StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Executive Summary For Integrated Risk Management - Essay Example

Cite this document
Summary
This essay "Executive Summary For Integrated Risk Management" is a very good example is of Honeywell Inc. Honeywell has used an overall annual aggregate retention to manage its risks rather than using separate retentions for each risk. This does not only reduce premiums paid to insurance companies and investment banks but also integrates different functions of a multinational…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.7% of users find it useful
Executive Summary For Integrated Risk Management
Read Text Preview

Extract of sample "Executive Summary For Integrated Risk Management"

Executive Summary The increasing cost of managing risk is taking its toll on risk managers all around the world. The legacy risk management systems are becoming obsolete, both because of their operational limitation and high premiums. The contemporary concept of an enterprise wide risk management system is being adopted by many multinationals around the world. A very good example is of Honeywell Inc. Honeywell has used an overall annual aggregate retention to manage its risks rather than using separate retentions for each risk. This does not only reduce premiums paid to insurance companies and investment banks but also integrates different functions of a multinational. Introduction World has evolved rapidly over the last few decades. The changes on our economic horizon are just a part of a global economic shift toward better more efficient and transparent systems. The term ‘better’ is a very generic term. This has been used basically to make a statement about diversity. The term ‘better’ changes its meaning every few years for everyone. For example a few years ago it was better to own an apartment in a high rise apartment building than an ordinary house. Today however the trend has changed once again. People prefer buying private houses rather than apartments; even the most expensive ones. This is because of a socio cultural shift in human evolution. This is just a very small example of the change that is present all around us. Another example if of the concept used mostly in International Business Management (IBM) called ‘International Product Life Cycle’. This concept basically assumes that a product exists in every phase of its life cycle if we look at the world as a whole. A very relevant example would be of a Plasma LCD. These LCDs are in the growth stage of their life cycle in developed countries. In other developed countries however they might still be in the introductory stage. This is just an example of the complexity and diversity that is present in our business environment today. This complexity and diversity makes decision making very difficult. The risk factor therefore becomes even more prominent and damaging. When every decision might be right and wrong at the same time, how can you minimize risk? Moreover a global business environment is order of the day. This means that there are very few large and successful corporations which are not multinationals. Going beyond borders has therefore become a recipe for success. Recently a new phenomenon has emerged called outsourcing. This basically includes using human capital, technology, raw material and intelligence of developing nations. One of the main reasons behind using out sourcing is the cost advantages achieved by buying cheap and selling expensive. The concepts such as outsourcing have increased the risks of doing business even more. A corporation every day makes thousands of different transaction with counterparts located in different countries around the world. These corporations have different currencies, interest rates and hundreds of different economic variables which affect their performance. A very small example is of exchange rate risk being faced by a corporation operating from USA. This exchange rate risk would exist for all the different business ventures going on which involve outsourcing. Boeing for examples ships thousand of different components daily into USA. An exchange rate risk exists for each of these imports. Moreover each foreign company has country risk and other systematic and unsystematic risks associated with their operations. The assessment of each specific business partner is impossible because of cost implications. These very reasons have increased the market for derivates which provide insurance against the uncertainty and diversity inherent in our business environment. The types of risks that can be faced by a typical multinational are as follow: Currency Interest rate Liquidity risk Pension fund Credit risk Hazard risk Legal risk Regulatory risk Market risk These mentioned risks are both managed through derivates and operational measures. Other risks which are managed through traditional insurance are as follow: Employee risk General liability Property Product liability Employee liability Automobile liability Ocean marine transit Workers compensation Legacy Risk Management Systems In multinational’s risk management roles have usually been carried out by the treasury departments. The approach to risk has been although incorrect. This is because risks have usually been treated separately for different categories. When you treat risk separately for each category it would usually mean that spate departments need to be set up for each category of risk. This is in fact a waste of more than man power and organizational resources. This is indeed a waste of risk management opportunities as we will further uncover. Derivatives and Insurance The legacy systems being used in organizations usually used three different departments for risk management. The credit risk and exchange rate risk are usually managed by the financial risk management department. The roles in departments managing such risks usually focused on hedging with derivates. These derivates include futures, options etc traded on exchanges such as CBOT and CME. The role of these derivates is to absorb risk of investors. If we take for example a currency future (let’s say GBP/USD) it gives a certainty that pounds could be converted into USD (at predetermined price) at an agreed future date. This would take away risk of increasing or decreasing USD rates for corporations. The contract however comes at a certain price and even if it’s not exercised that price has to be paid. Other risk management roles in a multinational are capital market and insurance risk management. The capital market risk management usually manages any liquidity risks associated with securities or other cash equivalents being held by the company. The insurance risk management involves managing risks associated with liability risks mentioned above. Value Creation The risk management perspective of value creation aims at minimizing losses. This is because losses inevitably reduce value. The value creation is therefore assed not only ROI and ROE but also by reduction in administrative expenses and options premium. This means that risk management also has the role of reducing the cost spend on minimizing risk. As mentioned earlier even if derivates are not exercised a number of costs are associated with their usage. These include premiums, brokerage costs and administrative expenses. Integrated risk management This is a new and revolutionary phenomenon in risk management. The concept is aimed at reducing costs of managing risk for multinationals. This concept is therefore only applicable for corporations with many different products and markets. As the diversity in markets and products increases the effectiveness of integrated risk management framework is also increased. The concept is basically borrowed from financial theories such as capital market theory. According to these financial concepts, each stock in the market has a beta, which shows its correlation with overall market movements. Betas of different stocks in the stock market make the beta of the market as a whole (i.e. 1). The beta of 1 according to portfolio management’s concepts would be a zero risk sate. In such a zero risk state all the unsystematic risk is removed from the portfolio. The systematic risk is although still present. This systematic risk is actually due to macro economic variables and cannot be diversified away. The enterprise risk management framework builds itself on these concepts. The entire set of risks being faced by a multination are considered as a portfolio. In such a portfolio risks will have both negative betas and positive betas. This will basically be dependent on correlations. Different risks with negative correlations will tend to cancel each other out. Such as system was proposed by Honeywell Inc. The idea behind their enterprise risk integration model was to create an innovative insurance contract. Under a multiyear policy such a contract can combine their traditional hazard risk with foreign exchange translation risk. The basic assumption behind this contract was that the total losses followed a probability distribution and that correlation between currency risk and insurance risk was zero. Therefore a singular insurance coverage policy can be established which has one annual aggregate retention rather than separate retention for each risk. This would not only reduce cost but integrate the business together. This integration is very important in a diverse business environment. From a purely strategic management perspective this would also provide the business with advantages of less reliance on outsourcing. The overall expenses on hiring and maintain administrative staff is reduced greatly. This is because the calculation and paper work for each insurance unit separately is much more expensive than overall. The method adopted can differ from organization to organization. If however we take a look at risk integration framework provided by Honeywell we can see that different categories have been redefined. A two dimension strategy incorporates the entire risks being faced by the company into two broad categories. The Product market risk has sub categories such as Input risk, Tax risk and regulatory risk. The second category defines the operational risks being faced by an organization. This broad category is divided further into Legal and financial risks etc. This whole process of integrating the risk management goes a long way into changing the perspective about risks. The managers of risk usually try to avoid taking risks. This however also means that important earnings are forgone because risk is not taken. The integrated management of risk approach motivates employees to venture into risky activities as long as these risks are balancing out other risks and thus bring down the risk of doing business. Conclusion The example of Honeywell Inc has shown that this system is effective in reducing cost of managing risk. The managers must take other measures as well such as flexible manufacturing, standardized product, diversification and using part timers to manage their risks. References Froot, K. David, S. Stein, J (1994). A Framework for Risk Management. HBR. Reprint 94604 Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Executive Summary For Integrated Risk Management Essay, n.d.)
Executive Summary For Integrated Risk Management Essay. https://studentshare.org/management/1563858-integrated-risk-management-financial-risk-management
(Executive Summary For Integrated Risk Management Essay)
Executive Summary For Integrated Risk Management Essay. https://studentshare.org/management/1563858-integrated-risk-management-financial-risk-management.
“Executive Summary For Integrated Risk Management Essay”. https://studentshare.org/management/1563858-integrated-risk-management-financial-risk-management.
  • Cited: 0 times

CHECK THESE SAMPLES OF Executive Summary For Integrated Risk Management

Analysis of Corporate Governance Arrangements - Sainsbury

Outside of traditional corporate governance activity found in most industries in large organisations, which include finance, operational strategy, risk management and compliance controls, Sainsbury's board is also structured with subcommittees (Steering Groups), responsible for a wide variety of assessments ranging from corporate social responsibility to stakeholder relationship management imperatives (Sainsbury 2012).... executive summary Corporate governance is defined as the system by which a business is controlled and directed, including a variety of different regulatory mechanisms, conducting market assessments, and aligning management activity to board-issued agendas and strategies (Tricker 2009)....
8 Pages (2000 words) Essay

Research typical business plan models

The layouts above consist of the executive summary that analyzes the objectives, keys to success and mission.... It is paramount for a business to have purpose and this must be well elaborated in the executive summary (Doan, 2013).... This is a strength consideration since achievement of objectives is based on the executive summary.... executive summary then consequentially followed by company, business type, market analysis, strategy and implementation, management and lastly financial plan summary is chronological steps essential for business plan....
4 Pages (1000 words) Essay

Strategic Capacity of Project Management

executive summary 2 2.... executive summary In this paper, there are set of questions that I am set to set to answer in compliance to a course that I am enrolled in.... Project management Name of the Student of Teacher Contents 1.... Project management Plan 5 3.... I will be discussing some salient points relative thereto project management and will also discuss how these key points will contribute to the enhancement and achievement of targeted company goals....
8 Pages (2000 words) Essay

The Unification of Information Security Program Management and Project Management

In light of the mentioned union, his paper will discuss the risks brought about by the new technology, the tasks to be dealt with in developing the Enterprise Information Security Program, and the adherence to executing risk management.... An executive summary of a research entitled "Making Security an Integral Part of the Management" from Computer Electronics Inc.... The breakthrough of the new technology and the aim of any organization or enterprise to achieve development and better service have pushed the unification of Information Security Program management and Project management....
5 Pages (1250 words) Article

The Financial and Regulatory Risk Facing the Organisation in Saudi Arabia

Good governance, prudent risk management and adherence to the established operating standards eliminate or limit financial and… Global markets have undergone rigorous changes in the past and current centuries.... The high profile scandals that have been reported in the past make the implementation of integrated GRC mandatory....
4 Pages (1000 words) Essay

W3Q-Executing and implementing project portfolio management

Rouse (2013) defines project portfolio management as “a strategic prioritization methodology employed to analyze and manage current or proposed projects within an organization”.... The purpose of this approach is to identify the best possible combination and sequence of… It is rather a continuous process based on collection of project data for evaluation of project performance and optimal utilization of company's resources towards execution of work that supports business Executing and Implementing Project Portfolio management Rouse defines project portfolio management as “a strategic prioritization methodology employed to analyze and manage current or proposed projects within an organization”....
2 Pages (500 words) Assignment

Private and Public Entity Risk Management

In the paper “Private and Public Entity risk management” the author analyzes the various categories of risk which are: personal risk which impact individuals on a personal level such as life and health issues.... hellip; The proceeding chapter of the paper divulges on the risk management process (risk controls) which begin with risk classification of specific risks in a given environment.... Like many of it is counter-parts the Minnesota state government has largely ignored the vital role played by risk management in achieving both operational and strategic objectives....
5 Pages (1250 words) Essay

Strategic Network Management

"Strategic Network management" paper provides insightful and detailed information pertaining to online social networking.... They should encourage accountability, introduce ethical guidelines on computer usage, integrate antivirus software, and construct a centralized data management unit.... 24) most institutions that are vibrant in terms of performance, productivity, and human resource management operate within the confines of networking platforms....
6 Pages (1500 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us