ermbc - Enterprise Risk Management and Business Continuity...

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Enterprise Risk Management and Business Continuity Rick Gorvett, FCAS, MAAA, ARM, FRM, Ph.D. Actuarial Science Professor Departments of Mathematics and Finance University of Illinois at Urbana-Champaign Crisis Management & Business Continuity Seminar Bloomington, IL October 10, 2003
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Agenda About me A risky world Broadening our perspective Enterprise risk management (ERM) Evolution Current state Relationship to Business Continuity Conclusion
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“Who am I? Why am I here?” - Admiral James Stockdale, 1992 Currently Professor, Depts. of Mathematics and Finance University of Illinois at Urbana-Champaign Prior Senior Vice President Director of Internal Audit & Risk Management Internal Audit Corporate Investigations Risk Management Enterprise Risk Management Business Continuity
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A Risky World And it just seems to be getting riskier! What’s getting riskier about our world? What isn’t ? Perhaps aspects of technology, medical care,…? Evidence of riskiness Catastrophic events in a more crowded world with greater vulnerabilities Current events Books – e.g., Safe Food: Eating Wisely in a Risky World Financial markets
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Why Worry About Interest Rate Risk? (cont.) Data per FRED II, St. Louis FRB, for 3-Month T-Bills, Secondary Market Monthly Change in U.S. T-Bill (Annualized) Returns -6 -4 -2 0 2 4 Month (Jan 1934 through June 2003) Change in Annualize Return (Percentage Points)
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Why Worry About Interest Rate Risk? (cont.) Data per FRED II, St. Louis FRB Historical Term Structure U.S. Treasuries 0 2 4 6 8 10 12 14 16 18 1977 1983 Calendar Month (1977 to 1983) Percentage Rate 3-month 1-year 5-year 10-year
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Why Worry About FX Risk? Time Series of Annual Percentage Changes in Exchange Rates Japanese Yen / U.S. Dollars (Data per FRED, St. Louis FRB) -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 1971 1975 1979 1983 1987 1991 1995 1999 Year Percentage Change
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Steps in the Risk Management Process Determine the corporation’s objectives Identify the risk exposures Quantify the exposures Assess the impact Examine alternative risk management tools Select appropriate risk management approach Implement and monitor program
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The Bottom Line: It All Boils Down to Capital Capital Assets less liabilities; owners’ equity; net worth Support for (riskiness of) operations Thus, supports profitability and solvency of firm Capital Management Determine need for and adequacy of capital Plans for increasing or releasing capital Strategy for efficient use of capital
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