2011 @RISK Congress
Risk Management
PwC and Palisade an overview
Who?
Frank Lyhne Hansen, Director, MSc. Math + Econ
Associate professor, Copenhagen Business School, department of Finance
E-mail: flh@pwc.dk
Direct tel:+45 40269961
PricewaterhouseCoopers
“Enterprise” Risk Management (ERM) are based on a simple
philosophy
” The purpose of risk management is to manage risk appropriately and creating a
return on investment, rather than to eliminate risk”
COSO II
FEE Discussion paper, EU Marts 2005
PricewaterhouseCoopers
Risk assessments are often not harmonized, which is a barrier to
effective reporting, consolidation and management
Risk
Severity
Low
Low
Medium
Medium
A fire starting in the electric system and spread to the stock and causes stop in production
A fire starts from a machine and the production building burns down
Worker get hurt after a fall
CXO leaves the company and goes to the competitor
Risk
Assessment
Risk
Competition
Dollar
Product development
Workers
Suppliers
☺
Sterling
Interest rate
Oil price
Marginal VaR (99%)
75 mDKK
20 mDKK
50 mDKK
10 mDKK
?
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Consequence
High
High
Medium
Low
Case: Conglomerate eliminated natural
diversification by hedging
BU A and BU B fluctuates due to
changes in the oil price. Group
profits are stable.
Profit
BU A hedges the oil price to stabilize
their profits. Group profits now
fluctuates.
Profit
BU 1
BU 1
Group
Group
BU 2
BU 2
Time
Time
Case: More and more companies are building models, that
includes strategic, financial and operational risks
One example is Copenhagen Airport:
• 4 (out of more the 150 identified risks) made up 91% of the total risk
exposure
• Very important to look at correlations between risks
• A lot of risk did not effect the risk exposure at all
• Potential savings on hedge, insurance and other risk initiatives
• Capacity planning taking risk into account
Risk management ”model”
• Identification of the risks to be included in the ”model”
• Collection of data for the risks
• Statistic analysis of the risks to estimate the statistical distributions
(probability and consequence )
• Subjective analysis of the non-data driven risks to estimate the statistical
distributions (probability and consequence )
• Quantitative and qualitative analysis's of correlations between risks
• Monte Carlo simulations
• Sensitivity analyses and review of the model
• Result analysis
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Risk Management is used in more and more processes in the
company
Outsourcing
Investment decisions
Project mamagement/pricing
M&A
Budgeting
Working capital
Liquitity management
Strategic planning
Insurance-/hedging strategy
……
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For the energy company the risk quantification revealed, that the
acquisition of loss insurance would increase the company's risk?
Production:
• 27 essential operational
risks.
Insurance:
• Operating loss and damage
Risk management:
• Insurance
• excess.
Risk management:
• purchase of expensive
spare parts
• increased commodity stocks.
Finance:
• electricity prices, exchange
rates , commodity prices.
Risk management:
• Purchases of financial
hedges and long-term
contracts.
Integrated
RISK
Best,MAP
mediu
WORKSHOP
m og
worst
case
nedetid for
27
risici
D
K
K
Elpris
er
Forven
tet
nedetid
Sands
ynlighed
for 27
risici
Forve
ntet
og
worst
case
tingsk
adeomkos
tning
for 27
risici
Fue
D
Risiko
l
K
Kvantificering
(kul
,
olie
hal
m)
pris
er
/
N
O
K
K
/
U
S
D
X ×k
i
Indtjening pr.
produktionsuge
pr. værk
Forven
tet
tingska
deomkost
ning
PricewaterhouseCoopers
The operational, insurance and financial risks
just reduces each other.
Fuel
udnyt
telse
pr.
værk
Business
Interruption
omkostning
Tingskadeomkostning
i
Prod
uktions
kapa
citet
pr.
værk
Indtjeni
ng
ERM allows for optimization and balancing of
risk management: purchase of spare parts,
insurance and financial hedges
The results of the analysis
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