Paul Hopkin. Fundamentals of Risk Management
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Fundamentals
of Risk
Management
i
ii
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Fundamentals
of Risk
Management
Understanding, evaluating
and implementing effective
risk management
Paul Hopkin
iii
Publisher’s note
Every possible effort has been made to ensure that the information contained in this book is accurate at
the time of going to press, and the publishers and authors cannot accept responsibility for any errors or
omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or
refraining from action, as a result of the material in this publication can be accepted by the editor, the
publisher or any of the authors.
First published in Great Britain and the United States in 2010 by Kogan Page Limited.
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as per-
mitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced,
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ers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the
CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the
undermentioned addresses:
120 Pentonville Road 525 South 4th Street, #241 4737/23 Ansari Road
London N1 9JN Philadelphia PA 19147 Daryaganj
United Kingdom USA New Delhi 110002
www.koganpage.com India
© The Institute of Risk Management, 2010
The right of The Institute of Risk Management to be identifi ed as the author of this work has been
asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
ISBN 978 0 7494 5942 0
E-ISBN 978 0 7494 5943 7
British Library Cataloguing-in-Publication Data
A CIP record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Hopkin, Paul.
Fundamentals of risk management : understanding, evaluating, and implementing effective risk man-
agement / Paul Hopkin.
p. cm.
Includes index.
ISBN 978-0-7494-5942-0 -- ISBN 978-0-7494-5943-7 (ebook) 1. Risk management. I. Title.
HD61.H567 2010
658.15'5--dc22
2009046006
Typeset by Saxon Graphics Ltd, Derby
Printed and bound in India by Replika Press Pvt Ltd
iv
Dedication
Michael, David and Kathy
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vi
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Contents
Dedication v
List of Figures xvii
List of Tables xix
Preface xxiii
Acknowledgements xxv
Introduction 1
Part 1 Introduction to risk management 9
Learning outcomes for Part 1 9
Part 1 Further reading 10
1 Approaches to defi ning risk 11
Defi nitions of risk 11
Types of risks 13
Risk description 14
Inherent level of risk 16
Risk classifi cation systems 16
Risk likelihood and magnitude 17
2 Impact of risk on organizations 20
Risk importance 20
Impact of hazard risks 21
Attachment of risks 22
Risk and reward 23
Risk and uncertainty 25
Attitudes to risk 26
vii
viii Contents
3 Types of risks 28
Timescale of risk impact 28
Hazard, control and opportunity risks 29
Hazard tolerance 31
Management of hazard risks 32
Uncertainty acceptance 33
Opportunity investment 34
4 Development of risk management 36
Origins of risk management 36
Insurance origins of risk management 40
Specialist areas of risk management 41
Enterprise risk management 42
Levels of risk management sophistication 43
Risk maturity models 45
5 Principles and aims of risk management 46
Principles of risk management 46
Importance of risk management 47
Risk management activities 48
Effi cient, effective and effi cacious 49
Perspectives of risk management 50
Implementing risk management 52
6 Risk management standards 53
Scope of risk management standards 53
Risk management process 56
Risk management framework 56
COSO ERM cube 58
Features of RM standards 59
Control environment approach 62
Case study: Barclays Bank – risk management objectives 63
Part 2 Risk strategy 65
Learning outcomes for Part 2 65
Part 2 Further reading 66
Contents ix
7 Risk management policy 67
Risk architecture, strategy and protocols 67
Risk management policy 69
Risk management architecture 72
Risk management strategy 72
Risk management protocols 73
Risk management guidelines 74
8 Risk management documentation 76
Record of risk management activities 76
Risk response and improvement plans 77
Event reports and recommendations 78
Risk performance and certifi cation reports 79
Designing a risk register 79
Using a risk register 83
9 Risk management responsibilities 87
Allocation of responsibilities 87
Risk management and internal audit 88
Range of responsibilities 88
Statutory responsibilities of management 90
Role of the risk manager 92
Chief risk offi cer (CRO) 93
10 Risk architecture and structure 95
Risk architecture 95
Corporate structure 97
Risk committees 98
Risk communications 100
Risk maturity 101
Alignment of activities 103
11 Risk-aware culture 104
Styles of risk management 104
Defi ning risk culture 105
Components of a risk-aware culture 106
Measuring risk culture 107