Risk management is not just a part of good management - it is all of it
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Part 2 of 3 of a panel presentation at Warwick Business School 11/02/2008 Mike Robertson
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Risk management is not just a part of good management - it is all of it
- 1. Risk Management……… Not just part of good management it’s all of it!! Presented on 11 February 2008 Presented by Mike Robertson Managing Director
- 3. Historical origins of risk thinking Pierre de Fermat (1601-1665) Blaise Pascal (1623-1662) Gerolama Cardano (1501-1665) Daniel Bernoulli (1700-1782) Jakob Bernoulli (1654-1705) Abraham de Moivre (1667-1754) Thomas Bayes (1702 – 1761)
- 4. Historical origins of risk thinking Pierre de Fermat (1601-1665) Blaise Pascal (1623-1662) Gerolama Cardano (1501-1665) Daniel Bernoulli (1700-1782) Jakob Bernoulli (1654-1705) Abraham de Moivre (1667-1754) Thomas Bayes (1702 – 1761)
- 5. Recent drivers of risk thinking 1980s 1990s 2000s
- 6. Key UK Government reports
- 7. Key UK Government reports http://www.hse.gov.uk/risk/theory/r2p2.htm http://www.hm-treasury.gov.uk./documents/ public_spending_reporting/governance_risk/ psr_governance_risk_riskguidance.cfm http://www.cabinetoffice.gov.uk/strategy/work_areas/risk.aspx http://archive.cabinetoffice.gov.uk/brc/
- 8. Definitions / Terminology Risk Analysis Risk Assessment Risk Management Definition (What?) Identification (To whom?) Estimation (How bad? Often?) Evaluation (So what?) Action (Implement, monitor)
- 11. Examples of impact scales Journey delay < 2 mins Low (L) Journey delay > 2 mins Medium Low (ML) Station closure Medium High (MH) Partial line closure (or worse) High (H) Impact Scale Operations managers on LUL Trivial Low (L) Short term damage to business Medium Low (ML) Long term damage to business Medium High (MH) Threatens business survival High (H) Impact Scale Board of a battery manufacturer
- 12. Examples of likelihood scales Greater than once per year Low (L) Greater than once per month Medium Low (ML) Greater than once per week Medium High (MH) Greater than once per day High (H) Likelihood Scale Operations managers on LUL Once every twenty years Low (L) Once every five years Medium Low (ML) Once a year Medium High (MH) Once a month High (H) Likelihood Scale Board of a battery manufacturer
- 13. Risk assessment X 11 X 6 X 3 X 2 X 7 X 12 X 9 X 1 X 8 X 5 X 10 X 4
- 14. Risk management X 11 X 6 X 3 X 2 X 7 X 12 X 9 X 1 X 8 X 5 X 10 X 4 Treat Treat Terminate Transfer
- 15. Tolerability of risk and ALARP Source: Risk: Improving government’s capability to respond to risk and uncertainty, Strategy Unit, Cabinet Office, November 2002 Risk of death: Worker: 1 in 1,000 per year Public: 1 in 10,000 per year Risk of death: Worker & public: 1 in 1,000,000 per year
- 17. Evolution of risk management Source: Risk: Improving government’s capability to respond to risk and uncertainty, Strategy Unit, Cabinet Office, November 2002
Editor's Notes
- Grey: R.51 G.51 B.51 Purple: R.102 G.0 B.102
- Gerolama Cardano – (1501 1576) His book on games of chance ( Liber de ludo aleae )was written in 1560s but published in 1663 after his death contained first systematic treatment of probability Pierre de Fermat – (1601 -1665) Pascal discussed the problem in his ongoing correspondence with Pierre de Fermat . Through this discussion Pascal and Fermat not only came up with a convincing, self-consistent solution to the division of the stakes, but also developed concepts that continue to be fundamental in probability to this day. Blaise Pascal (1623-1662) The problem of points , also called the problem of division of the stakes , is a classical problem in probability theory . One of the famous problems that motivated the beginnings of modern probability theory in the 1600s, it led Blaise Pascal to the first explicit reasoning about what today is known as an expectation value . Abraham de Moivre (1667-1754) De Moivre wrote a book on probability theory , entitled The Doctrine of Chances . Published in 1738 , the second edition of de Moivre's book introduced the concept of normal distributions as approximations to binomial distributions . In effect de Moivre proved a special case of the central limit theorem . Jakob Bernoulli (1654 – 1705) Law of large numbers (the average of a finite number of outcomes will stabilise over a large number) Daniel Bernoulli (1700-1782) Utility theory, decision theory Thomas Bayes (1702 – 1761) Bayesian probability is an interpretation of the probability calculus which holds that the concept of probability can be defined as the degree to which a person (or community) believes that a proposition is true. Bayesian theory also suggests that Bayes ' theorem can be used as a rule to infer or update the degree of belief in light of new information.
- Gerolama Cardano – (1501 1576) His book on games of chance ( Liber de ludo aleae )was written in 1560s but published in 1663 after his death contained first systematic treatment of probability Pierre de Fermat – (1601 -1665) Pascal discussed the problem in his ongoing correspondence with Pierre de Fermat . Through this discussion Pascal and Fermat not only came up with a convincing, self-consistent solution to the division of the stakes, but also developed concepts that continue to be fundamental in probability to this day. Blaise Pascal (1623-1662) The problem of points , also called the problem of division of the stakes , is a classical problem in probability theory . One of the famous problems that motivated the beginnings of modern probability theory in the 1600s, it led Blaise Pascal to the first explicit reasoning about what today is known as an expectation value . Abraham de Moivre (1667-1754) De Moivre wrote a book on probability theory , entitled The Doctrine of Chances . Published in 1738 , the second edition of de Moivre's book introduced the concept of normal distributions as approximations to binomial distributions . In effect de Moivre proved a special case of the central limit theorem . Jakob Bernoulli (1654 – 1705) Law of large numbers (the average of a finite number of outcomes will stabilise over a large number) Daniel Bernoulli (1700-1782) Utility theory, decision theory Thomas Bayes (1702 – 1761) Bayesian probability is an interpretation of the probability calculus which holds that the concept of probability can be defined as the degree to which a person (or community) believes that a proposition is true. Bayesian theory also suggests that Bayes ' theorem can be used as a rule to infer or update the degree of belief in light of new information.
- Challenger (Jan 1986) Chernobyl (April 1986) 52 dead +unknown latent cancers Kegworth air disaster (Jan 1989) 47 dead. British Midland Flight 92, M1 Leicestershire Michael Bishop Chairman Hillsborough (April 1989) 96 dead Pan Am Flight 103 (December 1988) 270 dead Herald of Free Enterprise ( March 1987) 193 dead Polly Peck (1990) Asil Nadir – believed to be in North Cyprus. Business overstretched itself - £100m revolving credit Robert Maxwell (1991) - £100ms of the pension funds raided to support rest of his business. Maxwell companies filed for bankruptcy in 1992 BCCI (1991) Enron (2001) – $16bn debt analagous to Group 4 Securicor (G4S) claiming that because they transport £300bn in cash every year in the UK they are loaded. Contributed to establishment of Sarbanes Oxley Act (2002) in US Worldcom (2002) – Chapter 11 filing - biggest bankruptcy protection filed in US history 1. Underreporting ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. 2. Inflating revenues with bogus accounting entries from ‘corporate unallocated revenue accounts’. Basel II (2004) – requires banks to demonstrate that they are able to manage their financial obligations/liabilities separating out credit/operational and market risk. Credit risk – risk of default payment lenders, suppliers, consumers Operational risk - risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events Market risk – quantified using Value at Risk (VaR) which is the maximum loss not exceeded with a given probability defined as the confidence level, over a given period of time. Barings (1996) – Nick Leeson lost £827m and brought bank down BAA T5 Inquiry (May 1995 to Feb 1999, 525 days, BAA original planning submission was in 1993, Govt approval 2001) Ladbroke Grove (October 1991) – How do we value safety? DfT use £100k on roads, Rail industry VpF is £1.1m TPWS £10m, ATP (after TPWS) is £30m Jerome Kerviel (2008) Societe General lost £3.7bn
- R2P2 – 2001 Strategy Unit Report – 2002 Orange Book 2004 BRC - 2006
- R2P2 – 2001 Strategy Unit Report – 2002 Orange Book 2004 BRC – 2006 Now replaced by the Risk and Regulation Advisory Council (RRAC)
- Risk Analysis – What can go wrong, to whom, how big, how bad. Risk assessment – So what? Comparison with tolerable criteria / risk appetite. What can be/should be done about it ? Risk management – Implementation and monitoring of risk controls.
- X4 transfer – e.g. insuring against a fire in a materials store X2 terminate – acquisition of critical supplier X3 treat – failure to retain key skills reduce likelihhood by appropriate remuneration/incentives reduce impact by developing more staff with same skills
- Real examples