Enterprise Risk Management

The aim of the Enterprise Risk Management (ERM) Specialist Technical subject is to instil in successful candidates the key principles underlying the implementation and application of ERM within an organisation, including governance and process as well as quantitative methods of risk measurement and modelling. The student should gain the ability to apply the knowledge and understanding of ERM practices to any type of organisation.

This subject develops concepts introduced in the earlier actuarial subjects, particularly (Risk Modelling and Survival Analysis) and (Loss Reserving and Financial Engineering). It also develops the risk management techniques introduced in Actuarial Risk Management.

Part 1: Introduction to Enterprise Risk Management

1. Overview – which is where we currently are

2. Understanding Risk – where we talk about the various dimensions of risk and explain how it is much more than just volatility.

3. ERM Framework – here we introduce the Risk Control Cycle which acts as a structure for the rest of the course. We also discuss Risk Awareness

4. Governance – A lot can be said on this topic so we try to distill the most important parts into governance principles and the various mechanisms that can achieve them.

5. Regulators and other Stakeholders – Here we introduce regulators and other stakeholders. We will revisit regulation in the later videos on Capital Management. Whereas the ActEd notes try cover all the regulation in one go.

Part 2: The Enterprise Risk Management Framework

6. Risk Identification – Some sources have Risk Identification as step 1 whereas we see it as step 2 in the ERM Framework. Step 1 is Risk Awareness where one defines Risk Objectives and Risk Appetite. We look at tools and techniques for identifying risks and discuss Risk Categories and the Risk Register.

7. Risk Assessment – In this chapter we introduce some of the aggregate models that help us measure risks. We speak about the mathematical properties of risk measures and discuss which risk categories can be quantified. The later videos will go into a lot more detail on how to measure each type of risk.

8. Risk Management – The four main ways we respond to risk are either by using capital as a reserve, transferring it to another party, removing it by ceasing activity or by using various controls to try reduce it by managing it. Again the later videos will go into a lot more detail on how to manage each type of risk.

9. Risk Monitoring – This is sometimes the forgotten step of Risk Management. Here we talk about what goes into a Risk Report and how its results need to be fed back into the Risk Awareness stage, thus completing and restarting the Risk Control Cycle.

Part 3: Risk Models and Risk Responses

10. Analysing Insurance Risk – This is a short recap of Actuarial Science. We discuss the fundamental actuarial assumptions and the business case for insurance. We then dive into a bit of the maths behind Pricing Models and talk about fitting distributions, parameter estimation and testing for goodness of fit.

11. Managing Insurance Risk – Here we talk about sources of Capital and discuss classic risk management techniques like excesses, exclusions, underwriting and claims process. We also look at more advanced techniques like co-insurance, reinsurance and contract design.

12. Introducing Market Risk – Here we define market risk as the profit or loss caused by the unexpected change in an assets price. We look at the economic factors that drive price changes as well as two different investment philosophies. We also look at how one can model stocks with Stochastic Processes.

13. Analysing Market Risk – This is quite a mathematical chapter as we look at ways of forecasting volatility. We compare GARCH models to implied volatility.

14. Extreme Value Theory – EVT can be applied to various types of Risks but we look at it after market risk because for too long market risk has been modelled with the Normal Distribution instead of fat tail distributions that capture extreme values. In this video we look at the tails and try to figure out how one can model extreme events in the absence of sufficient data.

15. Managing Market Risk – We start this chapter by looking at 20 ways a farmer can manage their market risk without the use of derivatives. We then look at the limitations of derivatives and discuss how to manage currency risks, interest rates and equity risk.

16. Analysing Credit Risk – We compare counterparty risk to default risk before discussing the main differences between credit and market risk and why we have put credit spreads in this section. We then look at the Merton, KMV and Markov Models and how they can be used to measure credit risk.

17. Copulas – Copulas can be applied to other risk and are commonly used to aggregate risks but we have included them amongst Credit Risk because they are used in Credit Derivatives. The basic idea with copulas is that we cannot directly added probabilities because then we might get nonsensical probabilities that are greater than one. So the Copula idea is to first transform probabilities from state spaces of 0 to 1 to state spaces of 0 to infinity. In this tranceded state space the probabilities can be added. We then transform the combined probabilities from a state space of 0 to infinity back to a state space of 0 to 1.

18. Managing Credit Risk – We look at various credit risk management strategies including securitisation. Securitisation is a technique that allows an organisation to transform credit risk into market risk.

19. More managing strategies for Market & Credit Risk – Exotic instruments blur the line between market and credit risk and so we take a look at instruments like Interest Rate Swaps and Credit Default Swaps.

20. Operational Risk: People – Organisations need people for innovation and to execute tasks but people can make mistakes or act against an organisation. We look at work culture as well as different techniques on how to manage people and get the most from employees.

21. Operational Risk: Systems – Systems are the set of procedures that aim to complete a specific function. A vital system is one that manages the cashflow of an organisation. Thus in this chapter we also consider liquidity risk, how to measure it and how to manage it.

Part 4: Models, Capital & Case Studies

22. Overview of Models – The majority of problems that require actuarial skills involve taking a view on uncertain future events. Models can assist and be part of the solution. In this video we look at the components of a model and the different types.

23. Models in ERM – Models are used at almost every step of the ERM Framework and so also pose an operational risk to an organisation. Therefore sophisticated models need to be managed carefully and their results need to be balanced with human judgement.

24. Capital Management – Organisations need to determine the optimal amount of capital to hold. Hold too much and shareholders will experience low returns. Hold too little and the risk of ruin may be too high. We also revisit regulation and see why its important in the financial industry.

25. Capital Models – In this chapter we discuss how to develop a capital model and how it can be used to allocate capital across a business organisation.

26. Case Studies – In the final video we look at famous case studies and the risk management lessons that we can learn from them.

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