ManagementFor

Cooperatives:

Presented by

Rolando C. CabreraRisk Management Advisor

Chairman of the Board, Risk and Insurance Management Association ofThe Philippines (RIMAP)

An Element of Good Governance

Risk Management contributes to good Corporate Governance by providing reasonable assurance to boards and senior managers that the organizational objectives will be achieved within a tolerable degree of residual risk.

Risk Management Creates Value

What are your Cooperative’s top 10 risks?

Do you have a concise report that shows the key exposures and trends for strategic, financial, and operational risks?

Are you in compliance with internal policies, laws, and regulations?

Were the majority of your Cooperative’s actual losses and incidents identified by the risk reports?

Are you managing businesses on a risk-adjusted profitability basis?

Acid Test of Good Governance

Common Definition of Risk

• the likelihood of something undesirable happening in a given event

• the conditional probability of the event occurring times the consequence of the event given that it has occurred

SEC Code of Corporate Governance

“The Board must identify key risk areas and key performance indicators and monitor these to ensure the effectiveness of internal control”

Why take

?

The Three components of Risk:

An event

A probability of occurrence

An impact

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I. Basics of Risk ManagementA. Elements of Risk Management

Risk

Elements of Risk

9

B. Types of Risk

• Pure Loss

• Speculative

Gain

Loss

(upside risk)

(downside risk)

Types of

1. Property

2. Finance

3. Legal Liability

4. Personnel

Areas of Exposure to Loss (Pure and BusinessRisk)

13

ERM Framework

1. Strategic

2. Financial

3. Legal and Compliance

4. Operational

Basel 2 (BSP)

1. Credit

2. Market

3. Operational

BSP Supervision and

Examination

1. Credit

2. Market

3. Interest

4. Liquidity

5. Operational

6. Compliance

7. Strategic

8. Reputation

BSP Supervision by Risk (Circular 510)

Financial Risk

In the financial world, risk can be defined as “any event which can impair corporate earnings or cash flow over short/medium/long-term horizons.”

Credit Risk

• Credit risk is defined as loss exposures due to counterparties’ default on contracts.

Market Rate Risk

• Cooperatives investments may suffer a loss if there is a fall in the market value of an investment.– Equity risk– Currency risk– Interest rate risk

Risk of loss of:

Properties

Income

Key personnel

Exposure to liabilities

Resulting from inadequate or failed:

Process

People

System

External events

Operational Risk is…

TToday’s organizations are concerned about:

• Risk Management• Governance• Control• Assurance (and Consulting)

Reputation Risk

• Reputation risk arises when a situation, occurrence, business practice or event has the potential to materially influence the public and stakeholder’s perceived trust and confidence in a cooperative.

• As with other risks, the board is responsible for overall management of reputational risks.

TraditionalRisk Management

Business RiskManagement

Enterprise Risk Management

Purchase of Insurance or self-insurance of risks affecting property, income, liability and people

Assessment of financial risk:

• Credit Risk• Market Risk

Silo approach

Assess risks which threaten objectives of• Strategic Management

Process• Core Business Processes

Develop ERM Framework• COSO• AS/NZS; AIRMIC; FERMA•ISO 31000

Portfolio view of risks

RBCA

RBA

RISK MANAGEMENT PERSPECTIVE

V A

L U

E

C R

E A

T I

O N

RISK MANAGEMENT VALUE CONTINUUM

Key Issues:1. What is the current location of the Cooperative along the continuum?2. What is the desired location of the Cooperative along the continuum3. How should the Cooprarative move from the current to the desired location?

What elements need to be put in place?

Recognize that ERM is a journey not a destination and requires a change

process

What are the expected

outcomes?

How will we know we are successful?

Where are we now?

How do we get there?

What are the obstacles along the way?

Why do we need to begin our journey?

Future State

Drivers

Constraints

Current State

INCREASING RISK

MANAGEMENT

CAPABILITIES

“Achievable Goal”

Why ERM Is Important To a Cooperative

Underlying principles:

• Every entity, whether for-profit or not, exists to realize value for its stakeholders.

• Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day to day.y-to-day.

Why ERM Is Important to a Cooperative

ERM supports value creation by enabling management to: 

• Deal effectively with potential future events that create uncertainty.

• Respond in a manner that reduces the likelihood of downside outcomes and increases the upside.

Enterprise Risk Management (ERM)

COSO has defined ERM as follows:

a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

The Enterprise Risk Management (ERM) Evolution

What has changed?

• Treating the vast variety of risks in a holistic manner

• Elevating risk management to a senior management responsibility

Enterprise Risk Managementfocuses on ensuring that the enterprise manages the uncertainties that exists around the achievement of its corporate objectives

Top Down

StrategicStrategic RM

OperationalRM

is focused on managing the risks that appear during its day-to-day activities of actually executing the SBUs/BUs strategy.

Bottom Up

Tactical

The COSO Framework provides an understanding of the components of ERM

Enterprise Risk Management:

Is a process Is effected by people Is applied in strategy setting Is applied across the enterprise Is designed to identify potential

events Manages risks with risk

appetite Provides reasonable assurance Supports achievement of

objectives

Monitoring

Information & Communication

Control Activities

Risk Response

Risk Assessment

Event Identification

Objective Setting

Internal Environment

DIV

ISIO

N

BU

SIN

ES

S U

NIT

SU

BS

IDIA

RY

STRATEGIC

OPERATIONS

REPORTING

COMPLIANCE

EN

TIT

Y-L

EV

EL

Source: COSO proposed ERM Framework

Risk Management Responsibility

The Board is responsible for the total process of risk management, as well as forming its own opinion on the effectiveness of the process

The Risk Management Process

The Board should set the risk strategy in liaison with management

Management is accountable to the Board for designing, implementing and monitoring the process and integrating it into the activities of the company

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Risk Management Structure

BOARD of DIRECTORS

RM Committee

Risk Mgt.Team

Risk Mgt.Team

Risk Mgt.Team

InternalAudit /Compli-ance

RM Council

RM Steering Committee

MACRO

M ICRO

Risk Management Teams (RMTs)

riskWATCH INTERNATIONAL, INC.

ERM Roles & Responsibilities

• Management

• The board of directors

• Risk officers

• Internal auditors

Example: ERM Organization

ERM Director

ERM Director

Vice President andChief Risk Officer

Vice President andChief Risk Officer

Corporate Credit Risk Manager

Corporate Credit Risk Manager

Insurance Risk Manager

Insurance Risk Manager

ERMManager

ERMManager

ERMManager

ERMManager

StaffStaff StaffStaffStaffStaff

FES Commodity

Risk Mg.Director

FES Commodity

Risk Mg.Director

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Basic Risk Management Process

PROCESS S T E P SDESCRIPTION

RiskAssessment

RiskTreatment

Monitoring andControl

Risk Identification

Risk Analysis

Risk Administration

Risk Control Risk Finance

Risk assessment is the identification and analysis of risks to the achievement of business objectives. It forms a basis for determining how risks should be managed.

Assess Risk

Event Identification

• Involves identifying those incidents, occurring internally or externally, that could affect strategy and achievement of objectives.

• Addresses how internal and external factors combine and interact to influence the risk profile.

Formal Risk Assessment

The Board should ensure that a formal risk assessment is undertaken at least annually for the purpose of making its public statement on risk management

Risk assessment should address :! Physical and operational risk! Technology Risk! Credit and Market Risk

Risks should be assessed on an ongoing basis and control activities should be designed to respond to risks throughout the company

Companies should develop a system of risk management and internal control that builds more robust business operations

How OFTEN will the loss occur?

How BIG will the loss be?

Will it THREATEN our FINANCIAL STABILITY?

Will they INTERFERE with our basic OBJECTIVES?

Risk Analysis

WHAT CAN GO WR NG?

The process of determining what, where,when, why and how something could happen.

Risk Identification

Risk, Peril, or Hazard?

Impact vs. Probability

Control

Share Mitigate & Control

Accept

High Risk

Medium Risk

Medium Risk

Low Risk

Low

High

High

IMPACT

PROBABILITY

Risk Mapping

High

High

S e v e r i t y

Frequency

Moderate High

Low Moderate

Low

Significance / Impact

Lik

elih

oo

d /

Pro

bab

ilit

y

1

2

6

3

4

5

Significance / Impact

Lik

elih

oo

d /

Pro

bab

ilit

y

1

2

6

3

4

5

Prioritizing Risks

• Establish the risks to be eliminated due to potential impact.

• Establish the risks which require regular management attention.

• Establish the risks that are sufficiently minor to avoid detailed management attention.

Risk Prioritization

X

HIGH

LOW R I S K HIGH

R

E

W

A

R

D X X

RISK CONTROL

Stops

Losses

from

Happening

Risk Control

Mitigate Risks

Plan forEmergencies

Measure andControl

Elements of Risk Control

RISK CONTROL

TOOLS:

A. Risk Avoidance

RIVER

WAREHOUSE

RISK CONTROL

TOOLS:

B. Loss Prevention

RISK CONTROL

TOOLS:

C. Loss Reduction

Fasten your seatbelt

RISK CONTROL

TOOLS:

D. Segregation of Risk

1. Separation

Production Warehouse

RISK CONTROL

TOOLS:

D. Segregation of Risk

2. Duplication

Head Office’s Computer

Back-up System atBranch Office

Risk Response• Identifies and evaluates possible

responses to risk.

• Evaluates options in relation to entity’s risk appetite, cost vs. benefit of potential risk responses, and degree to which a response will reduce impact and/or likelihood.

• Selects and executes response based on evaluation of the portfolio of risks and responses.

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AVOID• Divest• Prohibit• Stop• Target• Screen• Eliminate

RETAIN• Accept• Re-price• Self- Insure • Offset• Plan

REDUCE• Disperse • Control

TRANSFER• Insure• Allocate• Hedge• Indemnity• Securitize• Share• Outsource

EXPLOIT• Allocate• Diversify• Expand• Create• Redesign• Reorganize• Price• Arbitrage• Renegotiate• Influence

Development of Risk Strategies

RISK FINANCING

Provides Funds for Losses that do Occur

(Risk-Based Capital Adequacy)

Insurance

RISK FINANCING

A. Risk Retention Scheme - Current Expense - Unfunded Reserve - Funded Reserve - Borrowing Funds to Pay for Losses

B. Risk Transfer Scheme - Insurance - Contractual Transfer of Risk

Monitoring

Effectiveness of the other ERM components is monitored through:

• Ongoing monitoring activities.

• Separate evaluations.

• A combination of the two.

Internal Control

A strong system of internalcontrol is essential to effectiveenterprise risk management.

Embedding Risk Management in A Cooperative

• A risk aware culture

• Senior Management Commitment

• A common business risk language

• Risk management structure

• Risk management process

The Road Beyond 2015 for a Cooperative

• Business Continuity Planning (BCP)

• Corporarte Resiliency: your inner strength

Management theorist Peter Drucker has pointed out that the only way to increase the yield from a given amount of world resource is to introduce risk. To run away from risks is to miss the point: You need to take the right risks and to be aware that that’s what you’re doing.

It is only when one has put all the risks to bed, that one can have a quiet night’s sleep!

End of Presentation

Thank You!

E

Contact details:

Rolando C. CabreraMobile No. 09064703322Email: rolcabrera@gmail.com

T

Q&A