EWRM (Part 1) Seminar-SUMMARY

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BASIC ENTERPRISE-WIDE RISK MANAGEMENT CARLOS H. YTURZAETA, CPA Director, Environment & Risk Management Phils, Inc. Lecturer, Insurance Institute for Asia & Pacific Philippine Institute of Certified Public Accountants (PICPA) September 19, 2009, PICPA House Shaw Boulevard, Mandaluyong City

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RISK MANAGEMENT The process of planning, organizing, leading and controlling the activities of an organization to minimize the adverse effect of accidental losses at reasonable cost. Common definition of Risk Management .

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ENTERPRISE-WIDE RISK MANAGEMENT The Total Approach to the protection of assets , earnings , liabilities , reputation , and personnel against predictable and unpredictable losses in order to achieve the maximum efficiency at minimum cost. Modern definition of Risk Management

SOME INITIATIVES ON EWRM:

SOME INITIATIVES ON EWRM CORPORATE GOOD GOVERNANCE INDEPENDENT DIRECTORS FOR PUBLICLY LISTED COMPANIES SARBANES OXLEY COSO FRAMEWORK, IIA Standards BASEL 1 AND BASEL 2 for Banks & Financial Institutions IFRS, PFRS, PICPA, GACPA, ACPAPP SEC, PSE, CENTRAL BANK, other regulatory bodies,etc. INDUSTRY STANDARDS-National & Global Anti terrorism laws, anti money laundering, etc. Professional Ethical Standards-various Gov’t Boards Best Practices

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The Risks Exposures in EWRM FINANCING THE RISKS Controls Controls Physical damage Personnel Consequential Criminal Contracts Statutory Liability Tort Liability Product Liability War Sabotage &Terrorism State Action Regulations Securities/Investments Credit/Trade Receivables Interest Rate/Loans Currency/Cash Inventories Financial/Market Operational Legal Political Environment CAPITAL/EQUITY Occupation Health & Safety K and R PRICING

SPECIFIC EFFECTS OF LOSSES:

SPECIFIC EFFECTS OF LOSSES LOSS OF LIFE/INJURY – employees and 3 rd parties DAMAGE TO PROPERTIES – employees and 3 rd parties NON-DELIVERY OF SERVICES – customers and public FINANCIAL IMPACT – own and others LEGAL/PUBLIC LIABILITY (Environment, Health, Safety)

RISKS EXPOSURES:

RISKS EXPOSURES Natural Man Made – Errors/Negligence/Fraud Employees/Contractors Stakeholders Third Parties Organized Elements/Terrorists Technical – design and construction errors (According to origin/source)

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PURE RISK – where an event results at best in no change in the situation, though more likely, result in a loss with no possibility of a gain. Ex. Fire, explosion, earthquake, robbery, piracy, arson, sabotage and terrorism. SPECULATIVE RISK – where the outcome may either be a loss , a profit or remains status quo-no loss and no gain. Financial risks fall under this category. Ex. Stock market, equity funds, credit without security, RISK EXPOSURES (According to result/outcome)

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THE LOSS PYRAMID Some hazards will lead to accidents. Some accidents can lead to financial losses. Some losses are small. But huge losses can cripple the operation and even the whole organization.

POST-LOSS OBJECTIVES:

POST-LOSS OBJECTIVES SURVIVAL CONTINUITY OF OPERATIONS STABILITY OF EARNINGS GROWTH POTENTIALS HUMANITARIAN CONDUCT/CSR ENVIRONMENTAL IMPACT

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THE RISK MANAGEMENT PROCESS

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FIVE STEPS OF RISK MANAGEMENT 1. IDENTIFICATION/PROFILING 2. MEASUREMENT/ANALYSIS 3. MANAGEMENT TECHNIQUES 4. SELECTION & IMPLEMENTATION OF THE CHOSEN TECHNIQUEs 5. MONITORING & IMPROVEMENT OF EWRM PROGRAM (Risk Administration)

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RISK IDENTIFICATION METHODS Survey or questionnaire Going through the Company’s financial records Review of contracts, audit reports and surveys Flowcharting of operations Consulting/Engaging 3 rd party experts Ocular and physical inspection Table top discussion/interview with key personnel Group Discussion/Brainstorming session The 1 ST STEP

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RISK MEASUREMENT/ANALYSIS Frequency - probability or chance/likelihood - Workshop/Brainstorming - Loss History - Forecasting Severity - impact of losses/adverse effects - Workshop/Brainstorming - PML, EML, mathematical models - Impact on 3rd parties - Simulation models The 2 nd Step

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RISK MEASUREMENT/ANALYSIS Improbable Regular Negligible Catastrophic RETENTION LOSS CONTROL and PREVENTION INSURANCE Bus. Continuity P. Disaster Mgnt Emergency Mgnt CRISIS MGMNT Good Governance Bus Continuity Plan Disaster Recovery S e v e r i t y F r e q u e n c y The 2 nd Step

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RISK MANAGEMENT TECHNIQUES RISK CONTROL – Stop losses from happening or if it happens, reduce the effects and impact of the loss. or/and RISK FINANCE - Provides fund if and when loss occurs. THE 3 RD STEP

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1. Risk Avoidance 2. Loss Prevention 3. Loss Reduction 4. Segregation of Risks 5. Combination 6. Diversification 1. Retention through - Deductibles - Reserve/Funds - Current Expensing - Borrowing - Self-Insurance - Captive Insurance 2. Transfer through - Insurance - Hold Harmless/Outsource RISK CONTROL RISK FINANCING

RISK CONTROL AVOIDANCE:

RISK CONTROL AVOIDANCE Proper planning/design; feasibility studies Abandonment of existing project. Education and training-in & out of org Use of experts—in and out of the organization Hiring of capable personnel, managers Passing on of liability to 3 rd parties Physical Ocular Inspection Key-less entry/CCTV Use of non-related 3 rd parties to perform hazardous tasks or outsourcing

RISK CONTROL LOSS PREVENTION (Reduce Frequency/Likelihood):

RISK CONTROL LOSS PREVENTION (Reduce Frequency/Likelihood) Pre-audit /Post Audit Proper matching of expertise and job functions Training and Education-in and out Proper hiring procedures—psycho tests Suppliers Accreditation Performance review Third party engagements Use of receptionists/security guards/K-9 Color coding of vehicles, uniforms, markers & signs Reinforced fences and walls, proper lighting Note : We can use historical and statistical data to anticipate and prepare for natural perils

RISK CONTROL LOSS REDUCTION (Lower Severity/Impact):

RISK CONTROL LOSS REDUCTION (Lower Severity/Impact) Approvals Manual/Limits of Authorities Orientation, seminars and trainings-in & out Minimum Cash Balance-PCF and RF Drills, simulations, emergency exercises Contractual Limits Duplication of key facilities Firewall/Fire escape/Safety Deposit Vaults Benchmark with others. Dedicated Fire Marshalls/Fire Drills Dedicated Fire Department Auxiliary fire fighting support—LGU,NGO,etc Protective Personnel Equipment

SEGREGATION OF LOSS EXPOSURE:

SEGREGATION OF LOSS EXPOSURE Separation – dispersal of particular activity Duplication – “Back-ups” or Spares Outsourcing Subcontracting Segregation of flammable with the rest Duplication of key facilities Off-site back up files “Firewall”/Vault RISK CONTROL

RISK CONTROL DIVERSIFICATION:

RISK CONTROL DIVERSIFICATION “ DO NOT PUT ALL YOUR EGGS IN ONE BASKET” “TOO MANY COOKS SPOIL THE BROTH” CONSOLIDATION/COMBINATION

RISK FINANCING RETENTION:

RISK FINANCING RETENTION Deductibles Reserves-investment in bonds & stocks Current expensing of losses-treat as they come Borrowings-standby credit lines; pledging of TR Self-insurance Captive companies Note: Retain only those small and frequent predictable losses.

RISK FINANCING TRANSFER:

RISK FINANCING TRANSFER Insurance (bonds, prof. indemnity, guarantee) Reinsurance Non-insurance transfers -contractual transfers -hold harmless -outsourcing or subcontracting-use of 3 rd party experts. Note: DO NOT ABSORB THOSE HIGH & UNPREDICTABLE LOSSES.

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SELECTION OF THE RISK MANAGEMENT TECHNIQUES THE 4 TH STEP

CONTROL (Avoid, Prevent, Reduce):

CONTROL (Avoid, Prevent, Reduce) FINANCE (Retained or Transfer) CONTROL OR FINANCE: STRIKE A PERFECT BALANCE NOTE: IT COULD BE A COMBINATION OF BOTH.

RETAINED/FUNDED RISK:

RETAINED/FUNDED RISK TRANSFERRED RISKS RETENTION OR TRANSFER: A BALANCING ACT NOTE: IT COULD BE A COMBINATION OF BOTH.

RISK MANAGEMENT ADMINISTRATION:

RISK MANAGEMENT ADMINISTRATION Policy IRR & Guidelines Risk Management Organization Manuals and records RM Surveys/Audit/Compliance and Certifications External Conferences, education and training Internal Coordination meetings and forum Reports and Updates; monitor effectiveness Review of Contractual Obligation Incentives and motivation schemes Set standards and compare actual results Networking and benchmarking THE 5 TH STEP

ESTABLISHING A RISK MANAGEMENT PROGRAM:

ESTABLISHING A RISK MANAGEMENT PROGRAM Formulate a Risk Management Policy Set the Goals of the Risk Management Program Organize the Program Documentation Process Define roles and responsibilities Control of the RM Program (RM Administration) NOTE: MAY BE INITIATED IN HOUSE OR OUTSOURCED OR COMBINED

RESPONSIBILITIES IN EWRM:

RESPONSIBILITIES IN EWRM Top Management Line Management/CFO Risk Manager/Compliance Officer Committees --EWRM Committee --Credit Committee --Investment Committee --Audit Committee NOTE: MAY ALSO BE OUTSOURCED TO 3 rd PARTY or OWN SUBSIDIARY

KEY SUCCESS FACTORS :

KEY SUCCESS FACTORS Support of Top Management Good Governance. Centrally Managed EWRM/Strong driver Comprehensive EWRM Program (policies, guidelines, & procedures) interfaced with all the groups in the Company. Continuing Training and Education Networking and benchmarking NOTE: RISK MANAGEMENT IS A DAY-TO-DAY ENDEAVOR

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ACKNOWLEDGEMENTS/REFERENCE MATERIALS Risk and Insurance Management Association of the Phils (RIMAP)– various annual conferences from 1991-1993. Risk and Insurance Management Society of North America (RIMS)-various annual conferences in Winnipeg, Florida and San Francisco from 1992-1995. International Federation of Risk and Insurance Management Association of Asia and Pacific (IFRIMA) discussion meetings in Florida, Cologne, San Francisco from 1994 - 1995 Federation of Asia Pacific Association of Risk Management Organizations (PAFARMO) annual conferences – Malaysia, Singapore, Sydney, Philippines from 1993-1997. Books written by George Head of Insurance Institute of USA and Prakash A. Shimpi of Swiss Re New Markets. 5-Day Training with 13 Selected Electric Coops thru the sponsorship of NEA, UP-NEC and ECAP-USAID, Feb-March 2008 5-Day Training with Mactan Cebu International Airport, June 30-July 4, 2008

CARLOS “CALOY” YTURZAETA:

CARLOS “CALOY” YTURZAETA Certified Public Accountant (CPA)‏ Formerly Licensed Underwriter & Reinsurance Broker Lecturer , Insurance Institute of Asia & the Pacific/Marine Asso of the Phils(MUAP) Consultant/Speaker , Enterprise Wide Risk Management/Captive Insurance/ Accounting, Audit and Tax/Property Management/Estate Planning, Reinsurance, Disaster Management, Crisis Management, Emergency Management, Claims Administration, Business Continuity Planning, etc. Established the first Philippine Captive in Bermuda (Overseas Ventures Insurance Corp.or OVINCOR), reinsurer of Petrogen/Petron. Established /Gen. Manager of-the first “controlled” Phil. Insurer (Petrogen Insurance Corporation), a fronting company for OVINCOR. 25 years in the largest energy conglomerate in the Philippines consisting of Petron, PNOC , PNOC-Energy Development Corp, PNOC-Shipping & Transport Corp., PNOC-Coal Corp, PNOC-Exploration Corp, PNOC-Tankers Corp—in various capacities. Social work and community development, thru, Jose Carlo P. Yturzaeta Memorial Foundation, Inc and cooperatives and mutual aid benefits.

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Thank You! CARLOS H. YTURZAETA Director , Environmental & Risk Management Phils., Inc. Lecturer , Insurance Institute for Asia & Pacific, Inc. Email: <carlos_yturzaeta@yahoo.com.sg> Contact Nos. 0917 536 0937