Risk Bearing Case Study: Hydro One

Once Nationwide has identified major risk and degree of exposure to this risk, various strategies are employed to deal with these risks. One of these strategies is comparative advantage in risk bearing. This is a strategy that suggests that a company should make decision on which risk to take and which risk to avoid, based on the comparative advantages of the organization. The organization must also assess the tradeoff between risks and returns. The amount of returns associated with a certain venture should cover the cost of risks that arise from pursuing this venture. A centralized approach should be used to assess this venture. Nationwide uses this approach to determine which business opportunity to pursue and which ones are not worth the risk. Another way in which Nationwide manages risk is through the "factor based" capital allocation system. This approach involves examining the risks factors for the entire business. Nationwide insurance usually conduct its evaluation of risk factors annual basis. This enables the company to focus potential risks and make plan on how to mitigate the impacts of such risks. This approach is usually applied in the management of operational costs. According to Nocco & Stulz (2006) companies previous relied on hedging to manage risk. However, this method is less effective when it comes to operational risks. Nationwide also manages it risks by determining the right amount of risk. According to Nocco & Stulz (2006) different organizations have varying tolerance to risks. For instance, companies with large cash flows and equity capital have the propensity of taking on greater risks without going into financial distress. Risks can have adverse impact on the cash flow and liquidity of a business. This situation becomes more severe when the organization involved is a financial institution such as Nationwide. This is because financial institutions usually have liabilities that are credit sensitive. Thus, in order to avoid distress, Nationwide has to work out the optimal level of risk that the company can take without going into financial distress. This optimal level should not be surpassed. Achieving a balance between possible return and risks enables the company to avoid making decisions that are detrimental …show more content…
Hydro One introduced ERM in 1999 in order to streamline the activities of the corporation. The company wanted to view risks and opportunities from a similar perspective since this two were related (Aabo, Fraser & Simkins, 2005). The company also noted that the business environment was becoming increasingly challenging giving rise to the need for an effective mechanism for minimizing losses and optimizing returns. ERM was the most appropriate mechanism to suite Hydro One needs.Hydro One understood that ERM was all about managing all the risk of the organization centrally. Therefore the company began with the establishment of the Chief Risk Officer (CRO) position and a Corporate Risk Management Group (Aabo, Fraser & Simkins, 2005). These institutions were charged with the responsibility of identifying business risks, determining the level of exposure and developing ways for mitigating their impacts. The institution identified various strategies for managing risk. One of method is the risk tolerance method (Aabo, Fraser & Simkins, 2005). This method involves assessing different risks and ranking them based on the business tolerance to these risks. Hydro indentified various criteria for defining the level of risk