Enterprise-wide total cost of risk management using ARQ

• US 7,809,634 B1
• Filed: 07/07/2005
• Issued: 10/05/2010
• Est. Priority Date: 07/09/2004
• Status: Expired due to Fees

• Current Assignee: Gary J. Bierc
• Original Assignee: Gary J. Bierc
• Inventors: Bierc, Gary J.
• Primary Examiner(s): Kalinowski; Alexander
• Assistant Examiner(s): JOHNSON, GREGORY L
• Application Number:
  US11/176,762
• Time in Patent Office: 1,916 Days
• Field of Search: 705/38
• US Class Current: 705/38
• CPC Class Codes: G06Q 10/04 Forecasting or optimisation specially adapted for administrative or management purposes, e.g. linear programming or "cutting stock problem" market predictions or forecasting for commercial activities G06Q30/0202
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof

Abstract

The invention relates to the business disciplines known as Enterprise Risk Management, or ERM and with the addition of this invention, Strategic Risk Management, or SRM. It specifically relates to the quantification or measurement and validation of the historical impact of all risks and risk management activity on an organization. The invention provides a methodology to measure, baseline, track and benchmark the total cost of all historical risk events, including both positive and negative events, and risk-related activities that impact the earnings of an organization.

Claims

1. A method for managing and assessing risk to an organization, the method comprising the steps of:

providing a storage medium for storing data and programs used in processing data;

providing a central processing unit for processing data, wherein the central processing unit performs the determining steps;

dissecting the organization into two parts, the two parts comprising risk producing functions and risk handling functions;

determining a cost of the risk handling functions;

determining an aggregate risk quantification, the aggregate risk quantification comprising an enterprise-wide total cost of risk value that comprises the cost of the risk handling functions and a first value that is the result of subtracting variances from a business plan caused by a cost of Active Risk Management (ARM), a cost of Risk Sharing/Transfer (RST), and Impact of Standard Risks (ISR) from a variance of a financial variable from the business plan, as adjusted for extraordinary items;

establishing a baseline value for risk to the organization based on the determined aggregate risk quantification;

defining a measurable goal, wherein data used to determine the aggregate risk quantification is used to define the goal;

determining after a defined timeframe whether the organization accomplished the goal;

if the goal was not accomplished, reviewing the process to determine where adjustments could be made to more accurately arrive at the goal; and

repeating the steps of setting a goal and determining whether the organization accomplished the goal.

2. The method of claim 1, further comprising:

identifying negative risks, opportunities, causes, redundancies and correlations in the context of the goal;

quantifying the negative risks and opportunities in dollar terms;

using statistical analysis to identify key risks, which may require more attention than other risks; and

prioritizing the risks based on a risk'"'"'s expected financial impact on reaching the goal.

3. The method of claim 1, wherein the goal is a one-year sales goal for a new product and the method further comprises:

identifying all of the threats and opportunities that will affect a successful introduction of the product and achievement of the sales goal;

quantifying for each threat and opportunity a potential impact of the threat or opportunity on reaching the sales goal; and

prioritizing which risks must be addressed first based on their potential effect on reaching the sales goal within one year.

4. The method of claim 2, wherein the risks are quantified in dollar terms using minimum, maximum, and expected values.

5. The method of claim 2, further comprising formulating plans to respond to the identified key risks.

6. The method of claim 1, wherein the enterprise-wide total cost of risk value further comprises a value selected from the group consisting of:

a risk financing value, a risk sharing value, and a risk transfer value.

7. The method of claim 6, wherein the enterprise-wide total cost of risk value further comprises a cost of standard risks value.

8. The method of claim 1, wherein the determined aggregate risk quantification is based upon an enterprise-wide total cost of risk value and at least one value selected from the group consisting of:

an aggregate risk quantification index value, a return on risk value, and an aggregate risk quantification at risk value.

15. The method of claim 1, further comprising determining a cost of line item risk management spending in the risk producing functions, wherein the enterprise-wide cost total cost of risk value further comprises the cost of line item risk management spending in the risk producing functions and the cost of RST.

9. An apparatus for managing and assessing risk in an organization, the apparatus comprising:

a storage medium for storing data and programs used in processing the data;

a central processing unit for processing data, wherein the central processing unit performs the steps of;

detecting input data;

calculating a cost of risk handling functions for the organization, the cost of the risk handling functions based on a dissection of the organization into two parts, the two parts comprising risk producing functions and risk handling functions;

calculating an aggregate risk quantification, wherein the calculated aggregate risk quantification comprises an enterprise-wide total cost of risk value that comprises the cost of the risk handling functions and a first value that is the result of subtracting variances from a business plan caused by a cost of Active Risk Management (ARM), a cost of Risk Sharing/Transfer (RST), and Impact of Standard Risks (ISR) from a variance of a financial variable from the business plan, as adjusted for extraordinary items;

establishing a baseline value for risk to the organization based on the determined aggregate risk quantification;

defining a measurable goal, wherein data used to determine the aggregate risk quantification is used to define the goal;

determining after a defined timeframe whether the organization accomplished the goal;

if the goal was not accomplished, reviewing the process to determine where adjustments could be made to more accurately arrive at the goal; and

repeating the steps of setting a goal and determining whether the organization accomplished the goal.

10. The apparatus of claim 9, wherein a user manually enters the input data into spreadsheet software.

11. The apparatus of claim 9, wherein one of the programs is business intelligence software that automatically draws the input data from the data stored on the storage medium.

12. The apparatus of claim 9, wherein the enterprise-wide total cost of risk value further comprises a value selected from the group consisting of:

a risk financing value, a risk sharing value, and a risk transfer value.

13. The apparatus of claim 12, wherein the enterprise-wide total cost of risk value further comprises a cost of standard risks value.

16. The apparatus of claim 9, wherein the central processing unit further performs the step of determining a cost of line item risk management spending in the risk producing functions, wherein the enterprise-wide cost total cost of risk value further comprises the cost of line item risk management spending in the risk producing functions and the cost of RST.

14. A method of managing and assessing risk to an enterprise, the method comprising the steps of:

(a) providing a storage medium for storing data and programs used in processing the data and providing a central processing unit for processing data, wherein the central processing unit performs steps (c) and (h);

(b) dissecting the organization into two parts, the two parts comprising risk producing functions and risk handling functions and determining a cost of the risk handling functions;

(c) calculating an aggregated risk quantification a total cost of risk value for the enterprise based on input data, the aggregate risk quantification comprising an enterprise-wide total cost of risk value that comprises the cost of the risk handling functions and a first value that is the result of subtracting variances from a business plan caused by a cost of Active Risk Management (ARM), a cost of Risk Sharing/Transfer (RST), and Impact of Standard Risks (ISR) from a variance of a financial variable from the business plan, as adjusted for extraordinary items;

(d) establishing a baseline of risk to the enterprise based upon the determined risk value;

(e) defining a measurable goal using the input data;

(f) identifying a plurality of risks, a plurality of opportunities, a plurality of causes, a plurality of redundancies and a plurality of correlations in the context of the goal;

(g) quantifying the plurality of risks, and the plurality of opportunities in dollar terms;

(h) using statistical analysis to identify key risks of the plurality of risks, wherein the key risks require more attention than other risks of the plurality;

(i) prioritizing the plurality of risks based on a risk'"'"'s expected financial impact on reaching the goal;

(j) formulating a plurality of plans to respond to the identified key risks;

(k) examining outcomes of a process to determine whether any unexpected outcomes exist;

(l) if unexpected outcomes exist, reviewing the process to determine where adjustments could be made to more accurately arrive at the goal; and

(m) repeating steps (e), (f), (g), (h), (i), (j), (k) and (l).

17. The method of claim 14, in which step (b) further comprises determining a cost of line item risk management spending in the risk producing functions, and wherein the enterprise-wide cost total cost of risk value in step (c) further comprises the cost of line item risk management spending in the risk producing functions and the cost of RST.