An Element of Good Governance

Risk Management Creates Value

Risk Management contributes to good Corporate

Governance by providing reasonable assurance to
boards and senior managers that the
organizational objectives will be achieved within
a tolerable degree of residual risk.
 Acid Test of Good Governance
What are your Cooperatives top 10 risks?

Do you have a concise report that shows the key exposures

and trends for strategic, financial, and operational risks?

Are you in compliance with internal policies, laws, and

regulations?

Were the majority of your Cooperatives actual losses and

incidents identified by the risk reports?

Are you managing businesses on a risk-adjusted profitability

basis?
Common Definition of Risk

the likelihood of something undesirable happening in a

given event

the conditional probability of the event occurring times

the consequence of the event given that it has occurred
 SEC Code of Corporate
Governance

The Board must identify key risk areas

and key performance indicators and
monitor these to ensure the effectiveness
of internal control
Why
take

?
The Three components of Risk:

An event
A probability of occurrence

An impact
I. Basics of Risk Management
A. Elements of Risk Management

Event

Risk

Likelihood Impact

Elements of Risk

8
B. Types of Risk

Types of

Pure Loss

Gain

(upside risk)
Speculative
(downside risk)
Loss

9
Areas of Exposure to Loss (Pure and
BusinessRisk)
1. Property

2. Finance

3. Legal Liability

4. Personnel
 BSP Supervision by Risk (Circular 510)
ERM Framework Basel 2 (BSP) BSP Supervision and
Examination
1. Strategic 1. Credit 1. Credit
2. Market
2. Financial 2. Market 3. Interest
4. Liquidity
3. Legal and 3. Operational 5. Operational
Compliance
6. Compliance
7. Strategic
4. Operational
8. Reputation

13
 Financial Risk

In the financial world, risk can be defined as any event which can impair
corporate earnings or cash flow over short/medium/long-term horizons.
 Credit Risk

Credit risk is defined as loss exposures due to

counterparties default on contracts.
 Market Rate Risk

Cooperatives investments may suffer a loss if

there is a fall in the market value of an
investment.
Equity risk
Currency risk
Interest rate risk
Risk of loss of:

Properties Operational
Income
Risk is

Key personnel

Exposure to liabilities

Resulting from inadequate or failed:

Process

People

System

External events
 T
Todays organizations are
concerned about:
Risk Management
Governance
Control
Assurance (and Consulting)
 Reputation Risk

Reputation risk arises when a situation,

occurrence, business practice or event has
the potential to materially influence the
public and stakeholders perceived trust and
confidence in a cooperative.

As with other risks, the board is responsible

for overall management of reputational risks.
 RISK MANAGEMENT VALUE CONTINUUM

Key Issues:
1. What is the current location of the Enterprise Risk
Cooperative along the continuum? Management
2. What is the desired location of the Assess risks which threaten
Cooperative along the continuum objectives of
3. How should the Cooprarative move Strategic Management
from the current to the Process
Business Risk Core Business Processes
desired location? Management
Develop ERM Framework
Assessment of COSO
financial risk: AS/NZS; AIRMIC; FERMA
ISO 31000
Traditional Credit Risk
Market Risk Portfolio view of risks
Risk Management
Silo approach RBCA
Purchase of Insurance
or self-insurance of
RBA
risks affecting property,
income, liability and
people
RISK MANAGEMENT PERSPECTIVE
 Recognize that ERM is a journey not a
destination and requires a change process

How will we know

we are successful?
Why do we need to
begin our journey?

What are the

Achievable expected
How do we Goal outcomes?
get there?
What elements need
to be put in place?

Where are
we now?
What are the obstacles
along the way?
Why ERM Is Important To a Cooperative

Underlying principles:

Every entity, whether for-profit

or not, exists to realize value for
its stakeholders.

Value is created, preserved, or eroded

by management decisions in all
activities, from setting strategy to
operating the enterprise day to
day.y-to-day.
Why ERM Is Important to a Cooperative

ERM supports value creation by enabling

management to:

Deal effectively with potential future

events that create uncertainty.

Respond in a manner that reduces the

likelihood of downside outcomes and
increases the upside.
Enterprise Risk Management
(ERM)
COSO has defined ERM as follows:

a process, effected by an entitys board of

directors, management and other personnel,
applied in strategy setting and across the
enterprise, designed to identify potential events
that may affect the entity, and manage risks to
be within its risk appetite, to provide reasonable
assurance regarding the achievement of entity
objectives.
The Enterprise Risk Management
(ERM) Evolution

What has changed?

Treating the vast variety of risks in

a holistic manner
Elevating risk management to a
senior management responsibility
 focuses on ensuring that Top
the enterprise manages Down
the uncertainties that
Strategic RM exists around the
Strategic
achievement of its
corporate objectives

is focused on managing the Bottom

Operational risks that appear during its Up
day-to-day activities of
RM actually executing the
Tactical
SBUs/BUs strategy.
 The COSO Framework provides an understanding of the
components of ERM

Enterprise Risk Management:

Is a process RA
T EG
IC
ER
AT ION
S
RE
PO RT
ING
MP
L I AN
CE
ST OP CO
Is effected by people Internal Environment

Is applied in strategy setting

SUBSIDIARY
Objective Setting

BUSINESS UNIT

ENTITY-LEVEL
Event Identification

DIVISION
Is applied across the enterprise Risk Assessment

Is designed to identify potential Risk Response

events Control Activities

Manages risks with risk appetite Information & Communication

Monitoring
Provides reasonable assurance
Supports achievement of objectives

Source: COSO proposed ERM Framework

 Risk Management Responsibility

The Board is responsible for the total process of

risk management, as well as forming its own
opinion on the effectiveness of the process
 The Risk Management Process

The Board should set the risk strategy in liaison

with management

Management is accountable to the Board for

designing, implementing and monitoring the
process and integrating it into the activities of the
company
 Risk Management Structure

BOARD of DIRECTORS M
A
RM Committee C
R
O
RM Council

RM Steering Committee

Internal M
Audit / I
Risk Mgt. Risk Mgt. Risk Mgt. C
Team Team Team Compli-
R
ance O

Risk Management Teams (RMTs)

31
riskWATCH INTERNATIONAL, INC.
ERM Roles & Responsibilities
Management

The board of directors

Risk officers

Internal auditors
Example: ERM Organization
Vice President and
Chief Risk Officer

Insurance ERM Corporate Credit

Risk Manager Director Risk Manager

FES
ERM ERM Commodity
Manager Manager Risk Mg.
Director

Staff Staff Staff

 Basic Risk Management
Process
PROCESS STEPS
DESCRIPTION
Risk Identification
Risk
Assessment
Risk Analysis

Risk
Risk Control Risk Finance
Treatment

Monitoring and
Control Risk Administration

34
 Assess Risk
Risk assessment is the
identification and analysis of
risks to the achievement of
business objectives. It forms a
basis for determining how risks
should be managed.
 Event Identification
Involves identifying those incidents, occurring
internally or externally, that could affect
strategy and achievement of objectives.

Addresses how internal and external factors

combine and interact to influence the risk
profile.
 Formal Risk Assessment

The Board should ensure that a formal risk

assessment is undertaken at least annually for the
purpose of making its public statement on risk
management
Risk assessment should address :
Physical and operational risk
Technology Risk
Credit and Market Risk
Risks should be assessed on an ongoing basis and
control activities should be designed to respond to
risks throughout the company
Companies should develop a system of risk
management and internal control that builds more
robust business operations
 How OFTEN will the loss occur?
How BIG will the loss be?
Will it THREATEN our FINANCIAL STABILITY?
Will they INTERFERE with our basic OBJECTIVES?

Risk Analysis
 WHAT CAN GO WR ?

The process of determining what, where,

when, why and how something could happen.

Risk Identification
Risk, Peril, or Hazard?
 Impact vs. Probability
High Medium Risk High Risk

I
M Share Mitigate & Control
P
A Low Risk Medium Risk
C
T
Accept Control

Low PROBABILITY High

 Risk Mapping
High

F
r Moderate High
e
q
u
e
n
c Low Moderate
y

Low High
S e v e r i t y
 2 3
Likelihood / Probability

1
4

Significance / Impact
 2 3
Likelihood / Probability

1
4

Significance / Impact
 Prioritizing Risks
Establish the risks to be eliminated
due to potential impact.

Establish the risks which require

regular management attention.
Establish the risks that are
sufficiently minor to avoid detailed
management attention.
Risk Prioritization
 HIGH

R
E
W
A
R
D X XX
LOW R I S K HIGH
RISK CONTROL

Stops
Losses
from
Happening
 Elements of Risk Control

Mitigate Risks

Plan for
Risk Control Emergencies

Measure and
Control
RISK CONTROL

TOOLS:

A. Risk Avoidance

WAREHOUSE

RIVER
RISK CONTROL

TOOLS:

B. Loss Prevention
RISK CONTROL

TOOLS:

C. Loss Reduction

Fasten your seatbelt

RISK CONTROL

TOOLS:
D. Segregation of Risk

1. Separation

Production Warehouse
RISK CONTROL

TOOLS:

D. Segregation of Risk

2. Duplication

Back-up System at
Branch Office
Head Offices Computer
 Risk Response
Identifies and evaluates possible responses to
risk.

Evaluates options in relation to entitys risk

appetite, cost vs. benefit of potential risk
responses, and degree to which a response
will reduce impact and/or likelihood.

Selects and executes response based on

evaluation of the portfolio of risks and
responses.
 Development of Risk Strategies

AVOID RETAIN REDUCE TRANSFER EXPLOIT

Divest Accept Disperse Insure Allocate
Prohibit Re-price Control Allocate Diversify
Stop Self- Hedge Expand
Target Insure Indemnity Create
Screen Offset Securitize Redesign
Eliminate Plan Share Reorganize
Outsource Price
Arbitrage
Renegotiate
Influence

59
RISK FINANCING (Risk-Based Capital Adequacy)

Provides Funds for Losses that do Occur

RISK FINANCING
A. Risk Retention Scheme
- Current Expense
- Unfunded Reserve
- Funded Reserve
- Borrowing Funds to Pay for Losses

B. Risk Transfer Scheme

- Insurance
- Contractual Transfer of Risk
 Monitoring
Effectiveness of the other ERM
components is monitored through:

Ongoing monitoring activities.

Separate evaluations.

A combination of the two.

 Internal Control

A strong system of internal

control is essential to effective
enterprise risk management.
Embedding Risk Management in
A Cooperative

A risk aware culture

Senior Management Commitment
A common business risk language
Risk management structure
Risk management process
 The Road Beyond 2015 for a
Cooperative

Business Continuity Planning (BCP)

Corporarte Resiliency: your inner strength

Management theorist Peter Drucker has
pointed out that the only way to increase
the yield from a given amount of world
resource is to introduce risk. To run away
from risks is to miss the point: You need
to take the right risks and to be aware that
thats what youre doing.
It is only when one has put all the risks to
bed, that one can have a quiet nights
sleep!
End of Presentation

Thank You!
Contact details:
Rolando C. Cabrera
Mobile No. 09064703322
Email: rolcabrera@gmail.com
Q&A