CHALLENGES Edited by Nerija Banaitiene RISK MANAGEMENT CURRENT ISSUES AND RISK MANAGEMENT – CURRENT ISSUES AND CHALLENGES Edited by Nerija Banaitiene Risk Management – Current Issues and Challenges http://dx.doi.org/10.5772/2568 Edited by Nerija Banaitiene Contributors Werner Hürlimann, Rossella Agliardi, Petar Popivanov, Angela Slavova, A. Gonen, Sabrina Grimaldi, Carlo Rafele, Anna Corinna Cagliano, Pako Thupayagale, Marius Ioan Podean, Dan Benta, Robert Elliott Allinson, Daniel Ekwall, Omar Gaci, Hervé Mathieu, Jean-Pierre Deutsch, Laurent Gomez, David R. Comings, Wendy W. Ting, Gabriela Dobrotă, Emilia Vasile, Ion Croitoru, Óscar Lázaro, Agustín Moyano, Mikel Uriarte, Alicia González, Teresa Meneu, Juan Carlos Fernández-Llatas, Vicente Traver, Benjamín Molina, Carlos Palau, Óscar López, Etxahun Sánchez, Saioa Ros, Antonio Moreno, María González, José Antonio Palazón, Miguel Sepulcre, Javier Gozálvez, Luis Collantes, Gonzalo Prieto, Amparo Marin de la Barcena, Marin Andreica, Stere Farmache, Madalina Ecaterina Andreica, Octavian Stroie, Gurudeo Anand Tularam, Gowri Sameera Attili, Jordi Botet, Pedro Maria-Sanchez, Nerija Banaitiene, Audrius Banaitis, Satit Aditto, Christopher Gan, Gilbert V. Nartea, R. Martínez, D. Hemming, L. Malone, N. Bermudez, G. Cockfield, A. Diongue, J. Hansen, A. Hildebrand, K. Ingram, G. Jakeman, M. Kadi, G. R. McGregor, S. Mushtaq, P. Rao, R. Pulwarty, O. Ndiaye, G. Srinivasan, Eh. Seck, N. White, R. Zougmoré, Á.G. Muñoz, D. Ruiz, P. Ramírez, G. León, J. Quintana, A. Bonilla, W. Torres, M. Pastén, O. Sánchez, Andrew Charles, Yuriy Kuleshov, David Jones Published by InTech Janeza Trdine 9, 51000 Rijeka, Croatia Copyright © 2012 InTech All chapters are Open Access distributed under the Creative Commons Attribution 3.0 license, which allows users to download, copy and build upon published articles even for commercial purposes, as long as the author and publisher are properly credited, which ensures maximum dissemination and a wider impact of our publications. After this work has been published by InTech, authors have the right to republish it, in whole or part, in any publication of which they are the author, and to make other personal use of the work. Any republication, referencing or personal use of the work must explicitly identify the original source. Notice Statements and opinions expressed in the chapters are these of the individual contributors and not necessarily those of the editors or publisher. No responsibility is accepted for the accuracy of information contained in the published chapters. The publisher assumes no responsibility for any damage or injury to persons or property arising out of the use of any materials, instructions, methods or ideas contained in the book. Publishing Process Manager Mirna Cvijic Typesetting InTech Prepress, Novi Sad Cover InTech Design Team First published September, 2012 Printed in Croatia A free online edition of this book is available at www.intechopen.com Additional hard copies can be obtained from orders@intechopen.com Risk Management – Current Issues and Challenges, Edited by Nerija Banaitiene p. cm. ISBN 978-953-51-0747-7 Contents Preface IX Section 1 Approaches and Models for Risk Management 1 Chapter 1 Biometric Solvency Risk for Portfolios of General Life Contracts (II) The Markov Chain Approach 3 Werner Hürlimann Chapter 2 Boundary-Value Problems for Second Order PDEs Arising in Risk Management and Cellular Neural Networks Approach 31 Rossella Agliardi, Petar Popivanov and Angela Slavova Chapter 3 Selecting a Response Plan Under Budget Constraints 55 A. Gonen Chapter 4 A Framework to Select Techniques Supporting Project Risk Management 67 Sabrina Grimaldi, Carlo Rafele and Anna Corinna Cagliano Chapter 5 Long Memory in the Volatility of Local Currency Bond Markets: Evidence from Hong Kong, Mexico and South Africa 97 Pako Thupayagale Chapter 6 Risk Management in Collaborative Systems 115 Marius Ioan Podean and Dan Benta Chapter 7 On the Very Idea of Risk Management: Lessons from the Space Shuttle Challenger 133 Robert Elliott Allinson Section 2 Risk and Supply Chain Management 155 Chapter 8 Supply Chain Security – Threats and Solutions 157 Daniel Ekwall VI Contents Chapter 9 Dynamic Risk Management Strategies with Communicating Objects in the Supply Chain of Chemical Substances Within the European Union 185 Omar Gaci, Hervé Mathieu, Jean-Pierre Deutsch and Laurent Gomez Section 3 Enterprise Risk Management 203 Chapter 10 IA OM ® as an Enterprise Risk Management Metric 205 David R. Comings and Wendy W. Ting Chapter 11 Risk Management in Business – The Foundation of Performance in Economic Organizations 227 Gabriela Dobrotă Chapter 12 Integrated Risk Management System – Key Factor of the Management System of the Organization 253 Emilia Vasile and Ion Croitoru Chapter 13 Integrated and Personalised Risk Management in the Sensing Enterprise 285 Óscar Lázaro, Agustín Moyano, Mikel Uriarte, Alicia González, Teresa Meneu, Juan Carlos Fernández-Llatas, Vicente Traver, Benjamín Molina, Carlos Palau, Óscar López, Etxahun Sánchez, Saioa Ros, Antonio Moreno, María González, José Antonio Palazón, Miguel Sepulcre, Javier Gozálvez, Luis Collantes and Gonzalo Prieto Section 4 Risk Management Practice Across Different Projects and Industries 313 Chapter 14 Strengthening Risk Management in the Midst of Downturn Times 315 Amparo Marin de la Barcena Chapter 15 Risk Management on the Romanian Capital Market 329 Marin Andreica, Stere Farmache, Madalina Ecaterina Andreica and Octavian Stroie Chapter 16 Importance of Risk Analysis and Management – The Case of Australian Real Estate Market 357 Gurudeo Anand Tularam and Gowri Sameera Attili Chapter 17 Quality Risk Analysis: Value for Money in the Pharmaceutical Industry 387 Jordi Botet Contents VII Chapter 18 Project and Enterprise Risk Management at the California Department of Transportation 411 Pedro Maria-Sanchez Chapter 19 Risk Management in Construction Projects 429 Nerija Banaitiene and Audrius Banaitis Chapter 20 Sources of Risk and Risk Management Strategies: The Case of Smallholder Farmers in a Developing Economy 449 Satit Aditto, Christopher Gan and Gilbert V. Nartea Section 5 Climate Risk Management 475 Chapter 21 Improving Climate Risk Management at Local Level – Techniques, Case Studies, Good Practices and Guidelines for World Meteorological Organization Members 477 R. Martínez, D. Hemming, L. Malone, N. Bermudez, G. Cockfield, A. Diongue, J. Hansen, A. Hildebrand, K. Ingram, G. Jakeman, M. Kadi, G. R. McGregor, S. Mushtaq, P. Rao, R. Pulwarty, O. Ndiaye, G. Srinivasan, Eh. Seck, N. White and R. Zougmoré Chapter 22 Risk Management at the Latin American Observatory 533 Á.G. Muñoz, D. Ruiz, P. Ramírez, G. León, J. Quintana, A. Bonilla, W. Torres, M. Pastén and O. Sánchez Chapter 23 Managing Climate Risk with Seasonal Forecasts 557 Andrew Charles, Yuriy Kuleshov and David Jones Preface Companies face risks every day, they are part of normal business life. There are many risks — both threats and opportunities — which may impact on a company‘s resources, projects and profitability. Risk means different things to different businesses and organizations. Undoubtedly, the risk represents both a potential threat and potential opportunity for businesses. Every business and decision involves a certain amount of risk. Risk might cause a loss to a company. This does not mean, however, that businesses cannot take risks. As disengagement and risk aversion may result in missed business opportunities, which will lead to slower growth and reduced prosperity of a company. In today‘s increasingly complex and diverse environment, it is crucial to find the right balance between risk aversion and risk taking. To do this it is essential to understand the complex, out of the whole range of economic, technical, operational, environmental and social risks associated with the company’s activities. However, risk management is about much more than merely avoiding or successfully deriving benefit from opportunities. Risk management is the identification, assessment, and prioritization of risks. Lastly, risk management helps a company to handle the risks associated with a rapidly changing business environment. When risk management does receive attention, it is often in response to unforeseen (and usually negative) events. The impact of the global economic crisis has varied from one country to another: not all countries, sectors and organizations were affected in the same hard way by it. Even, the impact of the financial crisis is varying widely across companies within the same sector. In today’s post-crisis economy effective risk management is a critical component of any successful management strategy. In complex and rapidly changing situations, as today’s supply chains and partnership arrangements tend to be, management needs to consider all risks within the enlarged business connections. Understanding of the risk management is vital for both practitioners and researchers. The emergence of new insights into approaches and models can help address multifaceted risk management issues. There are five parts in this book of 23 chapters. The papers are organized according to theoretical, methodological and practical issues and areas of risk management: Part 1 X Preface provides new insights into theoretical approaches and models for risk management, Part 2 deals with risk and supply chain management, Part 3 focuses on specific aspects of enterprise risk management, Part 4 examines risk management practice across different projects and industries, and Part 5 discusses emerging issues related to climate change and climate risk management. The authors touched on a wide range of risk management issues. Consequently, in the context of the thematic classification scheme, some papers fall into more than one category. I consider it an honour and privilege to have had the opportunity to edit this book. I am particularly grateful to all the authors for their outstanding contributions, and to Mirna Cvijic, the publishing process manager at InTech, for her kind assistance in publishing this book. Dr. Nerija Banaitiene Department of Construction Economics and Property Management, Faculty of Civil Engineering, Vilnius Gediminas Technical University, Lithuania [...]... (liability risk of the current period) and a risk margin component (liability risk of future periods), where the latter must be included (besides the 4 Risk Management – Current Issues and Challenges best estimate liabilities) in the technical provisions This general decomposition is in agreement with the current QIS5 specification The proposed approach is then applied to determine the biometric solvency risk. .. trends (=systematic risk) and parameters (=parameter risk) but not for the random fluctuations around frequency and severity of claims (=process risk) In fact, the process risk has been disregarded as not significant enough, and, in order to simplify the standard formula, it has been included in the systematic/parameter risk component For the purpose of internal models and improved risk management, it appears... insurance risk liabilities with high probability A risk margin is added to this capital requirement (recall that in Solvency II the sum of the best estimate insurance liabilities and the risk margin determines the Technical Provisions) The liability VaR target capital is the sum of the liability VaR solvency capital and the risk margin defined by TCtVaR  SCtVaR  RMtVaR (7) 6 Risk Management – Current Issues. .. state “A” to the dead state “D” for the mortality risk) ,  AD  0.20 (permanent 20% decrease in mortality rates at each age for jumping from “A” to “D” for the longevity risk) , and  AJ  0.35 respectively  AJ  0.25 (increase of 35% in disability rates for the next year, respectively a permanent 25% increase 16 Risk Management – Current Issues and Challenges in disability rates at each age in following... vanish   4 Backward recursive reserve formula and the theorem of Hattendorff In a first step, we derive a recursion formula for the actuarial reserves Recall the recursion formula for the random prospective loss L  C  vL 1 Assume that the contract is in state k  S at time  Inserting (16) into (15) yields (16) 8 Risk Management – Current Issues and Challenges Vk  E C X  k   v  E  L... Olivieri & Pitacco [23], which up-dates its parameters to experience Given is a fixed time t and biometric 18 Risk Management – Current Issues and Challenges transition probabilities pij  k  , k  0,1,2, , for the given fixed states, which is based on an initial cohort of size  t at time t Let Dt  1 denote the random number of transitions produced by the cohort in the time period  t    1, t ... a status change) With state independent reserves, the insurance 12 Risk Management – Current Issues and Challenges company administers the contract as if it had no knowledge of any decrements, as long as the contract is not terminated Only the latter situation is considered in the present work In a first step, we determine the mean and variance of the conditional distribution of Zt given Et Similarly... that biometric risks in QIS5 accounts for the uncertainty in Biometric Solvency Risk for Portfolios of General Life Contracts (II) The Markov Chain Approach 15 trends and parameters, the so-called systematic/parameter risk, but not for the process risk We note that the solvency capital models of Section 5.2 only apply to the process risk For full coverage of the process and systematic risk components,... actuarial present values are defined by 22 Risk Management – Current Issues and Challenges n 1 a a a ( x : n)   v k  k px , for the n  year active life annuity (76) k 0 n 1 i ai ( x : n)   v k  k px , for the n  year disabled life annuity (77) k 0 The actuarial present value (APV) of future benefits for the n -year endowment with waiver of premium and one unit of sum insured for a life in... n) (1  px  n 1 )  n 1 px  v 2ix  n  2 px  1qx  n 1 ,       (88) 24 Risk Management – Current Issues and Challenges where the savings premiums are determined by the formulas  S (0)  vV11 ,      S ( k )  v Vk11  Ai ( x  k  1 : n  k  1)  Vk1  Ai ( x  k : n  k ) , k  1, , n  1, (89) and the probabilities P( Ek ) are defined in (87) Neglecting the probabilistic terms . CHALLENGES Edited by Nerija Banaitiene RISK MANAGEMENT CURRENT ISSUES AND RISK MANAGEMENT – CURRENT ISSUES AND CHALLENGES Edited by Nerija Banaitiene Risk Management – Current. (liability risk of the current period) and a risk margin component (liability risk of future periods), where the latter must be included (besides the Risk Management – Current Issues and Challenges. practical issues and areas of risk management: Part 1 X Preface provides new insights into theoretical approaches and models for risk management, Part 2 deals with risk and supply chain management,