managing risk new ideas from the private...

Managing Risk – new ideas from the private sector NHF Risk Conference

21st January 2014

Presented by:

Mike Morley-Fletcher

Devonshires Business Advisory Service

[email protected]

07876 240405

mailto:[email protected]




Who are these drivers?

Who are these drivers?

Risk Management is

about seizing

opportunities as well

as reducing risk

Danger and opportunity

Chinese definition of “risk”

Danger Opportunity

Look at

upside risk

as well as

downside

risk,

seize the

opportunities

“What is the reward for risk?”

From the 2013 film, Rush, about James Hunt and Niki Lauda’s rivalry for the 1976

Formula 1 World Championship title ………………..

Niki Lauda has met a lady he wants to

impress and has been asked to drive

her to the station. He drives rather

sedately and she, knowing he is a F1

driver, asks why:

Niki Lauda: “There's no need to drive

fast. We're not in a hurry, we're not

being paid. There is no reward for the

risk. So why would I drive fast?”

Marlene Knaus: “Because I'm asking

you to”.

[He speeds up and

marries her shortly afterwards]








driver, asks why:






you to”.

[He speeds up and





Link

risk to

reward





driver, asks why:






you to”.

[He speeds up and



Niki Lauda argues his case for

cancelling the 1976 German Grand Prix,

due to atrocious weather conditions:

Niki Lauda: I accept that every time I

get into my car, there's a 20% chance I

could die …. and I can live with that.

But not one percent more! And today,

with the rain, the risk is more.

[They raced, he crashed

and almost died]



Link

risk to

reward





driver, asks why:






you to”.

[He speeds up and



Niki Lauda argues his case for

cancelling the 1976 German Grand Prix,

due to atrocious weather conditions:

Niki Lauda: I accept that every time I

get into my car, there's a 20% chance I

could die …. and I can live with that.

But not one percent more! And today,

with the rain, the risk is more.

[They raced, he crashed

and almost died]



Link

risk to

reward

Know

your risk

tolerance

The challenge?

How to make

risk

management

less a

wearisome

compliance

exercise

and more

a winning

competency?

Agenda

1) Have a more interactive

presentation and discussion

of risks to get more value for

risk management

The challenge?

How to make

risk

management

less a

wearisome

compliance

exercise

and more

a winning

competency?

Agenda

How to:




risk management

2) Use Risk & Return Analysis

to make risk-adjusted

decisions

The challenge?

How to make

risk

management

less a

wearisome

compliance

exercise

and more

a winning

competency?

Agenda

How to:




risk management

2) Use Risk & Return Analysis

to make risk-adjusted

decisions

3) Use risk information real time

to provide confidence and

warn of impending danger

The challenge?

How to make

risk

management

less a

wearisome

compliance

exercise

and more

a winning

competency?

Agenda

How to:

The challenge?

How do you

make

presentation

and discussion

of risk more

valuable to the

Board and the

Association?

1) Interactive presentation &

discussion of risks

Risk Map

- What is the risk?

- What should it be?

The challenge?

How do you

make

presentation

and discussion

of risk more

valuable to the

Board and the

Association?


discussion of risks

Risk Map

- What is the risk?

- What should it be?

Risk Tolerance

- Board’s statement

- Management’s response

The challenge?

How do you

make

presentation

and discussion

of risk more

valuable to the

Board and the

Association?


discussion of risks

LIKELIHOOD (over BP period)

IMP

AC

T (

max p

a)

4) critical

1) manageable

2) moderate

( £ 50 – 100k)

3) serious

(g) high (d) high (b) critical (a) critical

(k) medium (h) medium (e) high (c) critical

(n) low (l) medium (i) medium (f) high

(p) v.low (o) low (m) medium (j) medium

1) Remote (< 10%) 2) Possible (10 - 50%) 4) Likely (> 80%) 3) Probable (50 - 80%)

(< £ 50k)

( £ 100 – 200k)

(> £ 200k)

RISK MAP (net risk)

Risk Map – what is the risk?

what should it be?


IMP

AC

T (

max p

a)

4) critical

1) manageable

2) moderate

( £ 50 – 100k)

3) serious






(< £ 50k)

( £ 100 – 200k)

(> £ 200k)

RISK MAP (net risk)

G

N

T


what should it be?

G

N

T

= Gross exposure, before controls

= Net exposure, after controls

= Target exposure, after further actions


IMP

AC

T (

max p

a)

4) critical

1) manageable

2) moderate

( £ 50 – 100k)

3) serious






(< £ 50k)

( £ 100 – 200k)

(> £ 200k)

RISK MAP (net risk)

G

N

T

G

N

T

= Gross exposure, before controls

= Net exposure, after controls

= Target exposure, after further actions


what should it be?

Score Description Relative %

Actual (eg, on Surplus of £1m)

4 Critical > 20% > £200K

3 Serious 10 - 20% £100 – 200k

2 Moderate 5 – 10% £50 – 100k

1 Manageable 0 - 5% < £50k

Score

Description Likelihood

4 Likely > 80%

3 Probable 50 - 80%

2 Possible 10 – 50%

1 Remote 0 - 10%

IMPACT Criteria

LIKELIHOOD Criteria

Which is

better

?

Risk Map – comparison?

Which is

better

?


40%

risk?

60%

risk?

Which is

better

?


FURTHER ACTIONS TARGET

actions who when now then

1) avoid risk GM 3/6 45 25

2) fix, prevent risk I T 5/8 12 22

3) contingency plan MD 5/5 27 25

MONITORING MECHANISM

report who to whom when

4) management report SD Exco 12/ 12

5) internal audit IA AC 16/12




























40%

risk?

60%

risk?

Which is

better

?






































40%

risk?

60%

risk? £XXm

£XXm

?

Risk Tolerance: what is it?

How much

risk are you

willing to

take?

How much risk

are you willing to

tolerate?

Key to

risk taking “Tipping point”,

calibrates

risk management


How much

risk are you

willing to

take?

How much risk

are you willing to

tolerate?

Key to

risk taking “Tipping point”,

calibrates

risk management

• Shows the ‘tipping point’, the

difference between right and wrong

• Calibrates decision making, ‘how

much risk to get how much reward?’

• Sets level of Delegation of

Authorities

• Can be used to communicate and

monitor acceptable levels of risk

taking

• Challenges right level of reward and

control (including the cost of control)

• Board responsibility and renewed

focus for regulators


Risk Tolerance: regulators say?

UK Corporate Governance

Code (May 2010) =

the Board is responsible for

‘determining the nature and

extent of the significant risks

it is willing to take in

achieving its strategic

objectives … and should

maintain sound risk

management and internal

control systems’.

(Principle C.2 )

Risk

appetite

Risk Tolerance: regulators say?

• The HCA’s Regulatory

Standards = have an

effective risk


controls assurance

framework.

• The Federation’s Code

of Governance = maintain

a sound system of

internal controls and

manage risk.

UK Corporate Governance

Code (May 2010) =

the Board is responsible for

‘determining the nature and

extent of the significant risks

it is willing to take in

achieving its strategic

objectives … and should

maintain sound risk


control systems’.

(Principle C.2 )

Risk

appetite

Board’s Risk Attitude scale

Risk Tolerance:

how to determine it?

Risk Attitude RISK ADVERSE

CAUTIOUS BALANCED OPPORTUNISTIC ENTREPENEURIAL

Characteristics Minimal/ 0 tolerance

Cautious tolerance

Balanced attitude

Enquiring appetite

Hungry appetite

% variance of outcomes

< 1% 1 – 2.5% 2.5 – 5% 5 – 10% > 10%

Illustrative examples

Corporate reputation

Safety

Trading

Asset investment

Operations 3rd party negotiations

Customer capture

New investments

Internet strategy

Board’s Risk Attitude Statement

Risk attitude An example Minimal

tolerance Cautious tolerance

Balanced Some appetite

Strong appetite

1 2 3 4 5

Val

ue

dri

vers

Resident/ tenant feedback

Surplus volatility

Capital requirement

Reputation

Credit rating

Regulatory standing

Board sets general direction Management responds with specific risk tolerances

Time

Value

£

Risk

Indicator

Risk

Tolerance

Risk

Appetite

Monitoring Risk Appetite

Time

Value

£

Risk

Indicator

Risk

Tolerance

Risk

Appetite



Management’s Risk Tolerance,

using Key Risk Indicators

Risk Tolerance:





Cautious tolerance

Balanced attitude

Enquiring appetite

Hungry appetite


< 1% 1 – 2.5% 2.5 – 5% 5 – 10% > 10%



Safety

Trading

Asset investment


Customer capture

New investments

Internet strategy





Strong appetite

1 2 3 4 5

Val

ue

dri

vers


Surplus volatility

Capital requirement

Reputation

Credit rating

Regulatory standing


Time

Value

£

Risk

Indicator

Risk

Tolerance

Risk

Appetite


Time

Value

£

Risk

Indicator

Risk

Tolerance

Risk

Appetite



Management’s Risk Tolerance,

using Key Risk Indicators

Risk Tolerance:





Cautious tolerance

Balanced attitude

Enquiring appetite

Hungry appetite


< 1% 1 – 2.5% 2.5 – 5% 5 – 10% > 10%



Safety

Trading

Asset investment


Customer capture

New investments

Internet strategy





Strong appetite

1 2 3 4 5

Val

ue

dri

vers


Surplus volatility

Capital requirement

Reputation

Credit rating

Regulatory standing


Policies

Risk Tolerance:


1. Board sets a directional ‘Risk Attitude’, using a consistent scale,

as a guide to Management of extent of risk to take

2. Management, as part of risk management process, respond by

defining specific risk tolerances for each key risk:

- identify Key Risk Indicators

- set specific upper limits of tolerance (and perhaps lower limits

for appetite)

- consider consistency and aggregation of separate tolerances

Risk Tolerance:


1. Board sets a directional ‘Risk Attitude’, using a consistent scale,

as a guide to Management of extent of risk to take

2. Management, as part of risk management process, respond by

defining specific risk tolerances for each key risk:

- identify Key Risk Indicators

- set specific upper limits of tolerance (and perhaps lower limits

for appetite)

- consider consistency and aggregation of separate tolerances

3. Board validates Management’s risk tolerances against their risk

attitude

4. Management monitor and report breaches, (using KRIs as early

warning)

5. Management document in policies, articulate in leadership

communications, reinforce by actions


IMP

AC

T (

max p

a)

4) critical

1) manageable

2) moderate

( £ 50 – 100k)

3) serious






(< £ 50k)

( £ 100 – 200k)

(> £ 200k)

RISK MAP (net risk)

G

N

T

RT Now Target Profile

can be compared to

Risk Tolerance

Risk Profiling with Risk Tolerance

The challenge?

How do you

use risk

information to

help choose

between

different

options

(investment or

others)?

2) Using Risk & Return Analysis

to make risk-adjusted decisions

Risk & Return Analysis

- comparing return to

investment to risk

- considering overall portfolio sufficiency with regard to stakeholders expectations

- concluding on: “green lighting”, “nurturing” or stopping investments.

The challenge?

How do you

use risk

information to

help choose

between

different

options

(investment or

others)?

2) Using Risk & Return Analysis

to make risk-adjusted decisions

Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Almost certain to fail to deliver

Remote possibility of failing to deliver

1

2

3

4

5

6

7

8

9

10

SI 4

SI 5

SI 7

SI 1

SI 3

SI 6

SI 8

SI 2

i) Plot return drivers from Impact Analysis for each SI

Example of Risk & Return Analysis

Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



1

2

3

4

5

6

7

8

9

10

SI 4

SI 5

SI 7

SI 1

SI 3

SI 6 SI 8

SI 2

ii) Plot risk drivers from Impact Analysis for each SI


Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



1

2

3

4

5

6

7

8

9

10

Return Hurdle

= £2.5m

Risk Tolerance = 45%

SI 4

SI 5

SI 7

SI 1

SI 3

SI 6 SI 8

SI 2

i, ii) Plot risk/ return drivers from Impact Analysis for each SI iii) Overlay cut off criteria: return hurdle & risk tolerance


Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



1

2

3

4

5

6

7

8

9

10

Return Hurdle

= £2.5m


SI 4

SI 5

SI 7

SI 1

SI 3

SI 6 SI 8

SI 2

IRR = 45%

IRR = 23%

i, ii) Plot risk/ return drivers from Impact Analysis for each SI iii) Overlay cut off criteria: return hurdle & risk tolerance iv) Make decisions: 5 SIs selected (3 require further actions), 3 stopped

v) Monitor progress: changes to return/ risk, completion of actions


Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



1

2

3

4

5

6

7

8

9

10

Return Hurdle

= £2.5m


SI 4

SI 5

SI 7

SI 1

SI 3

SI 6 X X

SI 8

SI 2

IRR = 45%

IRR = 23%



X


Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



1

2

3

4

5

6

7

8

9

10

Return Hurdle

= £2.5m


SI 4

SI 5

SI 7

SI 1

SI 3

SI 6

Reduce Execution Risk & Collateral Damage

X Stop this SI

X SI 8

SI 2

Reduce collateral damage

Stop these SIs

Reduce Execution Risk

IRR = 45%

IRR = 23%



X


Retu

rn (

e.g

. N

PV £

m/

soci

al fa

ctor)

Execution Risk (%)

“No need?” “No way”

“No sleep” “No brainer”

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



1

2

3

4

5

6

7

8

9

10

Return Hurdle

= £2.5m


SI 4

SI 5

SI 7

SI 1

SI 3

SI 6

Reduce Execution Risk & Collateral Damage

X Stop this SI

X SI 8

SI 2

Reduce collateral damage

Stop these SIs

Reduce Execution Risk

IRR = 45%

IRR = 23%



X


3) Using risk information

real time

The challenge?

How do you

make risk

information real

time, so that it

can bring

confidence and

warn of

impending

danger?

3) Using risk information

real time

Risk Dashboard

- measuring and monitoring

risks

- as part of performance

dashboard

- to bring us confidence

- to warn us of impending

danger

The challenge?

How do you

make risk

information real

time, so that it

can bring

confidence and

warn of

impending

danger?

Measuring and monitoring risks as part of performance dashboard

– We need them for our cars, why not for our businesses?

– To go faster, further and more safely

Risk Dashboard – the theory




KRI KRI

KCI

KCI

KRI

KPI

KPI

KPI





KRI KRI

KCI

KCI

KRI

KPI

KPI

KPI

Speed

camera

detector

KRI


Risk Dashboard – the practice

KEY RISK INDICATORS for Period 6

Strategic Objective Key Risk Indicator Target Actual Variance Prior period YTD trend

1) SERVICE DEMAND - passenger journeys 219m 205m -14m 206

2) SUPPLY - % trains operated at peak 95.2% 95.0% -0.2% 94.7%

3) RELIABILITY - on time (per index) 83.6 77.4 -6.2 82.6

4) SAFETY - injuries 60 58 2 59

5) CUSTOMER SATISFACTION - "recommend" 78.3% 76.8% -1.5% 79.3%

6) PEOPLE - no. of staff 22,487 22,250 -237 22,123

- absence 1 day 0.96 day -0.04 day 1.1 days

7) KEY INITIATIVES - PM status80%

on target

77%

on target-3%

60%

on target

Better than/ equal to target Within 5% of target 5% or more off target

Real time risk

information

integrated with

performance

information

The answers?

The answers?

Niki Lauda, F1 champion

1975,

1977,

1984

James Hunt, F1 champion

1976

The answers?


1975,

1977,

1984,


1976

Risk Management, a winning competency?

Use it to gain a competitive advantage

The answers?


1975,

1977,

1984,


1976

Risk Management, a winning competency?

Use it to gain a competitive advantage & help with

reassuring

the Regulator

managing risk new ideas from the private...

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