Risk Appetite, Tolerance and RBC
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Transcript of Risk Appetite, Tolerance and RBC
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Risk Appetite, Tolerance and RBCWhat do they mean?
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Is it all the same?Risk Appetite
Risk Tolerance
Risk Bearing Capacity
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What is it?Risk AppetitePropensity to take risk
Risk ToleranceAbility to take risk
Risk Bearing CapacityAbsolute financial measure to survive risk
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Risk AppetiteTotally subjectiveBased on perceptionsPersonalMay be measurable or notMay change very regularly as environment changes
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Risk ToleranceStill SubjectiveMeasurableCriteria need to be identifiedCriteria need to be agreedMust take note of business dynamics
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Risk ToleranceMeasured in terms of deviation from business objectivesPrioritised according to criticality to companyBoth upside and downside are identified and measured (each with own identity) KPIs
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Risk Tolerance DimensionsEnterpriseBusiness unitRegionProduct lineBrandCustomer
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Risk Tolerance DimensionsTimeRisk typeChange ValueOutcomeObjective
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Risk Tolerance DimensionsRewardInterestAssetValueActionChange AgentsInfluence
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Risk Tolerance DimensionsTimeProbabilityPositionInformation
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RewardStrategic goalsFinancial targetsProduction targetsMarketing & sales targetsOrganisational objectivesBusiness objectives
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InterestShareownersSuppliersCustomersEmployeesAuthoritiesCommunitiesBusiness PartnersIndustry Bodies
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AssetsDynamic assetsValue based assetsLegal assetsHuman assetsPhysical assetsProduct based assetsIntellectual assetsFinancial assetsStatic assets
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ValueFinancial valueStrategic valueCompetitive valueTime valueReplacement value
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ActionIncoming corporate actionsCorporate financial actionsCorporate process actions
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Change AgentsCompetitive FinancialFiscalOperationalIntellectualLegal
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Change AgentsReputationSocialHumanEnvironmentalNaturalTechnologicalPolitical
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InfluenceAccumulationAggregationArbitrageBackgroundComplexityCorrelationCriticalityCyclesDependency
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Influence
DiversificationDurationInterdependencyLiquidityProximityReliabilityToleranceVolatilityVulnerability
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TimeCyclical factorsSeasonal factorsTimingRegional cyclesDurationSimultaneity
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ProbabilityLikelihoodStatistical probabilityCorrelationVolatilityAggregationTimingRelative frequency
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PositionFlexibilityLiquidityCrisis responseContingenciesControl/influence
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InformationValue at riskEarnings at riskCash flow at riskYield curvesRisk capitalStability ratiosLiquidity 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 examplesEmployee safetyStaff TurnoverManagement turnoverEnvironmental incidentsMachinery breakdown incidentsEthics (fraud, bribery incidents)Training as % of RevenueEmployee engagement scoresAverage machinery ageR+D spend as % of turnover
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Risk Bearing CapacityDefinition:RBC is a prediction of the enterprises ability to endure losses and the effect such losses may have on the enterprises value and /or its ability to continue with its activitiesRBC 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 MethodologiesNet Working CapitalNet Working capital = Current Assets Current Liabilities
25%
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RBC MethodologiesQuick Asset ValueQuick Asset Value = Current Assets Inventory
Quick assets = trade debtors +bank account25%
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RBC MethodologiesCoverage RatioCoverage ratio : Times-interest-earned ratioHow many times the enterprises operating income covers its debt-service chargesT-I-c-v= earnings before interest and tax interest expenses10%
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RBC MethodologiesAnnual Cash Flow Generated
Annual Cash flow Value = Annual cash flow-interest paid annually on long term debt10%
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RBC MethodologiesSurplus Cash
Surplus cash (free cash) = after ops activities, interest, taxes, dividends and before investment
10%
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RBC MethodologiesTotal sales
Total sales from income statement
5%
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RBC MethodologiesNet Income
Net Income = Profits after tax and interest
10%
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RBC MethodologiesRetained Earnings
Earnings after dividends
10%
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RBC MethodologiesFixed Assets
Total value of Fixed Assets
5%
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RBC MethodologiesDistributable Reserves
= Accumulation of profits retained and reinvested
10%
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Risk Tolerance ValuePick a selection of RBC valuesSome may be negative or not applicable at allSelect as many as possibleCalculate the Average