IV: SPECIALIZED ASPECTS OF RISK MANAGEMENT
Part IV of the book captures unique aspects of ERM so that the reader can learn about the many broad applications, including insights into managing specific types of risk. This part starts with a case study in Chapter 17 of the challenges of risk management within a typical police department. This case is followed by eight additional chapters addressing other intriguing aspects of risk management.
Andrew Graham reveals the complex and challenging aspects of risk management in Chapter 17, "Developing a Strategic Risk Plan for the Hope City Police Service." This fictional case study was developed based on many years of teaching risk management to police forces. The setting is a medium-sized but growing city that is facing many issues, including changes in demographics, traffic issues, budgetary challenges, and so on. The student is required to act as a consultant who has been hired by the chief of police to assist him in briefing the Police Services Board and the mayor in understanding the most critical risks to their objective of having a best- in-class police service for their citizens. Andrew Graham researches, teaches, and writes on public-sector management, financial management, integrated risk management, and governance at Queen's University School of Policy Studies, Canada, as well as a variety of international and Canadian venues. Andrew had an extensive career in Canada's criminal justice system and has taught and worked with police services and police boards and commissioners in a variety of ways for the past 10 years.
Chapter 18, "Blue Wood Chocolates," is designed to facilitate discussion of the implementation of an ERM framework, corporate governance issues, and commodity risk management. The situation that this fictional company faces is typical of many midsize companies that have performed satisfactorily in the past but are exposed, often unknowingly, to major potential risks and do not have the internal governance and risk management structures to identify, quantify, and manage such risks adequately. In particular, this case illustrates commodity and foreign currency exposures, and challenges the student to investigate the specifics of hedging such positions. Rick Nason, PhD, CFA, and Stephen McPhie, CA, coauthored this chapter. Rick is an associate professor of finance at Dalhousie University, Canada, and is also a founding partner of RSD Solutions, a risk management consultancy firm. His coauthor, Stephen McPhie, CA, is a partner of RSD Solutions Inc. and has also held various positions in the United States, Canada, and the United Kingdom with a major Canadian bank.
Foreign exchange (FX) risk management is one of the greatest financial risks a company faces when expanding globally. Chapter 19, "Kilgore Custom Milling," illuminates the myriad of issues that arise when hedging FX risk, such as faced by a midsize original equipment manufacturer (OEM) operating in the automobile industry. Kilgore Custom Milling (a fictional company) needs to develop a hedging strategy to manage its foreign exchange risk for a new contract and decide what type of derivatives to use, what size of hedge to implement, and how the company's financial risk management fits in with its overall ERM process. Rick Nason and Stephen McPhie, coauthors of Chapter 18, team together again to explore the complex and challenging issues that many companies face with FX risk.
ERM is currently of very high interest to companies operating in the Middle East, an area that presents unique challenges for implementation. Alexander Larsen captures this scenario in Chapter 20, "Implementing Risk Management within Middle Eastern Oil and Gas Companies." This case study is based on real- life examples of Middle Eastern oil and gas companies and captures the challenges of implementing risk management in the Middle East. Alexander Larsen holds a degree in risk management from Glasgow Caledonian University and is a Fellow of the Institute of Risk Management. He has over 10 years of experience across a wide range of sectors, including oil and gas, construction, utilities, finance, and the public sector. Alexander has considerable expertise in training and working with organizations to develop, enhance, and embed their ERM.
Public safety organizations are increasingly adopting sophisticated enterprise governance and risk management techniques as a means of managing their programs and expenditures. Root cause analysis can provide these agencies with detailed insights into the problems and issues they face, and provide them with the information they need to make informed decisions on risk management. Chapter 21, "The Role of Root Cause Analysis in Public Safety ERM Programs," explores these issues by presenting six common root cause analysis techniques that are applied in a public safety or law enforcement environment. The chapter author, Andrew Bent, is a practicing risk manager with a large Canadian integrated energy company and was previously in charge of ERM for one of Canada's largest municipal police services.
Chapter 22, "JAA Inc. – A Case Study in Creating Value from Uncertainty: Best Practices in Managing Risk," provides extensive details about ERM implementation in a fictional international organization and discusses topics including governance structure, the processes, and the various tools used. The case is built on the principles and guidance of ISO 31000 and the implementation guidance created by The Australian and New Zealand Hand Book HB 436. This case emphasizes the roles of the heads of the internal audit function and the risk management function. The three coauthors of this chapter have extensive experience in risk management. Julian du Plessis, Head of Internal Audit at AVBOB Mutual Assurance Society, South Africa, has over eight years of financial sector experience. Arnold Schanfield is a Principal with Schanfield Risk Management Advisors LLC, and is an internal audit and risk professional with diversified industry expertise. Alpaslan Menevse is currently the Risk Officer at Sekerbank T.A.S., which has in excess of 310 branches in Turkey. He has 28 years of experience in information systems, both as an academic and as a practitioner.
A book on ERM case studies is not complete without some coverage of risk management failures. One of the most famous failures involving operational risk is discussed in Chapter 23, "Control Complacency: Rogue Trading at Societe Generale." In January 2008, Societe Generale uncovered €49 billion of unauthorized equity positions at its Paris head office, which cost €4.9 billion to unwind. Using an interactive format, this case study analyzes the origins, actors, causes, and consequences of this notorious control breakdown and derives risk management lessons from it in the areas of corporate governance, controls, compliance, systems, technology, and reputation risk. The author, Steve Lindo, Principal, SRL Advisory Services, has many years of experience in ERM and provides a thorough and fascinating coverage of this disaster.
Value at risk (VaR) is one of the most widely used techniques to measure financial risks, particularly in the area of investment portfolios. However, it is a technique that has not been fully understood by many risk managers. In Chapter 24, "The Role of VaR in Enterprise Risk Management: Calculating Value at Risk for Portfolios Held by the Vane Mallory Investment Bank," VaR is described along with its underlying assumptions, advantages, and disadvantages. Several examples for single assets are detailed for both the dollar and percentage VaR estimation methods. The main focus of this case study is a tutorial on calculating VaR for portfolios of assets using the covariance approach utilized in portfolio theory. Allissa A. Lee coauthored this case study with Betty J. Simkins. Allissa is an assistant professor of finance in the College of Business Administration at Georgia Southern University. She has published several academic articles and also worked in the mortgage industry for MidFirst Bank. Betty, coeditor of this book, is the Williams Companies Chair of Business and Professor of Finance at Oklahoma State University.
Chapter 25, "Uses of Efficient Frontier Analysis in Strategic Risk Management," covers an advanced analytical technique, efficient frontier analysis (EFA), where complex property and casualty risk profiles are being considered. This chapter provides insights into risk portfolio volatility, pricing, and insurance layering efficiency using EFA and is applied to a risk portfolio that presents catastrophic loss potential within the context of strategic risk management. This chapter's coauthors are Ward Ching, who is Vice President, Risk Management Operations, at Safeway Inc., and Loren Nickel, who is Regional Director and Actuary, Actuarial and Analytics Practice, at Aon Global Risk Consulting. Both authors have extensive experience in property and casuality risk management and share their expertise in this specialized topic of ERM.