Mitigate Risk Exposure Research Articles

A new adaptive approach for bridging the gap in insurance premium estimation

This paper proposes a new adaptive approach called adaptive mean (ADM) that combines the strengths of trimming and winsorization to minimize the mean square error (MSE). ADM will contribute significantly to insurers by enabling them to mitigate risk exposure caused by inaccurate premium estimation and establish more precise premiums for their clients. Furthermore, the proposed mean offers several pros compared to the conventional mean. It facilitates the natural and intuitive calculation of risk loading, identifies and measures the impact of large claims, and analyzes premium susceptibility to skewed risk by capturing the tails of the relevant loss models. In addition, this paper reviews two established, robust credibility methods (trimming and winsorization). It compares them with our proposed method, resulting in a more reliable and robustly accurate method for credibility premium estimation. We presented and analyzed two real data sets from engineering insurance companies and the Wisconsin Office of the Insurance Commissioner to highlight the advances of ADM in minimizing the MSE and building more robust credibility models that are less vulnerable to outlier events and model uncertainty.

Exploring the Use of Derivatives to Manage Financial Risks

Abstract: This research paper aims to investigate the use of derivatives in managing financial risks, with a special focus on the infrastructure sector. The study analyzes the positions taken by buyers in future and option contracts to mitigate risk exposure. The research period spans 28 days and focuses on three prominent companies listed on the National Stock Exchange (NSE): Larsen & Toubro Ltd, JSW Steel Ltd, and JMR Airports Infrastructure Ltd. The paper examines the profit and loss outcomes of derivative positions and evaluates their effectiveness in managing financial risks in the infrastructure sector.

An ASSESSMENT of the DISASTER PREPAREDNESS of the BARANGAY (VILLAGE) DISASTER RISK REDUCTION AND MANAGEMENT COMMITTEES of the TAGOLOAN RIVER BASIN COMMUNITIES in SOUTHERN PHILIPPINES

Climate-related hazards pose significant threats to communities worldwide, necessitating all governments to be at all times on high alert. Local governments, as required by law, should implement measures that would mitigate risk exposure to their constituents. This study utilized three research-made data gathering tools. Results revealed that the tasks of the Barangay (Village) Disaster Risk Reduction and Management Committees (BDRRMCs) in the river basin communities on disaster preparedness were at the low level. As a whole, the performance of the BDRRMCs is poor (2.45). This is broken down into building of competencies (poor = 2.72) and acquisition of hardware and supply (poor = 2.18). The results indicate that the BDRRMC leadership of the Tagoloan River Basin (TRB) communities has very limited capability with respect to its level of BDRRM Committee performance in the context of Building of Competencies as a component of disaster preparedness. The data also imply that the tools/facilities/materials, as sub-indicators of BDRRMC according to disaster preparedness, are not fully in existence and not available to many of the TRB barangays. There is a cogent need for all government offices handling the DRRM functions to provide appropriate attention at the community level for the proper implementation of the DRRM Plan.

Informing adaptation strategy through mapping the dynamics linking climate change, health, and other human systems: Case studies from Georgia, Lebanon, Mozambique and Costa Rica

While scientific research supporting mitigation of further global temperature rise remains a major priority, CoP26 and CoP27 saw increased recognition of the importance of research that informs adaptation to irreversible changes in climate and the increasing threats of extreme weather events. Such work is inevitably and appropriately contextual, but efforts to generalise principles that inform local strategies for adaptation and resilience are likely crucial. Systems approaches are particularly promising in this regard. This study adopted a system dynamics framing to consider linkages between climate change and population health across four low- and middle-income country settings with a view to identifying priority inter-sectoral adaptation measures in each. On the basis of a focused literature review in each setting, we developed preliminary causal loop diagrams (CLD) addressing dynamics operating in Mozambique, Lebanon, Costa Rica, and Georgia. Participatory workshops in each setting convened technical experts from different disciplines to review and refine this causal loop analysis, and identify key drivers and leverage points for adaptation strategy. While analyses reflected the unique dynamics of each setting, common leverage points were identified across sites. These comprised: i) early warning/preparedness regarding extreme events (thus mitigating risk exposure); ii) adapted agricultural practices (to sustain food security and community livelihoods in changing environmental conditions); iii) urban planning (to strengthen the quality of housing and infrastructure and thus reduce population exposure to risks); iv) health systems resilience (to maintain access to quality healthcare for treatment of disease associated with increased risk exposure and other conditions for which access may be disrupted by extreme events); and v) social security (supporting the livelihoods of vulnerable communities and enabling their access to public services, including healthcare). System dynamics modelling methods can provide a valuable mechanism for convening actors across multiple sectors to consider the development of adaptation strategies.

Corporate strategy, political contributions and corporate risk-taking

Purpose Despite the importance and prevalence of corporate political activities in modern organizations, there remains limited insight on the potential relationship between political contributions and companies’ risk-taking activities. This study aims to examine the relationship between monetary political contributions of firms and corporate risk-taking activities in the context of unstable political and economic environments. Design/methodology/approach The authors use a two-step system GMM estimation to investigate the subject using a cross-country sample of 307 firms from 22 countries covered over 2002–2017. In line with previous studies, the authors control for various corporate governance mechanisms, firm-level factors and country-level characteristics. Findings The findings demonstrate that firms that make monetary political contributions exhibit lower levels of risk as measured by different proxies for risks, namely, systematic, idiosyncratic and total risk. Practical implications The results suggest that political contributions can be a useful mechanism to mitigate risk exposure. Also, the use of different risk measures and other factors for robustness fosters a better understanding of political connectedness in a more contextualized and dynamic manner. Originality/value This study seeks to contribute to the debate surrounding corporate strategy, political connectedness and corporate risk-taking by using actual monetary political contributions as an explicit measure of political connection. This study furthers scholarly understanding on the dynamics of corporate political activities using political contributions in monetary terms as a measure of political connectedness and its impact on risk-taking. Furthermore, the authors explore this topic using insights from nonmarket strategy literature and studies on political contributions.

To own or not to own? Land tenure security and production risk in small-scale farming

While the impact of land tenure security on farm yield has been extensively investigated in the literature, little is known about the role tenure security plays in mitigating risk exposure. Using a nationally representative dataset collected through a multistage stratified random sampling of 1820 maize farmers in Nigeria during the 2014/2015 production season, we fill this knowledge gap by analysing the treatment effect of land ownership on production risk, measured by expected yield, yield variability (variance), and downside risk (skewness). To do so, we employ an endogenous switching regression model to sufficiently tackle selectivity bias that may arise from observed and unobserved factors. Our findings reveal that land ownership raises maize yield by 1.6% and reduces variability and downside risk by 95% and 164%, respectively. The robustness of these findings is established by further analyses using propensity score matching and inverse-probability-weighted regression adjustment approaches. Moreover, we find that the impacts of land ownership differ across landowners with different farmer characteristics and farm-level factors. Our results suggest that promoting policies that seek to encourage secure land tenure arrangements can be effective in mitigating production risk and crop failure, particularly in small-scale farming.

Who benefits from climate-friendly agriculture? The marginal returns to a rainfed system of rice intensification in Tanzania

Abstract Agricultural production in sub-Saharan Africa faces a multitude of challenges arising from land degradation, climate change, and limited access to improved technology. In this context, technologies that raise farmers’ crop productivity while mitigating risk exposure are particularly valuable. This study assesses the impacts of a modified, rainfed variant of the system of rice intensification (SRI) on expected yields, yield variance (variability) and yield skewness (exposure to downside risk) in Tanzania. The appeal of the technology lies in its yield-enhancing potential, its low demand for complementary external inputs as well as its drought resistance features. While the uptake of SRI has been considerable in Asia, the limited uptake in Africa is puzzling, particularly given its suitability for the African setting. Our empirical strategy relies on the estimation of marginal treatment effect (MTE) models. We find that, while the average effects on adopters suggest that SRI enhances yield and reduces the downside risk of crop failure, the marginal treatment effects indicate that only farmers with low resistance to adoption, benefit. Our analysis also highlights the importance of farmers’ climate perception for the adoption of SRI and the need for policies that increase climate awareness to ensure food security. However, these results may well be specific to small scale, rainfed rice cultivation in Africa and therefore may not be generalizable to situations where SRI relies on irrigation.

Chief financial officer roles and enterprise risk management: An empirical based study

This study investigates the influence of CFO roles on the implementation of ERM initiatives in a sample of Nigerian financial institutions (between 2013-2017). We develop three distinct factors representing the CFO roles namely CFO power, CFO experience and CFO knowledge using principal component factoring. Like prior work, we measure ERM components simultaneously to capture the extent of sophisticated ERM system. Our findings pose that the CFO involvement in ERM implementation remains minimal while the CRO is solely responsible for ERM implementation, which could undermine cost-benefit effectiveness. Our empirical evidence reports that the sophisticated ERM only promote the market evaluation while the accounting performance is undermined. The result then contravenes the expectation that effective ERM enhances accounting performance by mitigating risk exposure. While the sophisticated ERM is significantly positive with leverage, which reveals that ERM implementation does not necessarily reduce the firm risk. This indicates that the ERM implementation remains ineffective to mitigate risks, where the CFO involvement in the ERM initiative is limited. We then advocate that CFOs should be allowed to contribute strongly on some specific aspects of ERM initiatives namely identification and analysis of key risk indicators, the financial implication of risks and integration of ERM into traditional finance activities.

Bank’s financial stability and risk management

PurposeThis study aims to examine the effect of Saudi bank’s financial stability on risk management.Design/methodology/approachDifferent ordinary least square models have been used to study the significant effect of banks’ financial stability indicators on different types of risks in Saudi banks. Financial statements were collected of all Saudi banks (12 banks) from 2011 to 2014 from TADAWL website.FindingsThe results indicate a negative and significant effect of capital adequacy ratio on credit risk. Also, there is a significant and positive effect of leverage ratio on credit risk. Moreover, the results indicate negative and significant effect of provisions, leverage, ratio of loans to deposits and bank size on liquidity risk. Finally, results indicate a positive and significant effect of capital adequacy, provisions, leverage and asset utilization ratio on operational risk and indicate a negative and significant effect of loan-to-deposits ratio on operational risk. A robustness check was used to confirm the results. No differences between small and large Saudi banks was found. All banks are committed to apply Basel accord and Saudi Arabian Monetary Agency (SAMA) regulations. But there is a significant difference in applying SAMA toolkits regulations between 2011 and 2014. The 2014 results reflect very high degree of financial stability in Saudi banks when compared with that of 2011, also greater ability to mitigate risk exposure using different types of macroprudential toolkits stated by SAMA.Research limitations/implicationsThe study is limited to Saudi Banks from 2011 to 2014.Originality/valueThis is the first paper to use the macroprudential toolkits, suggested by SAMA as financial stability measurements, to examine their effect on different types of risks in Saudi banks. SAMA suggested this group of toolkits to comply with Basel III new regulations and to minimize the degree of risk exposure of Saudi banks.

Flexibility in planning and development of a container terminal: an application of an American-style call option

ABSTRACTThe prosperity and social progress of developed and developing economies is highly dependent on the existence of efficient transport infrastructure. Nevertheless, current budgetary constraints are jeopardizing the necessary investments in new or existing infrastructure. New models for planning and managing infrastructure are now necessary to overcome the lack of public economic resources available. Port infrastructure is no exception and, due to the vast number of uncertainties involving these projects, it is relevant to maximize the capture of the latent value of flexible options. Incorporating flexibility in these projects, prior to the implementation phase, can be a solution that allows port managers to address future uncertainties and mitigate risk exposure. This paper analyzes the incorporation of flexibility in port planning through the use of an American call option to the physical capacity expansion problem. The rationale is to implement a flexible expansion plan, through options that can be exercised at any given time, that are able to deal with uncertainty in demand. The paper uses a case study – Terminal Container of Ferrol, in Spain – and the results support the hypothesis that imbedded flexibility will robustly increase the net present value of the project.

Application in Risk Management

To investigate professional practice regarding applications in corporate finance this Application component provides generalized recommendations on how to use correlations and volatility to determine a hedging strategy in the currency markets. The next section entails a framework to help describe applied risk management methods pertaining to risk exposure in the currency spot market. A formulated discussion on how to implement and use different hedging strategies to improve financial performance either for a corporation or private investor by reducing risk in the currency spot market is provided. In the Breadth component an analysis of capital budgeting, portfolio investments, risk management, optimization, financial planning, mergers, acquisitions, and corporate governance was put forth. A compare and contrast was performed for each of the above theories in corporate finance. This component included a discussion of how these theories contribute to better performance from a corporate financial perspective. Influential writers from each theory, as to the role that contemporary corporate finance plays in promoting performance, were part of the analysis. There was a question posed: Why do fundamental analysis, risk management strategies, and knowledge of the agency problem still lead to system failure in corporations? To answer this question moral hazard was investigated through the framework of corporate governance. When the risk and rewards are out of sync excessive risk taking usually results. When socialized risks and privatized rewards are present in a system, such as the banking industry, then imprudent risk behavior is exhibited by the corporate leaders in that industry.It was shown in the Depth component that risk management can be an important tool to improve investors’ portfolios. Development of hedging models that reduce computational time and hedging error was shown. But hedging a portfolio is just one aspect of a risk manager. Risk managers are also heavily interested in counterparty risk exposure, expected loss calculations, and systemic risk from low probability events. Methods like VaR guide the risk manager in mitigating too much leverage for a corporation, such as a bank or investment firm. How can a risk manager mitigate risk exposure? This question was explored using different GARCH modeling techniques, the use of Sharpe ratios, systemic risk exposure using different visualization methods, and realization that illiquidity in markets can have distortions in VaR calculations.In the Application component a model is proposed to help hedge spot market positions in the currency market without the use of complicated mathematical models. An investor or treasurer at a corporation needs to hedge risk with low cognitive processing. If a simple and useful model can be developed then mitigating currency risk exposure will be possible. The key to this proposed hedging strategy is that currency pairs have a correlation with each other and that the returns on a certain currency pair have clustered volatility. It is possible to hedge a spot position in the currency pair with an offset position in a related currency pair. How do we determine the proper weight of the hedge? This can be done by understanding the level of correlation. The level of correlation can be a proxy to a delta hedge. The volatility of the currency pair is a metric to predict through chart patterns that a certain volatility epoch is approaching. When higher volatility is expected then a more immunized hedge is appropriate. Likewise, when volatility is expected to be low the hedge can be less protective.

Foiled by the Banks? How a Lender's Decision May Support or Undermine a Jurisdiction's Environmental Policies that Promote Green Buildings

A United Nations Environmental Programme report addressing climate change states that the built environment in both emerging and developed countries accounts for more than forty percent of global energy usage and at least one third of the world’s greenhouse gas emissions. The report further asserts that the built environment offers an unsurpassed opportunity to supply cost effective, lasting, and meaningful reductions in greenhouse gas emissions. In response to this call to action, state and local governments in the U.S. have turned to a variety of policies to ensure that real estate developments within their jurisdictions further green building objectives. However, the availability of mortgage financing for the construction or acquisition of green buildings can undermine policymakers’ overarching environmental objectives. Lenders who misunderstand the unique risks and opportunities associated with green buildings may undercut these important environmental policies by denying real estate financing for worthy construction projects or acquisitions. Accordingly, this Article builds upon my previous work that addressed some of the financial aspects relating to green buildings such as performance bonds, insurance, and construction loans while now turning to the unique issues associated with mortgages and provides solutions that can mitigate risk exposure to acceptable levels so the lending community can further a more ecologically-friendly built environment.

Scenarios, their concept, elaboration and application

Purpose – The purpose of this paper is to elucidate on specific risk mitigation approach which is known as “scenario approach”. Description of stepwise process of their elaboration, which is worth considering for managers, offers feasible tool not only for company risk management improvement but also for significant enhancement of the quality of company strategic planning. Authors also draw attention to advantages and disadvantages of investment and strategic scenario planning. Theoretical implications of using scenario approaches are exemplified both by the set of investment projects and company strategic planning process where method in question was applied. Design/methodology/approach – As for methods applied which fulfilled research strategies, it is worth mentioning following items: analysis which explores particular parts of methodology of scenario elaboration and application, the way of obtaining information, impact on strategy, working with risks and organizational support of outcomes in company environment; synthesis observing context and natural relation of problems solved which supports research hypotheses formulation; induction generalizing facts acquired from results in companies; deduction to be grounds on which conclusion of this paper was drawn up; abstraction used upon evaluation of case studies; comparison assessing consistency and inconsistency of phenomena and objects; description inevitable for characterization of companies and environment in which they operate; interview collecting information inevitable for the evaluation of the way of working with scenarios and company knowledge standards; modelling was used upon consideration about possible future development of factors observed. Findings – The paper arrived at conclusion, that scenario approach, when used appropriately, may significantly mitigate risk exposure of the company. Conclusions which have been made on selected industrial companies can be extended to other industrial branches. Practical application of scenario planning method confirmed that this approach was superior to deterministic single scenario model. Scenario technique thus compensates for deficiencies and omissions which are inherent in simplistic deterministic model. In cases where an investment scenario planning process proved to be insufficient, the paper refers to more advanced techniques like simulation methods or real options. Research limitations/implications – Over past ten years practical test of proposed stepwise process of scenarios elaboration was repeatedly tested on approx ten industrial companies during the tenure of Mr Soucek and Mr Špaček in top managerial positions. Practical implications – This paper offers flexible and feasible toll for scenario elaboration and their further development. Such an approach contributes significantly to the enhancement of company risk management process. Proceedures described were successfully tested in managerial practice by two of authors while holding CEO positions in oil prcessing and pharma business. Social implications – This paper does not have direct social implication. But scenario approach as a powerful tool of risk management process may significantly contribute to company survival and thus impact social status all stakeholders concerned. Therefore social implications should be identified rather on the background of the problem. Originality/value – Notwithstanding some general notion about scenario concept, there is still little evidence that scenario approach is applied in larger extent. It is prevalently due to lack of expertise of respective managers who are obviously puzzled with numerous outcomes to be obtained by this approach. Clearly define procedure of scenarios formation may be conducive to larger exploitation of this approach. Design of the elaboration and application of scenario approach which was proven to be functioning in the practice brings new benefits to risk management exploration.

Rice, irrigation and downside risk: a quantile analysis of risk exposure and mitigation on Korean farms

This article develops a quantile moment approach to evaluate risk exposure and to illustrate risk valuation, and then applies it to examine the relative importance of downside risk and risk mitigation options associated with a highly controlled but stochastic production system on Korean farms. The econometric approach exploits a rich panel dataset to develop consistent and robust econometric estimates of the quantile moments needed to decompose and analyse risk outcomes. The results show that about 90 per cent of the cost of risk on Korean farms comes from exposure to downside risk. We also examine how management factors can help to mitigate risk exposure outcomes.

Addressing Gaps in the Dodd-Frank Act: Directors' Risk Management Oversight Obligations

In the years leading to the recent financial crisis, finance theorists introduced innovative methods, including quantitative financial models and derivative instruments, to measure and mitigate risk exposure. During the financial crisis, financial institutions facing insolvency revealed pervasive misunderstandings, misapplications, and mistaken assumptions regarding these complex risk management methods. As losses in financial markets escalated and caused liquidity and solvency crises, commentators sharply criticized directors and executives at large financial institutions for their risk management decisions. By adopting the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress directly and indirectly addresses certain risk management oversight concerns at large, complex financial institutions. To improve risk management oversight at these institutions, Congress imposed several structural reforms altering the composition and obligations of financial institutions’ boards of directors. Unfortunately, even after the adoption of the Dodd-Frank Act reforms, financial institutions remain vulnerable to the same critical errors in enterprise risk management oversight that engendered systemic risk concerns during the recent financial crisis. While the Dodd-Frank Act may enhance a board’s risk management oversight capabilities, significant concerns persist regarding reliance on board committees. Organizational literature suggests that cognitive biases and structural limitations that influence group decision making will continue to plague boards’ efforts to effectively manage risk. This Article argues that better-tailored reforms are necessary to address weaknesses in enterprise risk management regulation and to reduce the threat of systemic risk. “Too many…acted recklessly, taking on too much risk…Like Icarus, they never feared flying ever closer to the sun.” “All the incentives-profits, compensation, glory, even job security-went in the direction of taking more and more risk, even if you half suspected it would end badly.”

Addressing Gaps in the Dodd-Frank Act: Directors' Risk Management Oversight Obligations

In the years leading to the recent financial crisis, finance theorists introduced innovative methods, including quantitative financial models and derivative instruments, to measure and mitigate risk exposure. During the financial crisis, financial institutions facing insolvency revealed pervasive misunderstandings, misapplications, and mistaken assumptions regarding these complex risk management methods. As losses in financial markets escalated and caused liquidity and solvency crises, commentators sharply criticized directors and executives at large financial institutions for their risk management decisions. By adopting the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress directly and indirectly addresses certain risk management oversight concerns at large, complex financial institutions. To improve risk management oversight at these institutions, Congress imposed several structural reforms altering the composition and obligations of financial institutions' boards of directors. Unfortunately, even after the adoption of the Dodd-Frank Act reforms, financial institutions remain vulnerable to the same critical errors in enterprise risk management oversight that engendered systemic risk concerns during the recent financial crisis. While the Dodd-Frank Act may enhance a board's risk management oversight capabilities, significant concerns persist regarding reliance on board committees. Organizational literature suggests that cognitive biases and structural limitations that influence group decision making will continue to plague boards' efforts to effectively manage risk. This Article argues that better-tailored reforms are necessary to address weaknesses in enterprise risk management regulation and to reduce the threat of systemic risk.