Risk Management

Please answer all questions below completely but concisely. This is a short answer exam, not an essay exam, so no answer should use more than one-half page of paper. Note that this is an individual exam. The exam is due to the bridge no later than 11:59 PM (Morocco) December 7, 2014

1. Explain why the liability exposure is more difficult for a firm to manage than the property exposure is.

The liability exposure is more difficult to manage than the property exposure as per its uncertainty. Indeed, property exposure is easy to assess as it is material, accountable and a maximum loss can hence be calculated. The issue with liability exposure is that it is hard to predict the scope and levels of damages. A small issue can become a long tail problem. Punitive damages are unpredictable. New exposures can be discovered over time.

This uncertainty in terms of both probability and severity make it very hard to manage or transfer to a third party.

2. What do you think is the most important step in the ERM process and why? Use one of our in-class cases to support your answer.

I think that the most important step in the ERM process is prioritizing risks. Indeed, this step will affect the corporate strategy (budget and management) as the prioritized risks will need urgent actions to become mitigated.

I feel it is the most important step as I see it as one of the hardest to perform. You never have enough data to be quite sure about the probability and the severity of the risk. Then, subjectivity plays a large role.

Finally, the responsibility over this task is heavy as, if you go wrong and another risk that you did not consider as more important occur and cause huge damages, you would have failed.

If we take the Chevron case, they tried to put in place a tool in order to help prioritizing the risks (DEMA). Nevertheless, the parameters to be completed by the ERM team, are quite subjective, as in many cases, data is not available. Either not enough...