Sep 2016 Paper 1 - Q4(ii)

[km389]

Question 4(ii) was a question on HHO Power and their hydro-electric and tidal plants, asking:

"Describe how the risks mentioned in part (i) could be managed by each of the four main risk management tools."

When I read this question it funnelled me down to just talking about diversification, claims control, underwriting and mgmt control which is explicitly asked for. And I struggled because claims control and underwriting don't make much sense in the context of the question. The solutions however gave credit for a wide range of answer including FAT SIR ones.

How do I read this question and realise there were marks outside of the 4 tools?

 

[Mark Willder]

Question 4(ii) was a question on HHO Power and their hydro-electric and tidal plants, asking:

"Describe how the risks mentioned in part (i) could be managed by each of the four main risk management tools."

When I read this question it funnelled me down to just talking about diversification, claims control, underwriting and mgmt control which is explicitly asked for. And I struggled because claims control and underwriting don't make much sense in the context of the question. The solutions however gave credit for a wide range of answer including FAT SIR ones.

How do I read this question and realise there were marks outside of the 4 tools?

This was a tricky question because risk management tools appear in three different places in the course. So it is difficult to work out which list the examiners are looking for.

We could look at the 6 tools in Chapters 44 and 45. But there are 6 here - ART, underwriting, reinsurance, claims controls, management controls, diversification. These tools are more appropriate when looking at insurance applications, but as you say, most of them don't help in this context.

Alternatively we could use FAT SIR from capital project appraisal. Again that gives us 6. And again, it doesn't fit the context, as this isn't a capital project (as the power plants are already in operation).

The examiners were actually looking at the tools given in Section 4.1 of Chapter 42:

The main tools available for risk management are:

● diversify the risk away

● implement control measures that reduce the likelihood of the risk event occurring

● implement control measures to ensure that the price paid for the risk is fair

● implement control measures to mitigate the consequences of a risk event that does occur.

Unfortunately these questions will always be tricky. The good news is that there is some overlap between the different lists (eg diversify is in all three). If you are unsure, you could always try using ideas from all of the three lists if you have time. However, hopefully by considering the context (eg is it insurance or a capital project) you can pick the right list.

Best wishes

Mark

 

[km389]

I totally forgot the list you mentioned existed.

Thank you very much for the explanation!

 

[Ana Chew]

This was a tricky question because risk management tools appear in three different places in the course. So it is difficult to work out which list the examiners are looking for.

We could look at the 6 tools in Chapters 44 and 45. But there are 6 here - ART, underwriting, reinsurance, claims controls, management controls, diversification. These tools are more appropriate when looking at insurance applications, but as you say, most of them don't help in this context.

Alternatively we could use FAT SIR from capital project appraisal. Again that gives us 6. And again, it doesn't fit the context, as this isn't a capital project (as the power plants are already in operation).

The examiners were actually looking at the tools given in Section 4.1 of Chapter 42:

The main tools available for risk management are:

● diversify the risk away

● implement control measures that reduce the likelihood of the risk event occurring

● implement control measures to ensure that the price paid for the risk is fair

● implement control measures to mitigate the consequences of a risk event that does occur.

Unfortunately these questions will always be tricky. The good news is that there is some overlap between the different lists (eg diversify is in all three). If you are unsure, you could always try using ideas from all of the three lists if you have time. However, hopefully by considering the context (eg is it insurance or a capital project) you can pick the right list.

Best wishes

Mark

In Q&A Part 9, the solution of Q9.15(ii) has a slightly different list of risk management tools, i.e.

● diversify the risk away

● implement control measures that reduce the likelihood of the risk event occurring

● implement control measures to limit the severity of the effects of a risk that does occur.

● implement control measures to mitigate the consequences of a risk event that does occur.

Is this correct? This was updated in CMP Upgrade 2015/16.

This point is also shown in Solutiom 42.2.

 

[Mark Willder]

In Q&A Part 9, the solution of Q9.15(ii) has a slightly different list of risk management tools, i.e.

● diversify the risk away

● implement control measures that reduce the likelihood of the risk event occurring

● implement control measures to limit the severity of the effects of a risk that does occur.

● implement control measures to mitigate the consequences of a risk event that does occur.

Is this correct? This was updated in CMP Upgrade 2015/16.

This point is also shown in Solutiom 42.2.

I agree that this is a very tricky area to interpret as there are several similar lists in the Core Reading. There is the list on page 5 of Chapter 42 covering risk control measures and then the list on page 8 on risk management tools.

The Q&A question says "outline four approaches to managing risk", it's not quite as prescriptive as the exam question so we have taken a pragmatic approach in effectively straddling both the lists on pages 5 and 8.

The exam question on the other hand does say "tools" in the question suggesting more clearly that they want the material on page 8.

Best wishes

Mark