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

Autorentext

Hongmu Lee is a professor of risk management and insurance at Waseda University, Tokyo, where he received his Ph.D.

He is also the president of the Insurance and Risk Management Institute of Waseda University. The institute aims to carry out research internationally in cooperation with industry and the academic world on insurance and risk management. He has authored several books and articles in academic and professional journals, mainly in Korea and Japan.

Inhalt

Table of contents 2

List of Figures and Tables

Foreword 14

Part 1 - General Theory of Risk Management 16

Chapter 1 The concept of risk and corporate risk 17

1. The concept of risk 17

(1) Risk in insurance 17

(2) Deviation from expected value 18 (3) Black Swan 19

2. Classification by insurance potential 19

(1) Pure risk and speculative risk 19

(2) Static risk and dynamic risk 20

3. Corporate risk types 20

(1) Market risk 21

(2) Credit risk 23

(3) Operational risk 27

Chapter 2 Corporate risk management and related fields 31

1. Risk management 31

2. Corporate risk management 32

3. Crisis management 36

4. Business continuity plan 38

5. Business continuity management 43

Chapter 3 Accounting Fraud and Internal Control 46

1. Frequent accounting fraud 46

(1) Enron 46

(2) WorldCom 49

(3) Cockroach theory 50 2. SOX act 51

3. Companies act 53

4. Japanese version of the SOX Act (Financial Instruments and Exchange Act) 54

5. Companies act and Japanese SOX act 55

Chapter 4 COSO-ERM framework 58

1. COSO Organization 58

2. Internal control framework 58

3. COSO-ERM framework 63 (1) ERM framework establishment 63

(2) Definition of ERM 65

(3) Features of COSO-ERM 65

(4) COSO-ERM objective categories 67

(5) COSO-ERM basic components 68

(6) Effectiveness and limitations of COSO ERM 69

4. COSO-ERM (2017) 71

(1) Outline of COSO-ERM (2017) 71

(2) Main COSO-ERM (2017) revisions 75

(3) Relationship with internal control of COSO-ERM (2017) 78

Chapter 5 ISO RM Framework 79

1. ISO organizations and risk management standards 79

2. Risk and risk management definitions 80

3. ISO 31000 system 81

4. Principles (ISO 31000:2018) 83

5. Framework (ISO 31000:2018) 85

6. Processes (ISO 31000:2018) 87

7. Features of ISO 31000 90

Chapter 6 Risk Assessment 92

1. Risk assessment overview 92

2. Risk assessment technique 93

3. Risk identification 94

4. Risk analysis 95

(1) Overview of risk analysis 95

(2) Consequence analysis 97

(3) Scenario analysis 97 (4) Quantitative risk analysis indicators 103

(5) Risk curve 104

(6) Risk matrix 105

5. Risk evaluation 106

6. Risk communication 109

Chapter 7 VaR (Value at Risk) 112

1. Probability 112

(1) Concept of probability 112

(2) Variance and standard deviation 114

2. Value at Risk 119 (1) VaR concept 119

(2) Origin and development of VaR 120

(3) VaR measurement method 122

(4) Limits of VaR 124

3. Expected loss and unexpected loss 125

4. VaR by risk type 126

5. Stress test 127

Part II Risk Financing 129

Chapter 8 Risk Treatment and ART 130

1. Risk treatment overview 130

2. Risk treatment measures 131

(1) Risk treatment measures overview 131

(2) Risk control 133

(3) Risk Financing 134

3. ART and risk financing 136

4. Financial market 141

5. Impact of ARTs on finances 142 Chapter 9 Limitations of insurance as a risk financing tool 146

6. Insurance and risk financing 146

7. Insurable interest and insurance 147

(1) Insurable interest and prohibition of gain 147

(2) Relationship between insurable value and sum insured 149

(3) Subrogation 151

3. Insurance Crisis in the United States 153

(1) The start of the insurance crisis in the United States 153

(2) Underwriting cycle 154

(3) Cash flow underwriting 155

(4) Punitive damages 156

(5) PL (Products Liability) lawsuit 158

(6) Court system 159

Chapter 10 Captive Insurers and Finite Insurance 162

1. Captive insurance companies 162

(1) Definition of a captive insurance company 162

(2) Captive insurance companies types 163 (3) Japanese operating companies and captive insurance companies 167

(4) Benefits of captive insurance companies 170

2. Finite insurance 171

Chapter 11 Contingent capital 176

1. Contingent capital overview 176

2. Contingent Debt 177

(1) Commitment line 177

(2) Contingent loan 181

3. Contingent Equity 182 (1) Contingent equity (CoCo bond) 182

(2) Contingent surplus notes and contingent equity puts 185

Chapter 12 Securitization and Insurance Linked Securities 188

1. Asset-backed securities 188

2. Real estate securitization 189

3. Securitization of receivables 190

4. Securitization and the financial crisis 195

(1) Subprime loans 195

(2) CDS 197

(3) CDS and subprimes 199

5. Insurance Linked Securities 200

(1) The emergence of insurance-linked securities 200

(2) The mechanism of insurance-linked securities 204

(3) Trigger 206

6. Japan's earthquake insurance and ILS 208 Chapter 13 Insurance linked security types 224

7. Cat bonds 224

(1) Cat bond mechanism 224

(2) Cat bond effects 226

(3) Cat bond issuance example 228

2. Sidecar 234

3. ILW 236

4. Collateralized reinsurance 239

Chapter 14 Derivatives and Insurance Derivatives 241

1. Derivatives 241

(1) Overview of derivatives 241

(2) Futures 244

(3) Options 246

(4) Swap 251

2. Insurance derivatives 255 Chapter 15 Weather derivatives trading 259

3. Weather risk and companies 259

4. Weather derivatives 262

(1) Features of weather derivatives 262

(2) Types of weather derivatives 263

(3) Effects of weather derivatives 267

3. Weather derivatives trading 269

(1) CDD and HDD 269 (2) Listing of weather derivatives 270

4. Weather derivatives in Japan 271

5. Examples of weather derivative products 273

(1) Risk exchange transactions 273

(2) Non-life insurance company products 275

(Bibliography/Sources) 279