The Risk Centre of Competence
1. Basel III is the Basel Panel’s response to the international economic meltdown that fixed several deficiencies in the regulatory framework before a disaster and established the basis for a robust monetary system that will help avoid universal risks. If this paradigm is followed, the financial sector maintains an actual economy throughout the economic cycle (High-Level Summary of Basel III Reforms.Pdf, n.d.). For example, an insurance business manages a corporate bond portfolio where one of the portfolio’s critical investments has just gone into default and is revealed to be a jeweller. As a result, the company’s debt instruments will be converted to equity, and the company now controls 55% of the jewellery maker’s shares. The Committee’s recent amendments complement these improvements to the worldwide regulatory structure. The changes are intended to improve the comparability of bank capital ratios and restore faith in risk-weighted asset computations (RWAs).
2.
- A more rigorous way is to use checklists of prospective risks and analyse the possibility of such events occurring during the venture. For example, some firms and activities create risk checklists founded on past project practice (Risk Assessment and Management: A Complete Guide | British Safety Council, n.d.). These specifications can help the scheme executive and team discover specific dangers on the agenda while also extending their ideas.
- After categorising risks, the development team assesses each one based on the possibility of a risk event and probable loss. Not all hazards are the same. Some risk incidences are more probable than others, and the cost of peril suggestively. The next step in the risk administration process is to evaluate the risk in terms of its chance of occurrence and the severity of the potential project loss.
- Contingency Planning – After identifying and analyzing the risk, the project team develops a mitigation plan that minimises an unanticipated event’s impact.
3. The Risk Centre of Competence helps the company achieve its risk management strategy by developing or civilising risk systems and procedures and the possessions and skills needed to undertake a risk effectively. This organisation can serve as a project trainer and guide and a supplier of capacity resources(“Risk Management Team Roles,” 2021). In addition, this group is in charge of the company’s documentation, guidance, audits, and counsel. If the risk manager has any difficulties with the strategy, they may seek assistance from the enterprise risk committee.
Stakeholders are likely to be interested in how successful the team is at these roles
The premier, vice commanders, management, division leaders, the commercial operations agency, and others are top executives. These people are in control of the company’s strategy and expansion.
On the good side, everyone will be more expected to eat well, making it modest to hire the finest personnel for the crucial supplies and incomes; visibility may also help a venture manager advance professionally within the firm.
On the negative, failure can be evident and spectacular, and if the project is costly (as most are), the cost of disappointment will be higher than it would be for a more minor, less noticeable effort.
4. The central risk policies EIOPA guidance expects an insurance group to have in place.
- Given the increasing severity and frequency of extreme weather occurrences, environmental risks are the top risk in predicted growth in materiality for the insurance and pension industries. As a result, supervisors must ensure that adequate risk management systems, particularly at reinsurers, are in place to handle underwriting concerns(Bekker, 2021). However, the insurance business may see increasing demand for new services and play a critical role in bridging current protection gaps. Furthermore, due to extensive digitisation trends and home office solutions, cyber risk is one of the most significant concerns for the European insurance market. Despite the growing pace, our understanding of cyber hazards is still restricted, indicating that data collecting and cyber risk modelling need to be improved. The cyber threat is similar to the environmental threat.
- Additionally, due to extensive digitisation trends and home office solutions, cyber risk is one of the most significant concerns for the European insurance market. Despite the growing pace, our understanding of cyber hazards is still restricted, indicating that data collecting and cyber risk modelling need to be improved. Since insurers may find potential in the cyber sector with environmental concerns, demand for cyber insurance is expected to increase. The epidemic, which is still going on, has brought to several sandy areas of financial stability concern and offered regulators, supervisors, and market participants significant lessons learnt. Despite this, EIOPA feels that data from the crisis should be treated with care. Keeping in mind that exceptional fiscal policies combined with supportive monetary policies may have thrown off conventional risk assessment frameworks
Ways in which the group’s central risk team may have contributed to these policies
- Transparency and openness—the government will be forthcoming about its sympathy for the nature of communal threats and its measures to address them.
- Participation—the government will make every effort to include as many individuals as possible in the decision-making process.
- Quantity and reliability—the government will consistently and reasonably respond to public safety threats.
- Evidence—the government will make decisions based on all available information.
- Responsibility—the government will attempt to delegate risk management tasks to those most qualified.
Governance requirements EIOPA guidance expects the group to have followed when preparing these risk policies
- Ascertain that insurance and reinsurance firms and organisations are taking the appropriate safeguards.
- EIOPA should receive a status report on the implementation of these Guidelines.
- Ensure that the undertaking’s administrative, management, or supervisory body has adequate engagement with any committees it establishes and senior management and other essential roles by proactively asking for information and questioning it when required.
- Ascertain that the project’s organisational and operational frameworks are in place to support the project’s strategic objectives and operations.
- Ascertain that risk management, compliance, internal audit, and actuarial tasks are correctly executed.
- Ensure that at least two persons are in charge of the project. Before a crucial decision can be implemented, it must be authorized by at least two persons who effectively run the organisation.
5. Assess the risks that such a business expansion might introduce to the airline.
- There is a cash shortage. As a result, a loan may be required to acquire more premises or equipment to expand.
- Capital needs have risen. A more significant business requires more labour, more buildings or equipment, and, in many circumstances, more cash.
- Sovereignty is being removed from you. (Advantages and Disadvantages of Business Expansion | Allianz Trade, n.d.) Larger organisations must delegate extra managerial tasks or divide workloads across many sites. This might lead to decreased quality, worker morale, and a higher employee turnover rate, eroding customer relationships.
- Productivity improvement has suffered as a result of a lack of resources. The additional effort may be too much for management, staff, and even computers.
6. Discuss the typical components of an economic capital model
The performance metrics reappearance on risk-adjusted capital (RORAC), risk-adjusted return on capital (RAROC), and economic worth-added all involve economic capital (EVA). Business divisions that perform better on specified indicators may get more of the firm’s cash to decrease risk(Aven & Renn, 2018). Market and operational risks are assessed and described using economic wealth in a financial firm. Economic capital assesses risk by emphasising economic authenticity above fictitious accounting and regulatory traditions. This technique, also known as a risk-based profitability assessment methodology, enables analysts to examine a company’s financial performance and develop a consistent profitability perspective across various business sectors and industries.
Governance requirements
How such a model might be used by an airline or by a bank
Banks and airlines can use the economic model to a to plan on future financial needs. the economic model can guide both banks and airlines on the amount of capital required for them to remain solvent at agiven confidence level. this economic capital would define the amoubt of risk capital requirement from the bank’s or airlines perspective.
How the output of economic capital models might help either or both of these parties when negotiating the terms of such a transaction
The outcome of economic capital estimates can be used in guiding the allocation of capiutal to units that generate high profit per unit risk. For example a business with a profit of $50 million and an Economic capital estimate of $100 million would be preferred to a business unit with $30 million profit and an epected EC estimate of $120 million.
7. Using only the above data, prepare estimates of these two VaR risk measures as at 31/12/2021, stating all assumptions you have adopted, explaining your choice of statistical methodology and providing your working
The maximum expected loss at both 95% and 99 % confidence level is 1.8 as
This has been calculated by importing the data to excel and calculated by following the below steps.
Step 1. Noting down the number of observations for the provided data
Step 2: deciding on the VaR confidence level to be used, which was taken as 95% and 99% for comparison purposes
Step 3. Determine the tail end risk which is = 1 – % confidence level
Step 4 .determine the VAR for the two confidence levels using the excel function: large =( array,k) where array is the loss data and k is number of observations + 1
Below is a snapshot of excel calculation results
Suggest additional data you might be able to obtain that would be likely to make your estimates more accurate
Trend analysis of the could be used to further get more accurate estimate of expected Value at risk
8. Describe how an equity-based portfolio credit risk model differs from a ratings-based portfolio credit risk model and the main instrument types that are hard to cater to in one or both models.
Ratings-based tactics, such as JP Morgan’s Credit metrics outline, presume that the risk of credit acquaintances is summed up in credit quality assessment and simulates evolutions between rating categories for individual experiences and associations between shifts for pairs of publicities(Nickell & Perraudin, n.d.). On the other hand, equity-based models, such as those employed by consulting firm KVM, presume that the value of credit exposures is a derivative written on the underlying asset value of the business. Following that, the behaviour of share price variations is used to determine the unpredictability and correlation structure of asset values.
References
Aven, T., & Renn, O. (2018). Improving government policy on risk: Eight fundamental principles. Reliability Engineering & System Safety, 176, 230–241. https://doi.org/10.1016/j.ress.2018.04.018
Bekker, M. (2021, December 13). EIOPA highlights critical risks for the insurance and pension sectors [Text]. Europe – European Commission. https://www.eiopa.europa.eu/media/news/eiopa-highlights-key-risks-insurance-and-pension-sectors_en
High-level summary of Basel III reforms.pdf. (n.d.). Retrieved April 6, 2022, from https://www.bis.org/bcbs/publ/d424_hlsummary.pdf
Nickell, P., & Perraudin, W. (n.d.). Ratings versus equity-based credit risk modelling: An empirical analysis. 38.
Risk Assessment and Management: A Complete Guide | British Safety Council. (n.d.). Retrieved November 5, 2021, from https://www.britsafe.org/training-and-learning/find-the-right-course-for-you/informational-resources/risk-assessment/
Risk Management Team Roles: Who takes care of Project Risk? (2021, September 27). MI-GSO |CUBEDD. https://www.migso-pcubed.com/blog/pmo-project-delivery/risk-management-team-roles/
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