The VAR and Consensus of forecasts (stock-exchange Analysis): What to make “information given to the public must be accurate, specific and sincere»? Case study: Banks, Insurances, Corporates.

 

One of the fundamental responsibilities of the listed companies is to identify situations being able to require a warning on results of Securities and Exchange Commission.

Your company is listed in stock exchange; it does not supply forecasts of result, but simply an outline on the strategy and objectives calculated with a notice at the end of every press release to avoid any confusion of “objectives” with “forecasts”.

The publication of forecasts of results is generally the responsibility of financial analysts.

This rule of caution is applied to avoid warnings on results of Securities and Exchange Commission (STOCK EXCHANGE WATCHDOG BODY) is less and less effective with the articulation of the texts of the device of financial security:

• Law on the internal control, (American law Sarbanes Oxley and the others),

• Standards IAS-IFRS (particularly the standards of management accounting: IAS 36 , 37 and 38),

• Basel 2 (from 2008 with the Approach AMA and the generalization of the Internal Rating Based -in SMALL AND MEDIUM-SIZED FIRM),

• Solvency II of the insurers which derives from Basel 2.

The objective of this article is to draw your attention on the deficits of your system of information of management and to indicate modalities to correct it.

Does the company have to be interested in the consensus of forecasts, when it has knowledge of it, and does it have to react when his most recent own estimations do not confirm the indications of the consensus? Which are the risks for the company when an erroneous consensus is not rectified?

THE STATUTORY CAPACITIES OF THE STOCK EXCHANGE WATCHDOG BODY

The capacities of the Securities and Exchange Commission (STOCK EXCHANGE WATCHDOG BODY) are without ambiguity on these questions: cf. http://www.amf-france.org/documents/general/4752_1.pdf
.

The company does not have to set of initiatives aiming to rectify an isolated analysis, which would deviate from a consensus of market in agreement with internal forecasts, this difference being by itself information useful for the market.

Role generally attributed to the leaders is to communicate their strategic orientations, action plans, and financial objectives that they settle as result of this strategy. These objectives are generally multi-annual and synthetic materials based on normative hypotheses in economic environment, in this particular case IASB for any highly-rated companies, procedure IASB-Solvency II for insurance companies and IASB-BÂLE 2 for banks, laws on the internal control.

It is the responsibility of the company to identify situations able to require precision on its communication, notably when a company is brought to notice that its waited results will be in a significant lower way in the fork of estimation given by a consensus of little scattered market.

Besides the company with wide and\or international shareholding, is subject to the constraints of information appropriate for this type of shareholding, and for elements necessary for the measure of the financial performance of the company by the investors. This is all the more necessary as the leaders undertake more and more often to the investors on objectives of financial nature (objectives of BPA, typical ratios ROE, ROCE, indicators of consequent creation shareholding).

It is advisable to remind that in both cases, that of objectives communicated by the company as that of forecasts published by the financial analysts, the information given to the market raises from the same general legal regime, namely Regulation n ° 98-07 of the Securities and Exchange Commission, which arranges in his article 2 that:

‘’Information given to the public must be accurate, specific and sincere “.

Now,

• The Value at RISK (VaR) is the indicator of measure of DISTANCES between forecasts / objectives calculated and obtained result;

• Value at RISK ( VaR) = Expected losses, (EL) + Unexpected losses, (UL);

• The Value at Risk is also the indicator of evaluation of the probability of ruin of a company;

• The VAR measures the probability that the amount of the Capital of Solvency or Solvency Capital Requirement ( SCR) is insufficient from a threshold of alert;

• Solvency ratio = Own Capital / operational Risks + Risks of market + Risk of counterpart.

Accounting regulation arranges that:

• “An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset” (IAS36, §9).

The procedure of posting of unexpected losses forces you to integrate the data of external sources:

• Unexpected losses (UL) represent to them only 90 millions per year and per bank according to the Committee of Basel (Study realized in 2002);

• For the set of sectors, unexpected loss (UL) represents on average 42.5 % of the salary mass according to the ISEOR (Study realized over 30 years on 1000 companies in 32 countries and on 5 continents).

RESPONSIBILITY INCREASED BY THE MANAGERS

The responsibility of the Managers is particularly increased with the IAS-IFRS, Basel 2 and Solvency II. The SCR integrates operational result waited in basic stockholders’ equity:

• “A resumption of a loss of value of a revalued asset is directly credited in own capital under the column distances from evaluation. However, as far as a loss of value relative to this even active revalued was before booked in result, a resumption of this loss of value is also booked in result ” (IAS 36 , §120);

• “The calculations of capital have to reflect conditions suited by decrease economic or necessities of reduction of risks ” (Committee of Basel of the banking control, Paragraph 468 of the Document of Structure, in July, 2005);

• “The measure of risks has to be translated by requirements in stockholders’ equity lessening according to the quality of the system of measurement and the management ” (FBF, on 2005);

• In practice, warned the National Committee of Accounting, for every entities “accounting information must be on-line with the information of management “(” Performance reporting “, Recommendation N 2004-R.02 of October 27, 2004);

• In Canada more and more investors are reluctant to invest in the companies which will not have taken their capacities for go farther than the calculation of the VaR and to administer the risk of sort to reduce distance between the objectives of the business plan and obtained return (cf. “The management of risks in Canada- To go beyond the simple evaluation “, Ernst and Young, Toronto, August 2006);

• In France the MEDEF, the FBF and the CCI of Paris asked SMALL AND MEDIUM-SIZED FIRM, in the perspective of the generalization of the rule as from 2008, to set the measures which are necessary to fit their management to new statutory requirements: cf. ” Basel II and accounting standards: which consequences for the relations of SMALL AND MEDIUM-SIZED FIRM with their bank?” (In June, 2005).

So, for the highly-rated companies, in application of the regulation of the STOCK EXCHANGE WATCHDOG BODY, when a company is brought to notice due to its system of information of management of risks (QUANTIFICATION, POSTING of LOSSES, PREVENTION, PILOTING of the RESUMPTION OF LOSS OF VALUE and INTERNAL REPORTING) that its expected results will be in a significant lower way or superior in the fork of estimation given by a consensus of little scattered market,

• the company has to intervene as fast as possible to restore a satisfactory level of information concerning it or these elements.

The company can do so only if its system of information of management (SIG) was straightened with regard to current statutory requirements on the financial security:

• The VaR;

• Recoverable potential;

• The plan of resumption of the loss of value (in terms of calculated objectives);

• The system of piloting of the processes of cost savings and prevention generating future economic advantages which will go to the company according to the IAS 38 / Intangible assets.

THE OFFER OF FREE DIAGNOSIS and SIMULATION

To allow companies which wish to have a visibility of their situation with regard to the three elements above, Riskosoft Company presently offers a FREE diagnosis and simulations of Plan of Continuance of Activity (PCA):

• Data of earnings reports and balance of the last three known exercises,

• Internal data of unexpected losses (specially for banks)

• External data of unexpected losses (for any sectors).

Models of summary simulations for sectors banks, insurances and corporate (Industries and services) are available as a rough guide.

You can download the document of your sector at: www.riskosoft.com

• Contact us for a simulation from your figures; it is FREE OF CHARGE and does not pull ANY COMMITMENT of your part.

contact@riskosoft.com

Our guarantee: a written agreement relative to the confidentiality of your data and the results of the simulation.

Software packages ERM-IAS-IFRS-SolvencyII for insurances: decision-making Intranet / Extranet system to set up current accounting modalities since 2005 and to integrate gradually Solvency II’s capacities

 

Contents

• Device of stake in accordance with an evolutionary rule
• Compatibility of Solvency II with the ERM, the COSO and the IAS-IFRS
• Pillar 1
- Calculation of own capital
- The VaR
- Calculation of provisions
• Pillars 2 and 3

I-Devise of stake in accordance with an evolutionary rule

RISKOSOFT ERM-ASSURANCE addresses the companies of assurance for their stake in accordance with the new regulations in force. Even though the text of the reform is not yet stabilized, a wide part is known and allows the companies to identify the computer and organizational devices to be set up.

This is of as urgent as new international accounting standards are effective since 2005.

Information system ERM-Intranet is the ideal, supple and evolutionary frame to measure to set up the basic device of statistical and accounting quantification that are already known because they are common in all the sectors and to integrate the specific requirements of Solvency II according to their publication.

Solvency II project is in its first phase of discussion and consultation, foreseen until July 2007. The first version of the text is foreseen for July, 2007. At the same time, the European Commission proceeds to QIS (Quantitative Impact Study) to quantify the effects of various hypotheses and the used methods.

A first QIS on the calculation of the technical provisions was finalized in March, 2006 and a second on the amounts of stockholders’ equity has just been published. Seen the complexity of the procedure, a 3-rd QIS will be necessary. It(he) will concern the aspect diversification group and on a refinement of the parameters of the previous QIS. This one is foreseen for the first half a year 2007.

Then, a phase of decision, foreseen to the end of 2008, will end in the definitive version of the text. Certain measures will be already implemented to facilitate integration within the companies of assurance.

During the third phase which lasts on 1 year, the governments of States members will integrate texts into their national legislation. Coming into force within the companies of assurance is foreseen for January, 2010. These will have so hardly 1 year to conform to the legal texts and to make necessary simulations.

II- Compatibility of Solvency II with the ERM, the COSO and the IAS-IFRS

RISKOSOFT ERM is a system decision-making intranet / extranet of Accounting of Risk Management arisen from searches led 15 years previously. These searches allowed the Riskosoft Company to anticipate the big changes which intervene today in the management of the financial risk.

The device Riskosoft ERM facilitates the financing of not transferable risks by savings of costs led by the early losses and not early losses bound to OPERATIONAL RISK, on one hand; and costs of risks bound to operational risks on the other hand: RISKS OF COUNTERPART and RISKS OF MARCHE.

Internal assurance (Prevention of risks) is a device being connected with the repository COSO of internal control (Committee Of Sponsoring Organizations of the Treadway Commission). Used within the framework of the implementation of capacities raising laws Sarbanes-Oxley after financial scandals (Enron, …), the COSO was integrated into their rule of CONTROL INTERNED by all the big countries (Canada, Japan, Australia, country of the EEC).

Standard IAS-IFRS and Basel 2 is situated in the continuation of this procedure which ends particularly for the European Economic Community with Solvency II

Requirement COSO is a step Enterprise Risk Management, (ERM) including eight constituents: Internal environment, implemented objectives, identification of event of depreciation of assets, evaluation of risks, treatment of risks, control, information and communication.

The COSO aims at four objectives of Enterprise Risk Metric (Risk Management Accounting or Accounting of management of risks):

- The strategy of creation of the value
- The operations of piloting
- The intensification of the financial report,
- The control of the correspondence to specific regulations

Solvency II requires for it a measure and a mastery of the risk at GLOBAL level and especially industrialization of the processes of measure of the VAR and from resumption of the loss of value.

Given that Solvency II’s works are current, the device Riskosoft ERM supplies scenario “best estimation” to define value updated by the future cash flows of companies following rule IASB, notably IAS 36 and IAS 37.

This estimation is necessary for the application of the approach which will be adopted from orientations in discussion about the pillar 1.

As Basel 2, Solvency II should be compatible with standards IFRS to avoid supplementary administrative loads (European Commission, on 2005). Procedure IASB-Solvency II implemented by Riskosoft ERM allows the insurance companies to proceed to the implementation of current accounting modalities since 2005, within the framework of a system intranet / extranet enough flexible and evolutionary to integrate statutory capacities to come from Solvency II

The structure of Solvency II is, following the example of Basel II, articulated on 3 pillars:
• First, more quantitative, foresees rules concerning the calculation of the technical provisions and the own capital;
• Second, more qualitative, foresees the rules of supervision;
• The third concerns transparency of financial information.

III- Pillar1

Assets are usually calculated on base of their value of market. Riskosoft allows taking into account the method of cash flow prescribed with the IAS 36 to take into account the assets which are not exchanged on the market.

Riskosoft ERM’s procedure IASB-Solvency allows generating the data of quantifications to be taken into account for:
- The calculation of own capital;
- The VAR
- Provisions

1-Calculation of own capital

The calculation of stockholders’ equity contains 2 levels, the SCR (SOLVENCY CAPITAL REQUIREMENT) and the provisions.

The Capital of Solvency will take into account 4 types of risks:
• Risks of credit/Counterpart,
• Risks of market,
• Risks of signature (life insurance and not life),
• Operational risks.

The Capital of Solvency has to cover all the risks and be calibrated in a way that the probability of bankruptcy of the company on a horizon of one year is enough low.

This level corresponds so to a test of ruin of 1 % (approach CEIOPS, 2005a). The ruin occurs if the level of assets(active persons) is lower than the amount of provisions. A horizon of one year is in phase with the period of reporting of companies.

2- The VAR

Current discussion is situated not on the methods of posting of the VaR, but at the level of the measure of risk to be adopted (the VaR or TailVaR) for the calculation of the Capital of Solvency. The methods of calculation of the VaR were clarified by standards IAS 36 and 37 for the accounting aspects and by Basel 2 for the statistical aspects).

The Value at RISK ( VaR) is situated indeed in the problem of DISTANCES among the foreseen and the realized (Cf. RISKOSOFT ERM 1).

• The VaR defines as the difference between the unfavourable result of a period of management and the expected result;

• The VaR estimates the probability of ruin;

• The VaR also measures the probability that the amount of the Capital of Solvency or Solvency Capital Requirement ( SCR) is insufficient from a threshold of alert (Tail Value at Risk or TailVaR-approaches CEIOPS), activating(starting) the intervention of the authorities of control to assist an ailing firm (Cf. RISKOSOFT ERM3).

Parameters and hypotheses used altogether calculations of the SCR in the approach CEIOPS reflect the idea of a level of safety corresponding to TaiVaR in 99 %.

Industry relieved by the European Committee of Insurances develops European Standard Approach (“European Standard Approach “, ESA on 2006). Industry privileges the use of the VaR and notices that if TailVaR must be used, the level of safety should be lower in 99,5 %.

Major Statutory or minimum Capital Requirement (MCR), should as in Basel II a threshold not be crossed at the risk of grave penalties.

Approach cost of the capital allows a maximal protection of the consumer.

3. Calculation of provisions

The angular stone of the Solvency II project is a bigger harmonization of provisions at European level (European Commission, on 2005). The mode of calculation of provisions is the object of an intense debate among the various actors, in particular the calculation of the margin of risk.

Industry privileges method cost of the capital for the calculation of the margin of risk. This approach was developed in Switzerland through the Swiss Test of Solvency (TSS, OFAP, on 2004). This TSS is a process relatively similar to Solvency II. In this approach, margin is defined as the theoretical cost, for a third, by the supplementary required statutory capital to protect itself from the risk to which it could be exposed in case of resumption of the wallet of an ailing firm. It is about the current value of the costs of the statutory capital for all the risks not covered during the period of liquidation (OFAP, on 2004).

IV-Pillars 2 and 3

RISKOSOFT ERM totally integrates pillars II and III of Solvency II. These pillars are indeed constituted by the requirements of the Approach Advanced Measure (AMA).

• The second qualitative pillar regroups all the rules concerning the good governance, the principles to be followed for effective Risk Management, rules concerning the tests of resistance, the scenarios, the procedures of supervision, evaluation as well as possible penalties in case of overtaking of the thresholds of capital.

- Not quantifiable risks, outside the pillar I, will be taken into account in the pillar II. At the conclusion of a process of control of these risks, the regulator should decide if a supplementary amount of capital (capital as we be add) is necessary. It should verify if the amount of the SCR calculated in the pillar I is in equivalence with the level of risk of the company. After a process of supervision, the regulator will also be able to decide to increase capital if she judges that qualitative requirements in terms of good governance, internal control and of risk management are not corresponding with the profile of risk of the company.

Asset Liability Management (ALM), absent in the current legislation, will be developed within the Pilier II. Objective is to assure a just balance between assets and passives (CEIOSP, 2005a). Risk ALM meets itself in all the classic risks of insurances.

The Pillar II will cover all the qualitative aspects such as the management of this inadequacy, the integration of the ALM within the strategy of companies and the justification of the hypotheses of modelling. These hypotheses should be plausible and in coherence with the strategy of the company.

• The third pillar is intended for the information in third parts. It will also be about information intended for the superintendents who will allow him better to fill their role. Transparency and publication of this information will strengthen discipline and mechanisms of market. The market must be able to judge and possibly to sanction companies.

It is also in this pillar that the strongest interactions among Solvency II, the COSO and the standards IAS / IFRS will be developed. To avoid supplementary administrative loads (European Commission, on 2005), Solvency II should be compatible with standards IFRS 36 , 37 and 38, modalities of ERM ( Enterprise Risk Management) to which the management of operational risks and the dependent risks (risks of counterpart and risks of market) are particularly sensitive.

Our site: www.riskosoft.com

Solvency II – the Insurer and the VAR: the requirements of ERM (Enterprise Risk Metrics) – Measure of the impairment of assets and the recoverable amount – Modelling of the prevention, piloting and Reporting.

 

Solvency II regulates the implementation of the Global balance devise of REVERSING the IMPAIRMENT LOSS to avoid the PROBABILITY OF RUIN.

The Value at RISK (VaR) is located indeed in the problem of DISTANCES among the foreseen and the accomplished.

The VaR defines as the difference between the unfavorable result of a period of management and the expected result;

The VaR estimates the probability of ruin;

The VaR also measures the probability that the amount of the Capital of Solvency or Solvency Capital Requirement (SCR) is insufficient from a threshold of alert (Tail Value at Risk or TailVaR), activating the intervention of the authorities of control to assist an ailing firm.

Any calculation of the Value at RISK (VaR) without MEASURING THE RECOVERABLE AMOUNT demonstrates the probability of RUIN of a company and not the probability of SOLVENCY.

1- THE OBLIGATION OF PREVENTION and MEASURE OF the VAR

The insurers have an obligation of control of the PREVENTION which attributes them a role of council so of INFLUENCER of the statutory procedure IAS-IFRS, IAS-IFRS / BASEL2, applicable IAS-IFRS/Solvency II for the assurance of risks in all the sectors (Insurances, banks, corporates and administration).

This new statutory requirement comes from the COSO which gave birth to Sarbanes Oxley Act, which was declined through various national laws on the Internal Control. Standard IAS-IFRS and Basel 2 is situated in the continuation of this procedure which ends particularly for the European Economic Community with Solvency II.

New rule pulls indeed profound modifications in insurers’ profession in what is notably:

• The audit of assurance: to verify the good coherence between risks incurred by the company and the guarantees insurances acquired by this one. Negotiation and control of the implementation of recommendations;

• The analysis of risks: to estimate the degree of vulnerability of the company towards its risks and to bring the solutions of prevention and protection;

• The diagnosis of safety: to raise the inventory of not correspondences, to make recommendations and to exercise a final control;

• The purchase of assurance: to redefine the program of assurance of the company, and to consult the market of the assurance with conditions of contract.

The responsibility of Risk-manager is particularly increased with the generalization of the rule relative to the coverage of not transferable operational risks by processes of PREVENTION or INTERNAL ASSURANCE. Effects concern the SOLVENCY and all the system of insurances RESPONSIBILITY (PROFESSIONAL Insurances and insurances of COMPANIES).

Internal assurance (Prevention of risks) is a device being connected with the repository COSO of internal control (Committee Of Sponsoring Organizations of the Treadway Commission). Used within the framework of the implementation of capacities raising laws Sarbanes-Oxley after financial scandals (Enron, …), the COSO was integrated into their rule of INTERNAL CONTROL by all the big countries (Canada, Japan, Australia and EEC).

Standard IAS-IFRS and Basel 2 is situated in the continuation of this procedure which ends particularly for the European Economic Community with Solvency II.

Requirement COSO is a method Enterprise Risk Management, (ERM), Intranet/Extranet system including eight constituents: Internal environment, implemented objectives, identification of event of impairment of assets, evaluation of risks, treatment of risks, control, information and communication.

The COSO aims at four objectives of Enterprise Risk Metric (Risk Management Accounting):

- The strategy of creation of the value
- The operations of piloting
- The intensification of the financial report,
- The control of the correspondence to specific regulations.

Solvency II requires for it a measure and a mastery of the risk at GLOBAL level and especially industrialization of the processes of measure of the VAR and from resumption of the value loss (so accounting step AMA).

 

2-THE DEVELOPMENT of RISK’S MANAGEMENT Internal MODELS

Even though the text of the reform is not yet stabilized, a wide part is known and allows the companies to identify the computer and organizational devices to be set up. This is of as urgent as new international accounting standards are effective since 2005.

The model of management of risks developed internally by insurance companies, must be confirmed by the authority of control, as for the approach AMA for banks. The United States, and to a certain extent Canada, Japan and Australia recognize only the methodology AMA. The key points are:

- Measure and treatment of expected losses and unexpected losses;
- The annexation of four elements AMA: internal data of loss, external data of loss, analyses of scenarios and factors reflecting economic environment and systems of internal control;
- The “assurability” of operational risks: the maximum threshold of transfer is 20 %;

The MCR (SOLVENCY CAPITAL REQUIREMENT) bases on the calculation of the technical provisions; it(he) can not so make except the main rules of the IFRS 36 , 37 AND 38. The non compliance with these rules can provoke the retreat of the approval and the transfer of the wallet.

To be able to declare that it widely respects all the qualitative and quantitative requirements required by Solvency II; to be able to use an approach AMA for the measure of the operational risk, the insurance company has to make, on the base notably of the validation of the model and the exam operated with the internal audit, a complete auto evaluation and results obtained for at least 1 year.

Using method AMA, the insurance company has to show in which measure the internal practices of the insurance company cover the early loss and develop and in which measure these practices can constitute a valid alternative in the coverage by statutory own capital.

Reform Solvency II articulates around three requirements (pillars): quantitative and accounting requirements relative to provisions and stockholders’ equity; requirements of reporting and transparency (discipline of market); requirements of governance of risks (processes, responsibilities, production and followed by indicators …).

Sociological and economic indicators are fundamental of the governance of risks. The device Riskosoft of MEASURE and PREVENTION of risks bases on socio-economic indicators processes, so accounting, effects of the incidents of risks in accounts of loads and products. Socio-economic process bases on five (5) generic indicators of the operational risk and the dependent risks (Risk of counterpart, risk of market, risk of liquidity and risk of signature – life insurance).

The five generic indicators are additive and structural (the one activates the others):

• So OCCUPATIONAL ACCIDENTS affect contributions ACCIDENT INSURANCE OF the WORK and the discount;

• However their indirect costs (hidden costs), or 83 % of rates, (Canadian studies), affect the other GENERIC INDICATORS OF RISKS: ABSENTEEISM, QUALITATIVE DEFECTS, DISTANCES FROM DIRECT PRODUCTIVITY (Over-time and over-consumption of materials), and DISTANCES FROM KNOW HOW.

The effects of occupational accidents concern the operational result, so the VaR.

Are directly concerned with the device of INTERNAL ASSURANCE:

• The margin of minimal solvency to be constituted, according to rules defined by Solvency II:

- To be capable of absorbing not anticipated losses (UL), a company of assurance must be capable of possessing at any time an adequate Capital of Solvency considering its profile of risk. The Capital of Solvency has to cover all the risks and be calibrated in a way that the probability of bankruptcy of the company on a horizon of one year is enough low.

- This level corresponds to a test of ruin of 1 %. The ruin occurs if the level of assets(active persons) is lower than the amount of PROVISIONS. A horizon of one year is in phase with the period of reporting prescribed to all the entities by the IASB to calculate the VAR, to estimate the future cash flows and the provisions.

• Insurance premium: the modelling of probability and costs has to become integrated into a step(method) of accounting(accounts department) of management to take into account ” cash flows waited ” from the customer in the current state, so the depreciation of assets (VAR) and the resumption of the loss of value;

• The Restructuring of companies: cf. standards IAS36/Impairment of assets and IAS37/ PROVISIONS for risks;

• The financing of employee benefits / Motivation of the HR: future exits of finance which will finance ” economic advantages ” resulting from the prevention of risks;

• The development of the processes of autoassurance and captive assurance (programs of prevention on the basis of a common strategy of the ERM): the device of prevention or internal assurance helps the groups to elaborate programs of prevention on the basis of a common strategy of the ERM with for objectives in the immediate to interest the INSURERS, and in the long run to establish or to strengthen captive assurance by companies formed with the aim of assuring members owners.

3- THE ASSURANCE OF RESPONSIBILITY

The responsibility of the Managers is particularly increased. The SCR (Solvency Capital Requirement) integrates operational result expected in basic own capital.

The capacity to execute functions of Internal Insurance better and faster than competitors is therefore determining in the success of a company.

The mission of the MANAGER is to develop the system of INTERNAL ASSURANCE to establish at 99.9 % a valid alternative in the coverage of UNEXPECTED LOSSES (UL) by PROVISIONS and OWN CAPITAL.

These Unexpected Losses (UL) represent to them only 90 millions per year per bank according to the Committee of Basel and on average 42. 5 % of the salary mass of all the sectors according to the ISEOR.

Regardless of the approach adopted by an entity (Assurance, Bank, Corporate or Administration), the integration of risks made within the framework of management of the active/passive global risk (risk of Asset Liability Management – ALM).

This device implemented with your Intranet / Extranet ERM according to the global balance approach, is that of the management accounting prescribed to all entities by the standards IAS-IFRS 36 /Impairment of assets, 37 / Provisions for risks and 38 / Intangible assets.

IAS 38 imposes on a company to book an immaterial immobilization if and only if it is likely that the future economic advantages attributable to the asset (the cost savings) will go to the company. Expense relative to an element which does not respect these criteria should be booked in loads.

4- COMPUTER DEVICE ERM (Enterprise Risk Metrics)

All the sectors are so forced by the general rule (Standards IAS-IFRS) and the professional rules (Basel 2 for banks and Solvency II for insurances) to articulate in a global procedure of management accounting ( IAS-IFRS), the mastery of the risk of counterpart and the mastery of the solvency ratio.

Earnings generated by RiskoSoft ERM to strengthen the assets of a company are from 80 to 100 % of the recoverable value of your VAR (EL + UL).

RISKOSOFT ERM is a system decision-making intranet / extranet of Accounting of Risk Management arisen from searches led 15 years previously. These searches allowed the Riskosoft Company to anticipate the big changes which intervene today in the management of the financial risk.

RISKOSOFT ERM addresses the companies of any sectors for their stake in accordance with the new regulations in force:

These constraints are active:

• Since 2005 with standards IAS-IFRS for quoted companies (So big accounts: banks, insurances, industries and services), and public administration for standards IPSAS-International Public Sector Accounting Standards). Riskosoft is a specialized solution IAS 36/ Impairment of assets; IAS 37/ Provisions for risks and IAS 38/Intangible assets

• Since January 1-st, 2007 with Basel 2 for banks: as from 2008 with the method AMA and the generalization of the internal notation of the risk of credit of counterpart, Basel 2 will affect SMALL AND MEDIUM-SIZED FIRM and all the entities reaching the bank credit;

- Level-headedness applicable to all the entities is active since January 1-st, 2007;

- This market was dominated until January 1-st, 2007 by the software packages of stocking of the data of incidents of unexpected losses (UL), calculation of their VaR and the realization of the cartography of risks;

- Riskosoft ERM is an exclusive device AMA of risk management accounting, which integrates the data collection into the reduction of costs or of the VaR in a procedure IAS-IFRS / BASEL 2 (requirement 2008, to which banks have to conform from 2007; many bank delay entering the procedure AMA, because they invested heavily in the software packages of cartography of risks and wait to pay off them; this making they increased their risks and their losses..

- Since 2007 with Solvency II, (preparatory phase) for insurances. Solvency II is the frame of IDEAL display of solutions ERM (Entreprse Risk Metrics).

5- OFFER RISKOSOFT

At present Riskosoft makes a special offer of implanting of PILOT SOLUTIONS and TO MEASURE of very advantageous conditions with the particularly representative companies of their professional sector.

Offer Riskosoft ERM concerns the articulation of two platforms for the global management of risks:

• The Platform Riskosoft ERM-A: system of management of the risk of counterpart in monoposts. This device integrates the naming of ACCOUNTS of MANAGEMENT of the sectors of all the customers (Insurances, Banks, Corporates, Hospitals, Local governments and public Administrations);

• The Platform Riskosoft ERM-B: system multiposts/multi-users, Intranet/Extranet of Management of the SOLVENCY ratio, (the requirement in OWN CAPITAL), the ANTICIPATION and the PREVENTION of risks;

• Forming and coaching of the users and leaders.

The device RiskoSoft earned in 2005 the Award of innovation from the EEC

Visit us at: www.riskosoft.com

Solvency II, IAS-IFRS and Basel 2: the BLOGS of reference Enterprise Risk Management ( ERM-COSO / SOX) of POSTING of the VAR, Resumption of Value Loss and PREVENTION of RISKS.

 

There are blogs of reference to help you to articulate standards IAS-IFRS, Basel 2 and Solvency II to build your GLOBAL device of Risks Management Accounting and industrialization of RESUMPTION OF THE LOSS OF VALUE.

IAS/IFRS, Basel 2 and Solvency II suppose a quantification of real risks supported at global level and industrialization of the processes of posting of the recoverable value. If certain risks are common (Risk of counterpart, risk of market, operational risk), their contribution to the global exhibition of the company presents significant differences considering specific risks in every sector.

Regardless of the approach adopted by an entity (Assurance, Bank, Corporate or Administration), the integration of risks made within the framework of management of the active/passive global risk (risk of Asset Liability Management – ALM).

IAS 38 imposes on a company to book an immaterial immobilization if and only if it is likely that the future economic advantages attributable to the asset (the cost savings) will go to the company.

Expense relative to an element which does not respect these criteria should be booked in loads.

You have the choice between three procedures to industrialize your internal model:

• Procedure IASB for INDUSTRIES and SERVICES, (methodological constraint: for the calculation of WAITED CASH FLOWS, you have to give priority to the data of not early losses, UL, external sources);

• Procedures IASB and Bale2 for BANKS [forced methodological: for the calculation of WAITED CASH FLOWS, you have to integrate the data of not anticipated losses (UL) of internal sources in the data of external sources];

• Procedures IASB and Solvency II for INSURANCES: the new rule of the sector of the insurances which is in preparation within the European Commission and the definitive version of the text of which is foreseen at the end of 2008 for an application within companies in the beginning of January, 2010. Solvency II bases himself on 3 pillars, following the example of the rule of banking sector Basel II, modifies Solvency I. The contents are so known:

- Forced methodological: for the calculation of EXPECTED CASH FLOWS, you have to integrate the data of not anticipated losses (UL) of external sources (IASB’s step), if possible and the data of internal sources.

All the sectors are so forced by the general rule (Standards IAS-IFRS) and the professional rules (Basel 2 for banks and Solvency II for insurances) to articulate in a procedure of global management the mastery of the risk of counterpart and the mastery of the solvency ratio.

STAKES:

• The IASB requires that “An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset” (IAS36, §9);

• Basel 2 recommends verifying the financial health of a company before dealing with her. Basel 2 and Solvency II imposes on banks and on insurances to be capable of justifying permanently that their procedures are in equivalence with rules.

• The stake in “Solvency Capital Requirement” concerns the optimal allowance of the own capital of the INSURER to cover Unexpected losses, (UL).

- Expected Losses, (EL) have vocation to be covered by the operational result;

- To be capable of absorbing unexpected losses (UL), a company of insurance must be capable of possessing at any time an adequate Capital of Solvency considering its profile of risk. The Capital of Solvency has to cover all the risks and be calibrated in a way that the likelihood of bankruptcy of the company within one year period is very low

- This period corresponds to a test of ruin of 1 %. The ruin occurs if the level of assets is lower than the amount of PROVISIONS. A one year period is in phase with the period of reporting prescribed to all entities by the IASB to calculate the VaR, to estimate the future cash flows and the provisions.

• An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset” (IAS36, §9).

The Value at RISK (VaR) is located in the problem of DISTANCES among the foreseen and the accomplished (cf. RiskoSoft ERM 1).

• The VaR defines as the difference between the unfavorable result of a period of management and the expected result;

• The VaR estimates the probability of ruin;

• The VaR also measures the probability that the amount of the Capital of Solvency or Solvency Capital Requirement (SCR) is insufficient from a threshold of alert (Tail Value at Risk or TailVaR), activating the intervention of the authorities of control to assist an ailing firm.

The responsibility of Managers is particularly increased with the IAS-IFRS, Basel 2 and Solvency II. The SCR integrates operational result expected in basic own capital.

The capacity to execute functions of Internal Insurance better and faster than competitors is therefore determining in the success of a company.

Any calculation of the Value at RISK (VaR)
without MEASURING THE RECOVERABLE AMOUNT
demonstrates the probability of RUIN of a company and not the probability of SOLVENCY.

The mission of the MANAGER is to develop the system of INTERNAL ASSURANCE to establish at 99.9 % a valid alternative in the coverage of UNEXPECTED LOSSES (UL) by PROVISIONS and OWN CAPITAL.

These Unexpected Losses (UL) represent to them only 90 millions per year per bank according to the Committee of Basel and on average 42. 5 % of the salary mass of all the sectors according to the ISEOR.

• “Future cash flows shall be estimated for the asset at its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from :

a) a future restructuring to which an entity is not yet commited; or

b) improving or enhancing the asset performance”
(IAS36 § 44).

• Once the entity is committed to the restructuring, its estimate of future cash inflows and cash outflows for the purpose of determining value in use reflect the cost savings and other benefits from the restructuring (based on the most recent financial budgets/forecasts approved by management)” (IAS36 § 47a).

The solvency ratio is calculated on the basis of three big risks: operational risk, risk of market and risk of counterpart.

The management of risks bases on the intensification of own capital and capacity of self-financing by the RESUMPTION OF LOSSES OF VALUE or of the VAR (potential maximum loss):

“A resumption of a value loss of a revalued asset is directly credited in own capital under the column distances from revaluation and in result ” (IAS 36 , §120)

To read the texts of specialized experts in Solvency II-IASB / INSURANCES, Basel 2-IASB / Banks and IAS-IFRS / CORPORATES:

• In French: blog of reference http://risques.blogg.org/

• In English: blog of reference http://riskosoft.wordpress.com/

• In German: blog of reference http://finanzielle-risiken.blogg.org/

ERM solution: Solvency II /Basel2/ IAS-IFRS

 

Insurance companies are major actors of the management of risks on the financial market and with banks and corporates. In the continuation of the reform Basel II for banks, the European Union established a new statutory frame in management of risks for insurance companies. The finalized version of this baptized reform “Solvency II” is waited running 2007, for an application foreseen in 2010.

If the text of the reform Solvency II is not yet stabilized, a wide part is known and allows the companies to identify impacts on IT and the organization, to structure and to equip services. This is as urgent as insurance companies are subjected to standards IAS-IFRS since 2005 and are affected by the system of level-headedness of claims set up by Basel II.

With regard to the directive Solvency I in place at present, Solvency II is much more sensitive to real risks supported by the company. Inspired by the reform Basel II, Solvency II imposes a real device of measure and supervision of the risk.

Solvency II supposes a measure of the risk at GLOBAL LEVEL and especially industrialization of the processes of posting of the recoverable value, the reporting and the supervision of the risk. Besides, Solvency II introduces a major constraint under the concept of SCR (Solvency Capital Requirement) which concerns the optimal allowance of own capital and who pulls the generalization of the measure of the operational risk, the greater control of the regulator (behaviour on financial markets, management asset (active/passive, authorities of governance of the risk …).

As for Basel 2, the transfer of the operational risk in insurances or reinsurances can not exceed 20 %. This measure is effective since January 1-st, 2007. Internal assurance has to cover the rest. This is as logical as an assurance of the operational risk in 100 % would mean assuring operational result.

Value at Risk (VaR)

The Value at RISK (VaR) is located in the problem of DISTANCES among the foreseen and the accomplished.

• The VaR defines as the difference between the unfavorable result of a period of management and the expected result;

• The VaR estimates the probability of ruin;

• The VaR also measures the probability that the amount of the Capital of Solvency or Solvency Capital Requirement (SCR) is insufficient from a threshold of alert (Tail Value at Risk or TailVaR), activating the intervention of the authorities of control to assist an ailing firm.

The mission of the MANAGER is to develop the system of INTERNAL ASSURANCE to establish at 99.9 % a valid alternative in the coverage of UNEXPECTED LOSSES (UL) by PROVISIONS and OWN CAPITAL.

These Unexpected Losses (UL) represent to them only 90 millions per year per bank according to the Committee of Basel and on average 42. 5 % of the salary mass of all the sectors according to the ISEOR.

The responsibility of Managers is particularly increased with the IAS-IFRS, Basel 2 and Solvency II. The SCR integrates operational result expected in basic own capital.

The capacity to execute functions of Internal Insurance better and faster than competitors is therefore determining in the success of a company.

Any calculation of the Value at RISK (VaR) without MEASURING THE RECOVERABLE AMOUNT demonstrates the probability of RUIN of a company and not the probability of SOLVENCY.

Regardless of the approach adopted by an entity the integration of risks made within the framework of management of the active/passive global risk (risk of Asset Liability Management – ALM). This device implemented with your Intranet / Extranet Riskosoft ERM according to the global balance approach, is that of the management accounting prescribed to all entities by the standards IAS-IFRS 36 /Impairment of assets, 37 / Provisions for risks and 38 / Intangible assets.

IAS 38 imposes on a company to book an immaterial immobilization if and only if it is likely that the future economic advantages attributable to the asset (the cost savings) will go to the company. Expense relative to an element which does not respect these criteria should be booked in loads.

Risk Management Accounting Approach

RiskoSoft Company possesses through its patent and the associated rights the EXCLUSIVITY of the computer device of POSTING of the VaR, REVERSING the IMPAIRMENT of LOSS and PILOTING OF THE PROCESSES OF PREVENTION, covering the global risk of active/passive (risk of Asset Liability Management – ALM), domain of the INTERNAL INSURANCE.

Risk ALM is the OPERATIONAL RISK to which operational profit, basic own capital and dependent risks are connected:

- RISKS OF COUNTERPART,
- RISKS OF MARKET,
- RISKS OF LIQUIDITY,
- RISKS OF SIGNATURE (Life insurance)

Earnings generated by Riskosoft ERM to strengthen your assets range from 80 to 100 % of the recoverable value of your VaR (EL + UL).

The device RiskoSoft earned in 2005 the Award of innovation from the EEC.

Offer Riskosoft ERM concerns the articulation of two platforms for the global management of risks:

• The Platform Riskosoft ERM-A: system of management of the risk of counterpart in monoposts. This device integrates the naming of ACCOUNTS of MANAGEMENT of the sectors of all your customers (Insurances, Banks, Corporates, Hospitals, Local governments and public Administrations).

• The Platform Riskosoft ERM-B: system multi posts /multi-users, Intranet/Extranet of Management accounting of the SOLVENCY ratio, the requirement in OWN CAPITAL, the ANTICIPATION and the PREVENTION of risks.

• Forming and coaching of the users and leaders.

Can you implant the platform ERM-B without the platform ERM-A?
• The IASB requires that “An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset” (IAS36, §9);
• Basel 2 and Solvency II recommends verifying the financial health of a company before dealing with her. Basel 2 and Solvency II imposes on banks and on insurances to be capable of justifying permanently that their procedures are in equivalence with rules.

• The solvency ratio is calculated on the basis of three big risks: operational risk, risk of market and risk of counterpart.

All the sectors are so forced by the general rule (Standards IAS-IFRS) and the professional rules (Basel 2 for banks and Solvency II for insurances) to articulate in a procedure of GLOBAL management the mastery of the risk of counterpart (Riskosoft ERM-A) and the mastery of the solvency ratio (Riskosoft ERM-B).

The platform ERM-A is important to calculate the SOLVENCY RATIO of the customer, the PD, the LGD, the EAD and the RESERVE for risk or the TECHNICAL RESERVE which you have to book to estimate the equivalence of your OWN CAPITAL administered with the platform ERM-B.

The total of subsidies in established for the risk of counterpart is so transferred every date with reporting to Riskosoft ERM-B (Modulate 3.35C).

Where to start ?

We suggest to:

• First, install the platform of management of the risk of counterpart;

• Then, install the platform of management of the solvency ratio;

• Finally, assure the training and coaching of Managers.

• Above all, verify if your position allows you to benefit from our special offer of implanting of PILOT SOLUTIONS (Cf. General conditions of Sale on our site).

Riskosoft ERM’s Intranet / Extranet technology articulates the system of aggregation of the accounting of risks in a system of COVERING of losses and PREVENTION generalized in the set of the company, the group and in its subsidiaries all around the world.

RISKOSOFT ERM is the unique model COSO / SOX of risks management accounting which exists at present on the world market.

Visit us at: www.riskosoft.com

Risk management: stakes in the Internal Assurance – to make statutory constraints on the Internal Control, the standards IASB and BASEL 2 an essential competitive trump card for your company

 

The problem of enfeeblement of losses generated by the operational risk has become one of a considerable strategic and competitive stake for all companies (insurances, banks and corporates). All the big groups now have a department of “Risk and Insurance Management” or “Internal Assurance” in charge of “Risk Management Development”.

The operational risk that this department has to deal with is the result of “inadequacy or failure of any internal process or outside events”.

The initial frame of management of internal control (publication of an annual report) was strengthened in the last two years by very binding specific regulations:

- In 2005, the regulation of the IASB for all listed companies (procedure IASB),

- Then, in 2007 the regulation of Basel 2 for banks, which were extended to SMALL AND MEDIUM-SIZED FIRMS (indirectly the IASB) by applicable ponderations for the management of the risk of credit of counterpart and the generalization of the internal notation;

- The Intensification will be finished in 2010 with the regulation of Basel 2 applicable to the management of the operational risks of insurances (Solvability II of the insurers).

In fact, insurances are already concerned since 2005 by the regulation of the IASB and by the conditions that they have to meet for the coverage of the operational risk of their customers.

Content of this article:

1-ENFEEBLEMENT OF OPERATIONAL RISKS BY INSURANCES:

1-1/ External assurance: 20 % at most of the requirements of stockholders’ equity.
1-2 / Internal assurance: 80 to 100 % of the requirements of stockholders’ equity

2-THE DATA OF EXTERNAL SOURCES OF UNEXPECTED LOSSES:
2-1/ The data of the Committee of Basel;
2-2/ The data of the ISEOR;

3-DATA OF EXPECTED LOSSES BY THE ENTITY;

1- ENFEEBLEMENT OF OPERATIONAL RISKS BY INSURANCES

1-1/ External assurance external: 20 % at most of the requirements of stockholders’ equity.

When they use a specific approach (AMA), entities can take into account, during the calculation of their necessities of stockholders’ equity regarding the operational risks, the effect of enfeeblement of the risk produced by insurance contracts.

However, the consideration of such effects of coverage is limited to 20 % at most of the requirements of stockholders’ equity calculated on the basis of a specific approach in the establishment.

The possibilities of reducing 20 % from the requirements of stockholders’ equity by insurances are bound to the respect of the following conditions:

A) The insurer benefits from a notation of long-term credit of the class of notation 3 or plus. The notation of credit must come from an agency of notation recognized by the authority of surveillance.

B) The insurance contract must concern an initial duration of at least one year. When the residual duration falls below one year, the consideration of the effect of coverage will be reduced in a linear way by 100 % (for a residual duration of at least 365 days) to 0 % (for a residual duration of 90 days). The effect of coverage resulting from insurance contracts of a residual duration of 90 days or less is not taken into account in the calculation of the requirements of stockholders’ equity.

C) The internal concept of the establishment for the consideration of solutions of assurance must be centred on the effective transfer of risks. It must be well documented.

D) The establishment must publish information about the appeal to solutions of insurance to help ease the operational risks.

1-2/ Internal Assurance: 80 to 100 % of the requirements of stockholders’ equity.

The Internal Assurance results from future economic advantages generated by solutions of costs saving:

“The future economic advantages resulting from an immaterial immobilization can include products resulting from goods or services, from savings of costs or from other advantages resulting from the use of the asset by entity. For example, the use of an intellectual property within the framework of a process of production can reduce the future costs of production rather than increase the future products” (IAS38, §17).

These savings concern the expected losses and unexpected losses:

- Entities must add them to anticipated losses (Expected losses, EL) to determine the maximum potential Loss to be covered by stockholders’ equity and the insurance.

- If need be, they indicate how the internal practices of economy of costs can cover the expected loss and produce argumentation aiming to recognize these practices as a valid alternative by the coverage of the statutory stockholders’ equity at 100 %.

THE IASB recommends to give priority to the data of non anticipated losses (Unexpected losses) from external sources (cf. IAS 36, § 33). The establishment must indicate:

- The way external data have been integrated into the system of measurement, including the possible measures of scaling which render external data relevant for the establishment;

- Measures guaranteeing the durable relevance of the use of external data.

2-THE DATA OF EXTERNAL SOURCES OF UNEXPECTED LOSSES:

For a long period of time, this problem has been one of the weaknesses of the traditional accounting; because it could only book what was charged. The traditional systems of accounting information do not allow evidencing all the costs supported by companies. Thus, they do not allow either to follow up, or to reduce the costs that do not exist:

“For example, an electronic industry noticed having a technological investment of 80 million, realized that efficiency and profitability of the company had not improved: in other words, earnings expected by the technological investment had been absorbed, gobbled up, by additional costs which the company did not know how to identify or master” (H. Savall, ISEOR, on 1995). It’s the same with productivity bonuses, diligence, which had no effect on the added value of companies.

Unexpected losses are huge. The data of available external sources at the current stage to take into account are: the data of the Committee of Basel on unexpected losses of banking sector and the data accumulated by the ISEOR in all sectors during 30 years within more than 1000 companies and organizations in 32 countries.

2-1/ The data of the Committee of Basel

. Losses undergone by establishments in conformance with the operational risk are estimated to over 200 billion euros over the period of 1980-2000.

. The collection of losses realized in 2002 by the group Risk Management of the Committee of Basel revealed that 89 banks having participated in the survey registered in the year 2001alone more than 47.000 events of losses for a total amount accumulated by operational losses of about 7.8 billion euros, or 90 million unexpected losses per bank. (The New Basel Accord “, April 2003)

2-2/ The data of the ISEOR:

Industries:
Electronics: 46,000 €uros per person per year, or 220 % of the salary mass;
Metal industry: 18,000 €uros per person per year, or 80 % of the salary mass;
Glass factory (losses: 38,000 €uros per person per year, or 150 % of the salary mass;
Household electrical appliance: 12,000 €uros per person per year, or 50 % of the salary mass;
Farm-produce industry 11,000 €uros per person per year, or 45 % of the salary mass;

Services:
Banks and insurances: 18,000 €uros per person per year, or 45 % of the salary mass;
Maintenance: 18,000 €uros per person per year, or 45 % of the salary mass;
Telecommunication: 16,000 €uros per person per year, or 40 % of the salary mass;
Local governments: 8,000 €uros per person per year, or 35 % of the salary mass;
Large-scale distribution: 9,000 €uros per person per year, or 40 % of the salary mass.

3-DATA OF LOSSES EXPECTED BY THE ENTITY:

The expected losses are revealed by the distances from the accounts of management (accounts of products and loads. They appear only where the analysis show a distance between what was foreseen and what was realized.

A distance has no interest if its report does not result in a corrective action of internal control:

“An entity has to appreciate every date of reporting if there is any indication that an asset can have lost value. If there is any such indication, the entity must estimate the recoverable value of the asset” (IAS36, §9).

The notion of asset for the IASB is the one popularized by Green (1960), Sorter and Horngren (1962). Assets are expenses intended to generate receipts or future savings: a cost is considered as an asset if and only if it has an economic effect in the future of expected costs or in the future incomes.

In practice, the company uses two categories of standards:

-Physical standards: levels of activity (sales targets and objectives of production) and led consumptions (numbers of units of work – hours worked or machines hours).

-Valuable standards: prices are fixed in comparison with the practices on the market.

The method of pre-established costs which was used up to now to fix objectives often difficult to achieve has to turn into the METHOD OF CASH FLOWS EXPECTED FROM THE ASSET AT ITS CURRENT STATE (IAS 36, § 41, § A7).

THE IASB put an end to the old debate on the fixation of the objectives between:

-The partisans of standards reflecting the average, therefore easy to achieve;

- The partisans of standards reflecting growth rate, therefore implying efforts.

The IASB (followed by Basel 2) took a stand in respect of the Expected losses (EL) for standards reflecting noticed average; standards requesting efforts being adapted to the mastery of causes, therefore generative incidents of unexpected losses (UL).

A distance can only be detected where it is possible to move the standard closer to reality.

The standard is based on the arithmetic average of historic data. Arithmetic average is a common average. The average then is a way of representing the historic data or realized by a unique data. One can use it to model the function of forecast or to correct the forecasts which the COUNTERPART communicated.

The use of “the method of expected cash flows” is so relevant that it allows to take into account “the valuation of not financial assets for which no market for the element or for the comparable element exists” (IAS 36 , §A6).

The use of probability is an essential element in the approach by “expected cash flows”. In this domain, the margin of uncertainty is reduced when one subtract the distance – type of the average of noticed losses: the behaviour of costs is variable depending on organizational habits, behaviour tolerated by human resources: level of absenteeism, the job accidents, over-consumption of materials, etc.). Dean suggested from 1937 to take distance – type as the interval of tolerance of losses anticipated in an organization (J. Dean Correlation Analysis of Cost Variation, The Accounting Review, March on 1937, pp. 55-60).

The functioning of an economic entity is never optimal at 100 %; it is governed by compromises by which the organization absorbs risks and expected losses (EL) up to certain level. The distance – type of historical costs measures this level. Evolution or growth rate is a function of the mastery of the generative incidents of the unexpected losses which vary this level.

The distance – type of historic data over a significant period (3 – 10 years) determines the price paid by the entity for this immigration limit; it is also the margin from which a measure of the performance adjusted for the risk (MPAR) or of RESUMPTION OF THE LOSS OF VALUE can be established by taking into account the current state of the entity.

4- BUSINESS OPPORTUNITIES: IMPLANTING OF RISKOSOFT ERM PILOT SOLUTIONS

Our purpose right now is to offer business partnership to some companies at a very advantageous price.

We suggest to:

• Install the platform of management of risk of counterpart or risk of credit of counterpart.
• Install the platform of management of the solvency ratio, the resumption of loss of value.
• Assure the training, the adaptation and the follow-up.

As you well know, a company cannot master its management of risk unless it is capable of mastering the risk of counterpart and the solvency ratio.

Now, Riskosoft is the best company on the market to provide software applications capable of managing both the risk of counterpart and the solvency ratio.

Until now, softwares of management of risks are not only limited at best to the calculation of the VaR, they are also very expensive.

With the purpose of reduced costs in mind, Riskosoft aims at the economy of scale, which brings us to contact some well represented companies such as yours to conclude partnerships for the installation of Riskosoft ERM pilot solutions.

Our team can work in French, English or German.

To learn more about us and to benefit from the offer, you can download both our plaque and catalog at www.riskosoft.com

Risk Management Development – Internal Assurance: objectives and computer solutions

 

1- Objectives of the internal assurance

All the experts agree on the fact that internal assurance has for objective to provide the support necessary for the efficiency of the internal control, notably:

- To ensure financial and operational risks are understood and appropriately managed;
- To promote the establishment of best practices;
- To identify opportunities for pragmatic efficiency and effectiveness improvements, primarily in internal controls and risk analysis;
- To advise on matters regarding internal controls and risk management;
- To provide leadership to key decision-makers in the identification of business, finance and control risks;
- To advise stakeholders regarding risk mitigation;
- To monitor and evaluate risk management procedures and internal controls;
- To provide financial, operational, and comprehensive assurance services;
- To support the corporate governance and public accountability process;
- To communicate collaboratively with key stakeholders.

2- Available computer solutions

Traditional information system does not arrange features to assume such an expertise. Only a publisher of software packages who made searches on the automation of the processes of cost savings or resumption of value losses has been able to realize the computer solutions that your company needs to assume its responsibilities of internal assurance.

The contribution of information system is of two types: the general computer technologies of facilitation processes and computer technology of resumption of losses of value.

2-1/ The general computer technologies of facilitation of processes

The problem of reduction of the VaR or of RESUMPTION OF THE LOSS OF VALUE is totally ignored by the traditional data processing. The offer of the technologies of optimization of the performance is reduced to the treatment of the problem by the integration of applications: integration of languages, alternative PGI II and EAI), convergence of platforms internet, intranet and extranet.

2-1-1/ The integration of languages: The revolution XML.

The first solution of reduction of costs was the settling of a common language in 1996: Extensible Markup Language. The XML created a common universe for the exchange of data between applications. The XML facilitates the exchanges of data between applications, while freeing itself, or almost, from constraints bound to the language.

2-1-2/ The alternative PGI II and EAI.

For the reduction of the costs of infrastructure, the software industry proposes either a migration of the PGI of first generation towards the PGI of second generation (PGI II), or the implementation a platform EAI (Enterprise Integration Application). The architecture of the PGI II services and platforms EAI contribute to soften the system of information of big companies as were SMALL AND MEDIUM-SIZED FIRMS and facilitates the integration of diverse applications to reduce the costs of scale.

2-1-3/ Convergence of Internet, intranet and extranet.

Since the creation of the first intranets, at the beginning of the 90s, and extranets which followed, most of the companies spread various platforms (teams, concepts, applications and contents on their Web sites). As the majority of these sites use the same IP technology, require infrastructures and similar, even identical software packages, and supply the same type of information in various groups of users, it seemed evident that to regroup and to rationalize these resources would allow realizing economies of scale.

A consensus formed on the necessity to converge on platforms intranet, extranet and internet for a better integration of technologies e-business, a better traffic of information and an increased productivity. But one noticed that what one could gain in costs, would make take big risks in safety and in economic intelligence.

2-2/ The computer technology of resumption of losses of value

This technology is exclusive to RiskoSoft because of previous researches which led to a patent on the procedures of economy of costs.

2-2-1/ Features riskosoft

RiskoSoft is the technical device:

- To model missing projected data or to correct projected data not based on the current state of the entity;
- To articulate STATISTICAL and ACCOUNTING procedures,
- To identify an asset which has impared,
- To calculate Expected losses,(EL),
- To establish the CARTOGRAPHY of risks,
- To publish the JOURNAL of risks,
- To integrate the internal / external data of unexpected losses (UL),
- To calculate the VaR and estimate RECOVERABLE VALUE;
- To calculate the PD, LGD, EAD, STOCKHOLDERS’ EQUITY and PROVISIONS bound to the risk of COUNTERPART, to OPERATIONAL risk and to the risk of MARKET;
- To prepare the entity for RESTRUCTURING as required by IASB for the resumption of the loss of value, to establish FORECASTS or future cash flows;
- To PILOT the Cash-Generating Units (CGU),
- To monitor the PARTICIPATION and MOTIVATION of Human resources ( HR),
- To establish monthly BALANCES of management of losses,
- To assure the REPORTING of both the economic performance and the Quality performance.

2-2-2/ The technological Bases of the Riskosoft system.

There are two types:

A- The structuralization of the organizational memory required by banks and insurance by the procedure IASB-Bâle 2: system of collection, stocking and treatment of the generative incidents of unexpected losses. Systematic approach RISKOSOFT ends in the construction of an organizational memory requiring a wide participation of all the members of staff for the dialogue and the sharing of the information leading to the decision-taking.

B- The modelling of an intelligent system or a continuous adaptation. The solution of problem required by the IASB allows integrating the processes of learning of second level: “To learn how to learn”. The equipped company becomes an organization where learning is done by the reflection, the action and the memorization of experiences. Standards as ISO and balances of payments of the unexpected losses with which is endowed internal control are integrated into its functioning so as to generate the specific reporting.

The set of practices which characterize learning organizations is taken care of by the platform: the analysis and the anticipation of the change within the system and within its environment; the purchase and the development of the capacities to question, to provoke and to modify the standards of functioning as well as their postulates; the intensification of a direction that can to transform in a constant way the organization.

2-2-3/ The key concepts of the RISKOSOFT system.

The device RiskoSoft bases on three key concepts: the deals of control of the piloting, the functioning of homeostatic processes, and the consideration of the laws of the motivation by the system of management of the performance.

A- The deals of control of the piloting. What distinguishes the companies of the market, is their capacity to realize internally deals in a cost lesser than the costs of the market; it is deal among the actors which allows loosening profit margins significantly. RiskoSoft takes into account:

-Deals relative to the control of assets: this type of control concerns the costs of capacity defined as fixed or not variable for a given period;

-Deals relative to the control of the uncertainty: it is here not about a control exercised on outside events, but of the control exercised on the uncertainty of the behaviour of the persons involved in the deal, notably in front of events which were not in its entirety envisaged during forecasts and contractual agreements;

-Deals relative to the control of frequencies: as soon as an incident or an event can repeat itself, the parties undertake through agreements of activities to reduce, even to avoid the costs of these events.

B- The functioning of homeostatic processes. In cybernetic terms, homeostatic processes are processes of auto-regulation. This device allows passing from static order of the authority of the traditional boss, to the dynamics of balance which rests on the commitment, the grip of responsibility and the participation. Working as safety valves, they allow to regulate in the least cost dysfunctions by generalizing a dynamics of resolution of problem in real time. Everything becomes active; the organization is then capable of estimating its own progress, of controlling it’s functioning, of adjusting tensions between its members, sub-systems and other structures of the environment. The concepts of “government of company” and of “internal control” aim at the release of such mechanisms.

As it is about human beings and not of machines, auto-regulation derives from the free will. Therefore the importance of the motivation in the release of homeostatic processes.

C- The implementation of the laws of the motivation by the system of management of the performance. This device involves the registration of the collaborative interaction in precise modes of deal and the level of motivation. The determination of the level is essential to fix the level of premiums based on the RESUMPTION OF LOSSES OF VALUE.

The platform RiskoSoft is conceived to complete the existing computer by offering a support of bridges between operational and decision-making systems. The function of the traditional SIG is to inform the managers so that they can decide and their hierarchy so that it knows where they are. The traditional SIG offers only two possibilities:

-The hierarchy is alerted at the same time as the manager in charge of the process to be administered (little decentralized systems);

-Hierarchy is informed later (systems of post-evaluation or system of reporting).

The traditional SI is then characterized either by decentralization in someone, or by fortifying information of post-evaluation.

The platform RiskoSoft supplies the structural bases to spread the decision-making system of information to the entire staff of the organization; it decentralizes the preoccupations of costs and controls of risks in real time in all the hierarchical levels to strengthen the grip of responsibility and the participation of all in the creation of the value.

3- BUSINESS OPPORTUNITIES:

Our purpose right now is to offer business partnership to some companies at a very advantageous price.

We suggest to:

• Install the platform of management of risk of counterpart or risk of credit of counterpart.
• Install the platform of management of the solvency ratio, the resumption of loss of value.
• Assure the training, the adaptation and the follow-up.

As you well know, a company cannot master its management of risk unless it is capable of mastering the risk of counterpart and the solvency ratio.

Now, Riskosoft is the best company on the market to provide software applications capable of managing both the risk of counterpart and the solvency ratio.

Until now, softwares of management of risks are not only limited at best to the calculation of the VaR, they are also very expensive.

With the purpose of reduced costs in mind, Riskosoft aims at the economy of scale, which brings us to contact some well represented companies such as yours to conclude partnerships for the installation of Riskosoft pilot solutions.

Our team can work in French, English or German.

To learn more about us and to benefit from the offer, you can download both our plaque and catalog at  www.riskosoft.com