Enterprise risk assessment: example, approaches and models

One of the elementary functions performed by insurance companies is risk assessment (underwriting). Its importance is due to the fact that it is at this stage that the basic parameters of insurance in the future are modeled. Thus, the adoption of inappropriate risks or their incorrect classification will lead to a deterioration in the financial results of insurance, as well as to the creation of an inadequate portfolio of risks. This is especially important in the insurance sector, which by its nature is long-term. Incorrectly concluded insurance contracts cannot be unilaterally terminated by the insurance company, which means that they can have a negative impact on its economic situation for a long period of time.

General view

Risk - the possible occurrence of an undesirable phenomenon associated with the work performed. This may result in loss, damage to health or the death of employees performing the work.

Under the risk assessment at the enterprise understand the identification of the dangers and threats of the company that exist in the workplace, determining the extent of these threats in order to identify ways to prevent.

It is also a set of analytical measures that allow us to predict the possibility of generating additional income or the expected amount of damage.

Principles of Risk Assessment

Among the basic principles of risk assessment at the enterprise can be identified:

• the complexity of the approach, which is expressed in the need to assess all the dangers and their sources in the enterprise;
• comparability of risk level with profitability level;
• correlation of risk level with costs means that the possible volume of losses should be appropriate to the share of capital that provides insurance of losses;
• economic feasibility, when the risk management process should be more profitable than the cost of it.

Purpose and subject

An enterprise risk assessment using insurance as an example covers the following areas:

• medical;
• professional;
• non-profit;
• financial.

Medical risk is associated with the health of the insured and is determined by many factors: biological and genetic, age, lifestyle and behavior.

Occupational risk includes all elements that affect the likelihood of death associated with the place and type of work performed. Its occurrence is based on the assumption that the danger in the profession is not linear, but is randomly distributed between different areas of work. This type of risk includes factors that directly affect human safety (noise, dust, light, etc.), as well as indirect (stress, stress, excitement, etc.)

Non-commercial risk - this type consists of all non-commercial activities carried out by the insured in his spare time. Here the interests of the individual must be taken into account. There are also interests that clearly do not increase the number of failures.

Financial risk is associated with the danger of some reinsurance, which is understood in two ways: as insurance is too expensive in relation to disposable income or as excessive in relation to insurance interest. The consequence of this phenomenon may be the quick liquidation of the enterprise.

Components

Insurance risk is assessed based on two components:

• choice;
• classification.

As part of the selection process, the insurance company evaluates individual claims in terms of the risk they pose to decide whether to accept them for insurance or reject them (postpone). The delay is applied in a situation when it is impossible to correctly assess the risk at the moment in question and when such an opportunity may appear in the near future. Therefore, the main and immediate goal of the selection process is to counteract the process of adverse self-selection made by companies that want to insure themselves.

The second component of the process is the classification of accepted insurance claims for specific risk classes. This is directly reflected in the application of the premium rate. During the classification process, the insured belongs to the group of customers representing a similar risk probability. The immediate purpose of the classification is to achieve a situation in which insurance is included on the conditions and at the premium level, reflecting the degree of its risk.

The starting point for customer classification and premium rate structure is the separation of the standard class (group). It will reflect the average risk for the entire portfolio of insured, and nominees will be burdened with an average premium. The standard group should be large enough and include a sufficiently large percentage of insured (about 90%). This reduces the likelihood of deviation from the average risk and reduces the cost of administering the insurance portfolio.

In addition to the standard class, it is necessary to create non-standard classes with increased insurance risk, as well as with an increased insurance premium. It is important that the number of these classes ensures a balance between the minimum requirements (arising from technical needs) and their maximum number, in order to avoid anti-risk selection and increase administrative costs.

Delphi Method and Nominal Group Method: Basics of Application

In the process of risk identification , various developed methods for quantitative risk assessment of an enterprise are used. Among the main methods, the following methods should be noted: checklist, heuristic, Delphi method and holistic.

For example, the Delphi method is based on the opinions of experts invited to participate in the risk identification process. In this case, individual specialists do not meet and often do not know who else is involved in the risk identification process and what types of risks have already been identified.

The Delphi method consists of three stages:

• Selection of a panel of experts who carry out the assessment.
• Drawing up an anonymous list of risks to which, in their opinion, the company is exposed.
• Providing all experts with a comprehensive study listing all types of risks identified by experts involved in the identification process. Formation of requests for a new identification, taking into account the results contained in the presented study (this process can be repeated many times).

The Delphic method of assessing the risks of enterprise activity is similar to the method of the nominal group. It allows you to contact individual experts without a direct connection between them.

Risk assessment at the enterprise and an example of the application of the nominal group method includes three stages:

• gathering an expert group and requesting to present in writing its identified risks;
• compiling a list of all types of hazards obtained in this way and discussed by experts;
• giving each expert weight (the importance of this risk for the company's profitability level) and compiling their rating.

VaR methodology for assessing investment risks

Today, the VaR method is very popular among many investors and banks in the enterprise risk assessment system. Its task is to express the existing investment risk in one number. In essence, VaR is the total loss that does not exceed the loss of portfolio value over any period of time and takes into account current probabilities.

For an accurate calculation, you need to know the function of the distribution of portfolio profit for a certain period of time. In most cases, VaR calculations are performed over a period of one to ten days, in which the confidence level is very high - up to 99%.

In order to accurately calculate VaR, several key parameters should be considered - a specific period of time (for which calculations are made), as well as the composition and distribution function of the total value of the investment portfolio.

It would seem that the information is not complicated for the composition of the portfolio, but in practice there are problems, especially when it comes to large enterprises. There may be thousands of assets in the arsenal of the past to track down difficulties. Another important point is determining the value of these tools.

VaR's risk assessment method has been developed to make it as easy as possible to assess the dangers and needs of various categories of investors. There are three main methods of VaR assessment. Each of them has its own characteristics:

• Historical method. It includes the study of price changes generated by the portfolio for a certain period of time in the past, to calculate historical data on the value of fixed assets (past). The advantages of this method are that you can evaluate a portfolio of assets, including derivatives (futures contracts, options, etc.). Disadvantage: tremendous effort to collect historical data.
• Analytical method. It includes identification and registration when calculating market factors affecting the value of the portfolio. The advantage is that most of the necessary parameters are already there, so VaR calculation is pretty fast. Disadvantage: poor quality and inaccurate calculations.
• Monte Carlo Method. It includes modeling probable price changes based on a number of assumptions. It also takes into account market factors that may affect the price of a portfolio. The advantage of this method: the ability to easily reconfigure the calculation based on economic forecasts. Disadvantage: it does not show the final price of the portfolio, but the only possible scenario of events, the complexity during the calculations.

Bankruptcy Risk Assessment

The tables below show the characteristics of the main methods for assessing the risk of bankruptcy of an enterprise.

It is usually associated with the likelihood of a company's financial loss resulting from adverse factors.

An enterprise risk assessment and an example methodology are presented in the table below.

The following model is associated with the calculation of indicators of the ratio of assets and sales financial values.

Assessment of the bankruptcy risk of an enterprise through the model of J. Gaidk, D. Stos.

An enterprise risk assessment and an example of model A. Holds are presented in the table below. In the framework of this method, the ratio of various groups of assets, liabilities to company income is presented.

The following model presents the calculation of indicators of the ratio of financial results to assets and liabilities of the company.

Enterprise risk assessment model E. Michinska and M. Zawadski (GINE PAN model)

Economic risk assessment

Consider the methodology for assessing risks in the enterprise. There are a huge number of possible calculation options both in domestic and in foreign practice.

To assess economic risk, mainly qualitative methods are used. The choice of one of them should be preceded by familiarity with the characteristics of this group. Qualitative risk assessment methods can be divided into three groups: matrix methods, indicator methods, risk charts.

Matrix ones are usually two-parameter methods. Assessing the economic risks of an enterprise in this way is based on a matrix built of two parameters. After analyzing them, risk assessment is not difficult, however, it should be remembered that the absence of parameters related to the working environment, such as exposure to risk, may interfere with an accurate assessment of hazards.

The group of matrix methods includes the PHA method and the risk matrix method for immeasurable factors.

Indicator methods are multi-parameter and multi-level methods. In this case, the risk assessment is based on the calculation of the indicator value, which is a product of the parameter weights. The introduction of several levels of assessment of parameters and risk values ​​makes the assessment more complete and more accurate than in the case of matrix methods. The use of indicator methods of risk assessment is facilitated by such parameters as risk exposure, the ability to protect against threats. An enterprise risk assessment and an example of an indicator method is often called the Five Step method.

The graph method is the most diverse methods in terms of the number of levels for the parameters being evaluated - for each parameter, there are from two to five levels. It is worth remembering that although with a small number of levels it is easier to evaluate the parameters, the risk assessment will not be accurate enough. Four parameters are evaluated in this method, but additional criteria, such as exposure and the possibility of using protection against threats, are also taken into account. This solution allows a more complete assessment of economic risk.

Occupational Risk Assessment

Assessment of occupational risks at an enterprise is a process of constant study of all possible aspects of the work performed by employees in order to identify hazards, determine the possibility of eliminating them or not having such an opportunity to prevent their creation using the necessary measures and means of protection.

There are many effective methods for assessing occupational risk. Nevertheless, it is recommended to choose those that do not require special knowledge and which can be easily evaluated by a group of specialists. However, it should be noted that the results provide the necessary information to prevent hazards. Three areas with different risk levels can be distinguished:

• in area I, where the risk is unacceptably large and cannot be reduced using available resources, work is not allowed;
• area II, where the risk can be taken if it is constantly monitored, but efforts should be made to reduce the possible danger, taking into account the economic situation;
• III, , .

, . , , , .

, :

• ;
• ;
• , ;
• , .

, ​​ , .

Conclusion

, , . . . - .