DFA Capital Management Inc.

DFA vs. ERMIs There A Difference?

CAS Special Interest SeminarUnderstanding the Enterprise Risk Management ProcessSan Francisco, CAApril 2-3, 2001

André Lefebvre, FCAS, MAAA

DFA Capital Management Inc.

Changes in the Business World In the new economy, CEOs are facing

unrelenting pressure to lead and improve their company’s performance

At the same time, the rules are changing:• Increasing complexity of the global economy• Higher customer expectations• Intense competition• Rapid changes in technology

DFA Capital Management Inc.

Master Risk Create Value Organizations are searching for and

developing more comprehensive approaches to monitor and manage business risks

Business Risk: The threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully1

1 Managing Business Risk: An Integrated Approach, The Economist Intelligence Unit, 1995

DFA Capital Management Inc.

Enterprise Risk Management

ERM is an interactive process of well-defined steps which, taken in sequence, support better decision-making by contributing a greater insight into business risks and their impacts

DFA Capital Management Inc.

Elements of ERM Process

Establish Context

Identify Risks

Analyze/Quantify Risks

Assess/Prioritize Risks

Treat/Exploit Risks

Monitor

&

Review

Communication

Integrate Risks

DFA Capital Management Inc.

Establish Context Understand the:

• strategic (external) context• organizational (internal) context• risk management context

Develop the risk evaluation criteria Define the structure

DFA Capital Management Inc.

Identify Risks

Document the conditions and events that represent material threats to the organization’s achievement of its strategic objectives or represent areas to exploit for competitive advantage

DFA Capital Management Inc.

Types of Risks Strategic

• e.g., competitor risk, shareholder relations risk

Operational• e.g., customer satisfaction risk, authority/limit risk

Financial• e.g., price risk, liquidity risk, credit risk

Hazard• e.g., catastrophic loss risk, health & safety risk

DFA Capital Management Inc.

Analyze/Quantify Risks Analyze risks in terms of

consequence and likelihood in the context of existing controls

Quantify the consequence and likelihood using qualitative, semi-quantitative, or quantitative (or a combination of these) analyses

DFA Capital Management Inc.

Integrate Risks

Aggregating all risk distributions, reflecting correlations and portfolio effects

DFA Capital Management Inc.

Assess/Prioritize Risks Evaluate the risk Prioritize list of risks

DFA Capital Management Inc.

Treat/Exploit Risks Identify options for risk treatment Assess the options Prepare risk treatment plans Implement treatment plans

DFA Capital Management Inc.

Monitor & Review It is necessary to monitor the risks,

the effectiveness of the risk treatment plan, the strategies, and the management system that is set up to control the implementation

Ongoing review is essential to ensure that the management plan remains relevant

DFA Capital Management Inc.

Communicate

Important to develop a communication plan for both internal and external stakeholders at the earlier stage of the process