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DFA vs. ERM Is There A Difference?

DFA vs. ERM Is There A Difference?. CAS Special Interest Seminar Understanding the Enterprise Risk Management Process San Francisco, CA April 2-3, 2001 André Lefebvre, FCAS, MAAA. Changes in the Business World.

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DFA vs. ERM Is There A Difference?

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  1. DFA vs. ERMIs There A Difference? CAS Special Interest Seminar Understanding the Enterprise Risk Management Process San Francisco, CA April 2-3, 2001 André Lefebvre, FCAS, MAAA DFA Capital Management Inc.

  2. Changes in the Business World • In the new economy, CEOs are facing unrelenting pressure to lead and improve their company’s performance • At the same time, the rules are changing: • Increasing complexity of the global economy • Higher customer expectations • Intense competition • Rapid changes in technology DFA Capital Management Inc.

  3. Master Risk  Create Value • Organizations are searching for and developing more comprehensive approaches to monitor and manage business risks • Business Risk: The threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully1 1 Managing Business Risk: An Integrated Approach, The Economist Intelligence Unit, 1995 DFA Capital Management Inc.

  4. Enterprise Risk Management ERM is an interactive process of well-defined steps which, taken in sequence, support better decision-making by contributing a greater insight into business risks and their impacts DFA Capital Management Inc.

  5. Elements of ERM Process C o m m u n i c a t i o n Establish Context M o n i t o r & R e v i e w Identify Risks Analyze/Quantify Risks Integrate Risks Assess/Prioritize Risks Treat/Exploit Risks DFA Capital Management Inc.

  6. Establish Context • Understand the: • strategic (external) context • organizational (internal) context • risk management context • Develop the risk evaluation criteria • Define the structure DFA Capital Management Inc.

  7. Identify Risks Document the conditions and events that represent material threats to the organization’s achievement of its strategic objectives or represent areas to exploit for competitive advantage DFA Capital Management Inc.

  8. Types of Risks • Strategic • e.g., competitor risk, shareholder relations risk • Operational • e.g., customer satisfaction risk, authority/limit risk • Financial • e.g., price risk, liquidity risk, credit risk • Hazard • e.g., catastrophic loss risk, health & safety risk DFA Capital Management Inc.

  9. Analyze/Quantify Risks • Analyze risks in terms of consequence and likelihood in the context of existing controls • Quantify the consequence and likelihood using qualitative, semi-quantitative, or quantitative (or a combination of these) analyses DFA Capital Management Inc.

  10. Integrate Risks Aggregating all risk distributions, reflecting correlations and portfolio effects DFA Capital Management Inc.

  11. Assess/Prioritize Risks • Evaluate the risk • Prioritize list of risks DFA Capital Management Inc.

  12. Treat/Exploit Risks • Identify options for risk treatment • Assess the options • Prepare risk treatment plans • Implement treatment plans DFA Capital Management Inc.

  13. Monitor & Review • It is necessary to monitor the risks, the effectiveness of the risk treatment plan, the strategies, and the management system that is set up to control the implementation • Ongoing review is essential to ensure that the management plan remains relevant DFA Capital Management Inc.

  14. Communicate Important to develop a communication plan for both internal and external stakeholders at the earlier stage of the process DFA Capital Management Inc.

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