Risk Management, 1st ed. 2021 Fundamentals, Theory, and Practice in Asia Springer Texts in Business and Economics Series

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

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

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

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

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

(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

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

(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

(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

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

1. Insurance and risk financing   146

2. 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

(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

(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

1. 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

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

1. Weather risk and companies  259

2. 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

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

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. 

Proposes a framework for risk management theory

Serves as an overview to facilitate understanding of the systematic fundamentals of enterprise risk management

Is based on actual cases of risk management in Japan, China, South Korea