think of a full-scale risk
management system as a system with four elements:
1.Risk identification
2.Risk evaluation
3.Risk control, and
4.Risk financing

4. 1.Risk identification
The risk manager first must identify a
potential loss before it can be evaluated.
2. Risk Evaluation
Evaluation is necessary to know
how to control the expected loss.

5. 3. Risk Control
Third element, Risk Control, is one of the most often
recognized by county officials. It is subdivided into
“loss prevention” and “loss reduction.”
4. Risk Financing
To finance the loss in the proper manner -- after identifying
it, evaluating it, and using such control measures as safety
programs, inspections, and disaster training -- the risk
manager must cover the risk with insurance or with a
combination of insurance and risk retention methods.

6. 3.1 Risk Control
The two-fold goal of the Risk Control element of a program is to-
•decrease the frequency of losses and
•reduce their severity once they occur.

7. 4.1 Risk Financing
The two major categories of risk financing are retention and transfer. All risk
financing techniques are one or a combination of both. Risk retention includes-
•all self-insurance programs
•deductibles
•uninsured losses

8. Risk is transferred through a contract in which one
organization agrees to pay for the losses of another organization
in exchange for a premium. Insurance is the most common form
of risk transfer. County executives and county commissioners
must make the final determination of what forms of risk financing
to use.

9. E L E M E N T S O F R I S K M A N A G E M E N T
Of the four elements of a risk management program,
the policy-making role of county mayors and county
commissioners is greatest in Risk Financing, which is
simply arranging a method of paying for losses.
No matter how successfully a manager handles loss
exposures, the county will always need some type of
risk financing program. No loss prevention program is
100% effective so when losses occur, they need to
be paid.

10. CONCEPT OF BLACK SWAN IN RISK
MANAGEMENT

11. THE BLACK SWAN
The Impact of the Highly Improbable by
Nassim Nicholas Taleb (2007)

12. WHAT IS A BLACK SWAN?
WHATARETHETHREE EVENT
UNDER BLACK SWAN?
HOW PAST EVENTS INTERCONNECT
TO BLACK SWAN?

13. INTRODUCTION
A black swan is an unpredictable event that is
beyond what is normally expected of a situation and has
potentially severe consequences. Black swan events are
characterized by their extreme rarity, severe impact,
and the widespread insistence they were obvious in
hindsight.

14. 1.1
I N T R O D U C T I O N
• The metaphor is based on the old European assumption that all
swans are white, until black swans were discovered in 1697 in Australia.
originated in medieval Europe during philosophical discourses.
• Black Swan refers to unpredictable events, such as September
11, 2001, that happen from time to time and have enormous consequences.
• widely known subsequent to the recent publication of Nassim
Nicholas Taleb’s eponymous bestseller, The Black Swan: The Impact of the
Highly Improbable. (2007)

15. THE THREE MAIN EVENT
1) Black swan is so rare that even the
possibility that it might occur is unknown,
B L A C K S W A N
2) has a catastrophic impact when it does
occur, and ;
3) is explained in hindsight as if it were act
ually predictable.
Nassim Nicholas Taleb
Lebanese-American essayist,
scholar, mathematical statistician,
and former option trader and
risk analyst, whose work concerns
problems of randomness
probability, and uncertainty

16. HOW PAST EVENTS INTERCONNECT
TO BLACK SWAN?
The last key aspect of a black swan is that as a
historically important event, observers are keen to explain
it after the fact and speculate as to how it could have been
predicted.

17. Examples of Past Black Swan Events
• The crash of the U.S. housing market during the 2008 financial
crisis is one of the most recent and well-known black swan events.
The effect of the crash was catastrophic and global, and only a few
outliers were able to predict it happening.

18. Examples of Past Black Swan Events
• Also in 2008, Zimbabwe had the worst case of hyperinflation in
the 21st century with a peak inflation rate of more than 79.6 billion
percent. An inflation level of that amount is nearly impossible to
predict and can easily ruin a country financially.

19. (1) To dismiss probabilistic reasoning
and (2) to extend it to describe certain events in
risk management that require extra explanation

20. The most common
definition of a Black
Swan is:
an event in which the
probability of occurrence
is low, but the impact is
high.

21. According to Taleb, a Black Swan event has these three attributes:
First, it is an outlier,
as it lies outside the
realm of regular expe
ctations, because not
hing in the past can
convincingly point to
its possibility.
Second, it carries
an extreme
'impact'.
Third, in spite of its outlier
status, human nature
makes us concoct
explanations for its
occurrence after the
fact, making it explainable
and predictable.
1 2 3

22. Factor Analysis of
Information Risk (FAIR)
Developed by Jack Jones
also called “risk condition”

23. “Risk Conditions”: The FAIR Way to Treat a Black Swan
FAIR provides the
taxo-nomy to assess, analyze an
d report risks based on a number
of factors (e.g. threat capability,
control strength, frequency of a
loss event).
There may be something that
can be done to reduce the impact (e.g.
diversification of company resources
in preparation for an earthquake) or
perhaps nothing can be done
(e.g. market or economic conditions
that cause company or sector failure).

24. Describe a situation in which the probability of a loss event is low and
there are no mitigating controls in place. It’s up to each organization to
define what “low probability” means, but most firms describe
events that happen every 100 years or less as low probability.
UNSTABLE RISK CONDITION
A fragile risk condition is very similar to an unstable risk condition;
however, the distinction is that there is one control in place to
reduce the threat event frequency, but no backup control(s).
FRIGILE CONDITION
FAIR describes two risk conditions:

25. Preparing for a Black Swan Event
Catastrophic Events
Black Swans are defined as rare, ra
ndom, and high-impact events and are chara
cterized to be catastrophic and broad.
In reality, Black Swan events still continue to be un
predictable and unpreventable. Although you can’t
prepare for every scenario, but you can establish
principles and protocols to be better prepared for
the unexpected.

26. Principles for Preparing for and Responding to a
Black Swan
1. Establish response goals, assigning leadership to meet
those goals and establishing reporting channels during
the crisis.
2. Establish immediate response goals and values in order
to limit the impact before a formalized plan is developed
3. Empower local leadership and personnel to recognize
and mitigate emerging catastrophic risks.

27. …
4. Plan and execute redundant mitigation responses in case
the primary response fails
5. Know your resources and how to use them during a
catastrophe. Leaders should keep track of internal and
external recourses including personnel, financial, and
physical resources.
6. Incorporate outside perspectives and experience
s into their response strategy.

28. 7. Remain objective throughout the process when analyzing,
discussing, and responding to catastrophic risks.
…
8. Maintain the moral high ground by planning and executing
responses based on what is right, rather than planning for
only the company’s best interest.
9. Challenge your response strategy with an independent
perspective to help identify weaknesses before the Black
Swan does.

29. Why Do We Underestimate Black
Swan Risks?
1. Humans tend to categorize, focusing
on preselected data that reaffirm beliefs as
opposed to any contradictions (confirmatio
n bias);
2. Humans construct stories to explain events
and see patterns in data when none exist, due
to illusion of understanding (narrative fallacy);

30. Why Do We Underestimate Black
Swan Risks?
3. Human nature is not programmed to
imagine Black Swans;
4. Humans tend to ignore the silent evidence
and focus disproportionately either on the
failures or successes;
5. Humans overestimate one’s knowledge and
focus too narrowly on one’s field of expertise
(tunnel vision), ignoring other sources of unce
rtainty, and mistaking concocted models for
reality (ludic fallacy).

31. CONCLUSIONS
There’s always unpredictable and unexpected
scenarios you can leave the concept of black-swan to philosophers
howevertry to understand why someone is calling something a Black
Swan although they are unpredictable but can be prepared for by es
tablishing identification methods, response goals, and quick respons
e strategies before the event occurs.

32. Thank you

33. REFERENCES:
• https://erm.ncsu.edu/library/article/risk-planning-blackswan
• https://www.fairinstitute.org/blog/black-swans-in-risk-myth-reality-and-bad-
metaphors#:~:text=From%20a%20purely%20practitioner%20point,so%20
often%20in%20risk%20management.&text=The%20most%20common%2
0definition%20of,year%20flood%20or%209%2F11.
• https://ascelibrary.org/doi/10.1061/%28ASCE%29LM.1943-563
0.0000036
• https://www.investopedia.com/terms/b/blackswan.asp#:~:text=Taleb%20d
escribes%20a%20black%20swan,if%20it%20were%20actually%20predict
able.
• https://eli.ctas.tennessee.edu/reference/elements-risk-management