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Risk Management: Fundamentals, Theory, and Practice in Asia

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This book outlines risk management theory systematically and comprehensively while distinguishing it from academic fields such as insurance theory. In addition, the book builds a risk financing theory that is independent of insurance theory.

Until now, risk management (RM) theory has been discussed while the framework of the theory has remained unclear. However, this book, unlike previous books of this type, provides risk management theory after presenting a framework for it. 

Enterprise risk management (ERM)  is seen differently depending on one’s position. For accountants, it is a means for internal control to prevent accounting fraud, whereas for financial institutions, it quantifies the risk that administrators can take to meet supervisory standards. Therefore, most of the ERM outlines are written to suit the intended uses or topics, with no systematic RM overviews. This book discusses a systematic RM theory linked to the framework of it, unlike previous books that were written according to topic.

After the Enron scandal in December 2001 and WorldCom accounting fraud in June 2002, several laws were enacted or revised throughout the world, such as the SOX Act(Sarbanes-Oxley Act) in the United States and the Financial Instruments and Exchange Law and Companies Act in Japan. In this process, the COSO(Committee of Sponsoring Organizations of Treadway Commission) published their ERM framework, while the ISO (International Organization for Standardization) published their RM framework. The author believes that the competition between these frameworks was an opportunity to systematize RM theory and greatly develop it as an independent discipline from insurance. 

On the other hand, the Great East Japan Earthquake that occurred on March 11, 2011, caused enormous losses. Also, because pandemics and cyber risks are increasing, businesses must have a comprehensive and systematic ERM for these risks associated with their business activities

Author(s): Hongmu Lee
Series: Springer Texts in Business and Economics
Publisher: Springer
Year: 2021

Language: English
Pages: 272
City: Singapore

Foreword
Acknowledgements
Contents
Abbreviations
List of Figures
List of Tables
Part I: The General Theory of Risk Management
1: The Concept of Risk and Corporate Risk
1.1 The Concept of Risk
1.1.1 Risk in Insurance
1.1.2 Deviation from Expected Value
1.1.3 Black Swan
1.2 Classification by Possibilty of Insurance Coverage
1.2.1 Pure Risk and Speculative Risk
1.2.2 Static Risk and Dynamic Risk
1.3 Corporate Risk Types
1.3.1 Market Risk
1.3.2 Credit Risk
1.3.3 Operational Risk
2: Enterprise Risk Management and Related Fields
2.1 RM
2.2 Enterprise Risk Management
2.3 Crisis Management
2.4 Business Continuity Plan
2.4.1 Major Earthquakes
2.4.2 Floods (Floods, Storms, Tsunamis)
2.4.3 Infectious Diseases (New Influenza Strain Pandemic)
2.4.4 Ash Fall Due to Eruption of Volcano and Snow Fall Following Cold Wave
2.4.5 Indiscriminate Human-Made Disaster
2.4.6 Disasters, Bankruptcy, and Scandals of Affiliated Suppliers
2.4.7 Intimidation/Theft/Cyber Attacks
2.4.8 Information Leakage, Food Poisoning, Window Dressing
2.4.9 Death, Hospitalization, Retirement, or Job Change of Important Person
2.5 Business Continuity Management
3: Accounting Fraud and Internal Control
3.1 Frequent Accounting Fraud
3.1.1 Enron
3.1.2 WorldCom
3.1.3 Cockroach Theory
3.2 SOX Act
3.3 Companies Act
3.4 Financial Instruments and Exchange Act
3.5 Companies Act and the Financial Instruments and Exchange Act
4: COSO ERM Framework
4.1 COSO Organization
4.2 Internal Control Framework
4.3 The COSO ERM (2004) Framework
4.3.1 ERM Framework Establishment
4.3.2 Definition of ERM
4.3.3 Features of COSO ERM (2004)
4.3.4 COSO ERM (2004) Objective Categories
4.3.5 The COSO ERM (2004) Basic Components
4.3.6 Effectiveness and Limitations of COSO ERM (2004)
4.4 COSO ERM (2017)
4.4.1 Outline of COSO ERM (2017)
4.4.2 Main COSO ERM (2017) Revisions
4.4.2.1 Definition of Risk
4.4.2.2 Integrate Risk with Strategy and Performance
4.4.2.3 Five Components and 20 Principles
4.4.2.4 Risk Capacity
4.4.3 Relationship Between COSO Internal Control and COSO ERM (2017)
5: ISO RM Framework
5.1 ISO Organizations and RM Standards
5.2 Risk and RM Definitions
5.3 ISO 31000 System
5.4 Principles (ISO 31000:2018)
5.5 Framework (ISO 31000:2018)
5.6 Process (ISO 31000:2018)
5.7 Features of ISO 31000
6: Risk Assessment
6.1 Risk Assessment: An Overview
6.2 Risk Assessment Technique
6.3 Risk Identification
6.4 Risk Analysis
6.4.1 An Overview
6.4.2 Consequence Analysis
6.4.3 Scenario Analysis
6.4.3.1 Event Tree Analysis
6.4.3.2 Fault Tree Analysis
6.4.3.3 Weakness Analysis
6.4.4 Quantitative Risk Analysis Indicators
6.4.4.1 Value at Risk
6.4.4.2 Probable Maximum Loss
6.4.4.3 Expected Loss
6.4.5 Risk Curve
6.4.6 Risk Matrix
6.5 Risk Evaluation
6.6 Risk Communication
7: Value at Risk
7.1 Probability
7.1.1 Concept of Probability
7.1.2 Variance and Standard Deviation
7.1.2.1 Variance
7.1.2.2 Standard Deviation
7.1.2.3 Volatility
7.2 Value at Risk
7.2.1 Overview
7.2.2 Origin and Development
7.2.3 Measurement Method
7.2.3.1 Variance-Covariance Method
7.2.3.2 Historical Simulation Method
7.2.3.3 Monte Carlo Simulation Method
7.2.4 Limitations
7.3 Expected and Unexpected Loss
7.4 VaR by Risk Type
7.5 Stress Test
Part II: Risk Financing
8: Risk Treatment and ART
8.1 Risk Treatment: An Overview
8.2 Risk Treatment Measures
8.2.1 An Overview
8.2.2 Risk Control
8.2.2.1 Risk Avoidance
8.2.2.2 Loss Control
8.2.2.3 Separation and Combination of Risk
8.2.2.4 Risk Transfer
8.2.3 Risk Financing
8.2.3.1 Retention
8.2.3.2 Loss (Risk) Transfer
8.3 Risk Financing and Corporate Finance
8.3.1 Relationship Between Risk Financing and Corporate Finance
8.3.2 Insurance and ART
8.4 Financial Market
8.5 Impact of ARTs on Finances
9: Limitations of Insurance as a Risk Financing Tool
9.1 Insurance and Risk Financing
9.2 Insurable Interest and Insurance
9.2.1 Insurable Interest and Prohibition of Gain
9.2.2 Relationship Between Insurable Value and Insurance Amount
9.2.3 Subrogation
9.3 Insurance Crisis in the United States
9.3.1 The Start of the Insurance Crisis in the United States
9.3.1.1 The First Insurance Crisis
9.3.1.2 The Second Insurance Crisis
9.3.2 Underwriting Cycle
9.3.3 Cash Flow Underwriting
9.3.4 Punitive Damages
9.3.5 Products Liability Lawsuit
9.3.6 Court System
10: Captive Insurers and Finite Insurance
10.1 Captive Insurance Companies
10.1.1 Definition of a Captive Insurance Company
10.1.2 Captive Insurance Companies Types
10.1.2.1 The Essence of a Captive Insurance Company
10.1.2.2 Classification by Insurance Underwriting Form
10.1.2.3 Classification by Ownership
10.1.3 Japanese Business Companies and Captive Insurance Companies
10.1.4 Benefits of Captive Insurance Companies
10.1.4.1 Risk Management
10.1.4.2 Cost Optimization
10.1.4.3 Risk Financing Means for Risks that Are Difficult to Insure
10.1.4.4 Leveling Fluctuations in Insurance Premium Rates
10.1.4.5 Profit-Center
10.2 Finite Insurance
10.2.1 Loss Portfolio Transfer
10.2.2 Spread Loss
10.2.3 Post-loss Funding Program
11: Contingent Capital
11.1 Overview
11.2 Contingent Debt
11.2.1 Commitment Line
11.2.2 Contingent Loan
11.3 Contingent Equity
11.3.1 Contingent Equity (CoCo Bond)
11.3.2 Contingent Surplus Notes and Contingent Equity Puts
12: Securitization and Insurance-Linked Securities
12.1 Asset-Backed Securities
12.2 Real Estate Securitization
12.3 Securitization of Receivables
12.3.1 Commercial Mortgage-Backed Securities
12.3.2 Residential Mortgage-Backed Security
12.3.3 Collateralized Debt Obligation
12.4 Securitization and the Financial Crisis
12.4.1 Subprime Loans
12.4.2 Credit Default Swap
12.4.3 CDS and Subprimes
12.5 Insurance-Linked Securities
12.5.1 The Emergence of Insurance-Linked Securities
12.5.2 The Mechanism of Insurance-Linked Securities
12.5.3 Trigger
12.6 Japan´s Earthquake Insurance and ILS
13: Insurance-Linked Security Types
13.1 CAT Bonds
13.1.1 CAT Bond Mechanism
13.1.2 CAT Bond Effects
13.1.2.1 Long-Term Cover
13.1.2.2 Fixed Cost
13.1.2.3 Reinforcement of Underwriting Capacity of Insurance Companies
13.1.2.4 Immediateness of Funds
13.1.2.5 Neutrality from Credit Risk
13.1.2.6 Flexible Response to Issuance Conditions
13.1.2.7 Rating
13.1.2.8 Risk Independence
13.1.3 CAT Bond Issuance Example
13.1.3.1 Case of Oriental Land (Issued by the Company)
13.1.3.2 JA Mutual Aid CAT Bond ``Muteki´´ (Reinsurance Company Intervention)
13.1.3.3 Typhoon Risk Securitization (Reinsurance Company Intervention)
13.1.3.4 World Bank CAT Bond
13.2 Sidecar
13.3 Industry Loss Warranties
13.4 Collateralized Reinsurance
14: Derivatives and Insurance Derivatives
14.1 Derivatives
14.1.1 Overview
14.1.2 Futures
14.1.2.1 Exchange Transactions
14.1.2.2 Standardization
14.1.2.3 Margin System
14.1.2.4 Difference Settlement
14.1.3 Options
14.1.3.1 Outline
14.1.3.2 Profit and Loss of Call Options
14.1.3.3 Profit and Loss of Put Options
14.1.3.4 Offsetting Transaction
14.1.3.5 Loan with Cap
14.1.4 Swap
14.1.4.1 Interest Rate Swap
14.1.4.2 Currency Swap
14.2 Insurance Derivatives
15: Weather Derivatives Trading
15.1 Weather Risk and Companies
15.2 Weather Derivatives
15.2.1 Features of Weather Derivatives
15.2.2 Types of Weather Derivatives
15.2.3 Effects of Weather Derivatives
15.3 Weather Derivatives Trading
15.3.1 CDD and HDD
15.3.2 Listing of Weather Derivatives
15.4 Weather Derivatives in Japan
15.5 Examples of Weather Derivative Products
15.5.1 Risk Exchange Transactions
15.5.2 Non-life Insurance Company Products
16: Risk Management in China
16.1 Earthquake Risk
16.1.1 Characteristics of Earthquakes in China
16.1.2 Large-Scale Earthquakes
16.1.2.1 Tangshan Earthquake
16.1.2.2 Sichuan Earthquake
16.1.2.3 Yunnan Earthquake
16.1.3 Earthquake Insurance
16.2 Typhoon/Flood
16.2.1 Occurrence of Disaster
16.2.2 Agricultural Disaster Insurance
16.3 Cyber Risk
16.3.1 Overview
16.3.1.1 Malware Infection
16.3.1.2 Targeted Attack E-mail
16.3.1.3 DoS/DDoS Attacks
16.3.1.4 Website Tampering
16.3.1.5 List-Type Account Hacking
16.3.1.6 Watering Hole Attack
16.3.2 Cybersecurity Law
16.3.3 Cyber Risk and Insurance
16.4 Pandemic
16.4.1 Pandemic History
16.4.2 Infectious Diseases and Insurance
17: Risk Management in South Korea
17.1 National Disaster Treatment
17.2 Natural Disasters
17.2.1 Wind and Flood Damage
17.2.2 Earthquakes
17.3 Wind and Flood Insurance
17.3.1 Disaster Support Money and Storm and Flood Damage Insurance
17.3.2 Risk Diversification of Insurance System
17.4 Cyber Risks
17.4.1 Cyber Risks Trends
17.4.2 Cyber Risks and Insurance
17.5 Pandemic
References
Japanese Literature, etc.
English Literature
Index