PRINCIPLES AND AIMS OF RISK

MANAGEMENT

DR. RABIHAH MD.SUM

Enterprise Risk Management Certified Professional (ERMCP), Singapore
Certified Member The Academy of Risk Management Malaysia (ARiMM)
Actuarial Science And Risk Management Program
Faculty Of Science And Technology
Universiti Sains Islam Malaysia

SMR4023 RISK MANAGEMENT

BSc.(Hon.) Financial Mathematics

rabihah@usim.edu.my 1
 Principle of Risk Management
• The main principle of risk management is that it
delivers value to the organization.
• Risk management activities are designed to achieve
the best possible outcome and reduce volatility or
uncertainty of outcomes.
• A principle of risk management consists of
 what the risk management activity should be, and
 what the risk management activity should achieve
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 Principle of Risk Management
• What the risk management activity should be means
 what is the nature of the risk management framework
that will be put in place? or
 what should be the characteristics of risk management
activity?
• What the risk management activity has been set up to
achieve means
 what the risk management framework has been set up
to achieve? Or
 what should the risk management activity deliver?
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 Principle of Risk Management
Nature or characteristic of a good risk management
framework (PACED):
• proportionate to the level of risk within the
organization;
• aligned with other business activities;
• comprehensive, systematic and structured;
• embedded within business procedures and protocols;
• dynamic, iterative and responsive to change.
PACED is the principle of risk management.
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 Principle of Risk Management
A risk management framework or risk management activity
must achieved (MADE2):
• mandatory obligations placed on the organization;
• assurance regarding the management of significant
risks;
• decisions that pay full regard to risk considerations;
• effective and efficient core processes.
MADE2 is the objectives of risk management.
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 Importance of Risk Management
Risk management Becomes Importance because of
• global financial crisis
• high-profile corporate failures across the world
• increasing stakeholder expectations
• the ever-increasing ease of communication.

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 Importance of Risk Management
Risk management contribute to the provision of greater assurance
to stakeholders. This assurance has two important components
1. The board of directors of an organization need to be confident
that risks have been identified and that appropriate steps have
been taken to manage risk to an appropriate level.
2. Accurate reporting of information by organizations, including
risk information. Stakeholders require detailed information on
company performance, including risk awareness.

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 Risk Management Activities
• Risk management is a process that can be divided into several
stages. For example, the 7-steps risk management process.
• ISO Guide 73 and British Standard BS 31100 describe the risk
management process as the systematic application of
management policies, procedures and practices to the tasks of
communicating, consulting, establishing the context, identifying,
analysing, evaluating, treating, monitoring and reviewing risk.
• The textbook describe the risk management process as a narrow
set of activities, of identifying, analysing, evaluating, treating,
monitoring and reviewing risk.
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 Effective and efficient core processes
• Strategic decisions are the most important that an organization
has to make.
• Risk management delivers improved information so that
strategic decisions can be made with greater confidence.
• The strategy that is decided by an organization must be capable
of delivering the results that are required.
• There are many examples of organizations that selected an
incorrect strategy or failed to successfully implement the
selected strategy.
• Many of these organizations suffered corporate failure.
rabihah@usim.edu.my 9
 Effective and efficient core processes
• Strategic decisions are the most important that an organization
has to make.
• Risk management delivers improved information so that
strategic decisions can be made with greater confidence.
• The strategy that is decided by an organization must be capable
of delivering the results that are required.
• There are many examples of organizations that selected an
incorrect strategy or failed to successfully implement the
selected strategy.
• Many of these organizations suffered corporate failure.
rabihah@usim.edu.my 10