Risk Appetite, Tolerance and RBC What do they mean?
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Transcript of Risk Appetite, Tolerance and RBC What do they mean?
![Page 1: Risk Appetite, Tolerance and RBC What do they mean?](https://reader035.fdocuments.in/reader035/viewer/2022062421/56649e105503460f94afb974/html5/thumbnails/1.jpg)
Risk Appetite, Tolerance and RBCWhat do they mean?
![Page 2: Risk Appetite, Tolerance and RBC What do they mean?](https://reader035.fdocuments.in/reader035/viewer/2022062421/56649e105503460f94afb974/html5/thumbnails/2.jpg)
Is it all the same?• Risk Appetite
• Risk Tolerance
• Risk Bearing Capacity
![Page 3: Risk Appetite, Tolerance and RBC What do they mean?](https://reader035.fdocuments.in/reader035/viewer/2022062421/56649e105503460f94afb974/html5/thumbnails/3.jpg)
What is it?• Risk Appetite• Propensity to take risk
• Risk Tolerance• Ability to take risk
• Risk Bearing Capacity• Absolute financial measure to survive risk
![Page 4: Risk Appetite, Tolerance and RBC What do they mean?](https://reader035.fdocuments.in/reader035/viewer/2022062421/56649e105503460f94afb974/html5/thumbnails/4.jpg)
Risk Appetite• Totally subjective• Based on perceptions• Personal• May be measurable or not• May change very regularly as environment changes
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Risk Tolerance• Still Subjective• Measurable• Criteria need to be identified• Criteria need to be agreed• Must take note of business dynamics
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Risk Tolerance• Measured in terms of “deviation from business objectives”• Prioritised according to criticality to company• Both upside and downside are identified and measured (each
with own identity)• KPI’s
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Risk Tolerance Dimensions
• Enterprise• Business unit• Region• Product line• Brand• Customer
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Risk Tolerance Dimensions
• Time• Risk type• Change • Value• Outcome• Objective
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Risk Tolerance Dimensions
• Reward
• Interest
• Asset
• Value
• Action
• Change Agents
• Influence
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Risk Tolerance Dimensions
• Time
• Probability
• Position
• Information
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Reward• Strategic goals
• Financial targets
• Production targets
• Marketing & sales targets
• Organisational objectives
• Business objectives
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Interest• Shareowners
• Suppliers
• Customers
• Employees
• Authorities
• Communities
• Business Partners
• Industry Bodies
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Assets• Dynamic assets
• Value based assets
• Legal assets
• Human assets
• Physical assets
• Product based assets
• Intellectual assets
• Financial assets
• Static assets
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Value• Financial value
• Strategic value
• Competitive value
• Time value
• Replacement value
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Action• Incoming corporate actions
• Corporate financial actions
• Corporate process actions
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Change Agents• Competitive
• Financial
• Fiscal
• Operational
• Intellectual
• Legal
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Change Agents• Reputation
• Social
• Human
• Environmental
• Natural
• Technological
• Political
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Influence• Accumulation
• Aggregation
• Arbitrage
• Background
• Complexity
• Correlation
• Criticality
• Cycles
• Dependency
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Influence
• Diversification
• Duration
• Interdependency
• Liquidity
• Proximity
• Reliability
• Tolerance
• Volatility
• Vulnerability
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Time• Cyclical factors
• Seasonal factors
• Timing
• Regional cycles
• Duration
• Simultaneity
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Probability• Likelihood
• Statistical probability
• Correlation
• Volatility
• Aggregation
• Timing
• Relative frequency
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Position• Flexibility
• Liquidity
• Crisis response
• Contingencies
• Control/influence
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Information• Value at risk
• Earnings at risk
• Cash flow at risk
• Yield curves
• Risk capital
• Stability ratios
• Liquidity ratios
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Some examples• % of Revenue• % of EBITDA• % of Adjustable earnings• % of Debt Service cover headroom• % Leverage
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Some examples
• Employee safety• Staff Turnover• Management turnover• Environmental incidents• Machinery breakdown incidents• Ethics (fraud, bribery incidents)• Training as % of Revenue• Employee engagement scores• Average machinery age• R+D spend as % of turnover
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Risk Bearing Capacity
• Definition:• RBC is a prediction of the enterprise’s ability to endure
losses and the effect such losses may have on the enterprise’s value and /or its ability to continue with its activities• RBC is a monetary value which is used as a yardstick,
measuring the maximum loss the enterprise can endure, without exposing it to the point where its existence and survival is under threat, given an equivalent loss.
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RBC Methodologies• Net Working Capital• Net Working capital = Current Assets – Current Liabilities
• 25%
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RBC Methodologies• Quick Asset Value• Quick Asset Value = Current Assets – Inventory
• Quick assets = trade debtors +bank account• 25%
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RBC Methodologies• Coverage Ratio• Coverage ratio : Times-interest-earned ratio• How many times the enterprise’s operating income
covers its debt-service charges• T-I-c-v= earnings before interest and tax – interest
expenses• 10%
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RBC Methodologies• Annual Cash Flow Generated
• Annual Cash flow Value = Annual cash flow-interest paid annually on long term debt
• 10%
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RBC Methodologies• Surplus Cash
• Surplus cash (free cash) = after ops activities, interest, taxes, dividends and before investment
• 10%
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RBC Methodologies• Total sales
• Total sales from income statement
• 5%
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RBC Methodologies• Net Income
• Net Income = Profits after tax and interest
• 10%
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RBC Methodologies• Retained Earnings
• Earnings after dividends
• 10%
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RBC Methodologies• Fixed Assets
• Total value of Fixed Assets
• 5%
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RBC Methodologies• Distributable Reserves
• = Accumulation of profits retained and reinvested
• 10%
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Risk Tolerance Value• Pick a selection of RBC values• Some may be negative or not applicable at all• Select as many as possible• Calculate the Average