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The Actuary The magazine of the Institute & Faculty of Actuaries

RAMP an update

The RAMP (risk analysis and management for projects) handbook was published in July 1998. It was produced by the RAMP Working Party which is a joint initiative between the actuarial and civil engineering professions.

What is RAMP?
For those readers who are not familiar with RAMP, it is a comprehensive framework for the identification, analysis, mitigation, and control of the risks in projects of all kinds. They need not necessarily be civil engineering schemes but can be projects where there is no asset of a physical nature, for example, the launch of a new product line or a new business. RAMP is concerned with upside potential as well as downside risk.
RAMP takes a whole life cycle approach to projects and is not merely concerned with the asset construction phase. It links with an investment model, which ensures that the financial aspects of risk are properly taken into account. It is important to identify the objectives of the project at the outset, and they are often different from what they might seem at first sight. Risk can be regarded as events which cause the outcome to deviate from that expected, in either an upwards or downwards direction.
The RAMP methodology has been commended by officials of the National Audit Office for use by the public sector in appraising PFI projects. In November 2000 it was recommended by the transport minister, Keith Hill, for transport infrastructure projects. In a speech he said that implementation of the transport ten-year plan was dependent upon the expertise of the private sector in managing risks, because the public sector was not well placed to do this. RAMP, he said, showed how to combine risk with the project appraisal process and he stressed the use of sensitivity analysis.

Promoting RAMP
Several joint seminars have been held by the actuarial and civil engineering professions to promote the use of RAMP. The next seminar will take place on 6 February 2002 to consider the way ahead for the UK’s national investment programmes. Massive programmes of investment are planned over the next ten years, to improve facilities and services. What should be the objectives of these programmes? Where is the money to come from? Will new financial instruments be needed? How can investors be given confidence? How should the risks be managed? Where are the business opportunities and for whom?
Put the date in your diary now!

RAMP has been adopted by one of the smaller firms of consulting actuaries, which has successfully applied it to a project of its own for acquiring new computer software. The project was a substantial one for the firm, and there were several different options which were all appraised using the RAMP process, with a comprehensive report then being prepared as the basis for a decision.
In the UK it is clear that risk management is currently being given new impetus in both the public and private sectors. The Turnbull initiative presents many opportunities for the actuarial profession, and the RAMP method will be an important tool in enabling companies to control the risks on their own projects. The fact that actuaries have played a leading part in the development of the RAMP methodology will undoubtedly raise the credibility of the profession. We are trying to emphasise the point that actuaries have an important contribution to make alongside other professionals as part of a multi-disciplinary team, rather than suggesting that actuaries could solve all the problems in risk management on their own.
RAMP is a natural process and corresponds to what we do in real life for our own projects. Consider, for example, a walk which your family intends to take while on holiday. The first step is to be clear about the objectives. The key objective might seem obvious, namely to have an enjoyable walk, but it will not be a success if a 12-year-old member of the party secretly has it as his objective to see a steam engine and this does not occur. At the outset, the family identifies the risks involved in the project. For example, there may be a storm, you may get lost, you may get back too late to go to the show for which you have booked tickets, or you may encounter mud which will spoil your clothes. You then decide on your risk mitigation measures, after identifying various options and analysing their costs and inconvenience.
Let us assume that you decide to take boots in order to protect you against muddy places and a mobile phone with which you could call a taxi if you got lost, but no rainwear. You are then left with some residual risks and these need to be controlled. For example, you need to keep an eye on the sky, so that you can take shelter in time if a storm approaches. Taking the mobile phone gives rise to some secondary risks which need to be controlled: it may get broken or lost. For a large project the process is much more complicated than for a family walk, but in principle it needs to follow the same path.

New developments
The RAMP Working Party is currently considering a change of direction whereby it will be seeking to become a centre of excellence in strategic risk management. The RAMP methodology will continue to be an important tool for this purpose but other tools will need to be developed.
One such new tool could be a framework to assist company boards and top decision-makers in managing risk and uncertainty at the strategic level. The process would start by considering the key objectives of the business and identify as far as possible the strategic risk areas which could hinder the achievement of these key objectives. These particular risk areas would then be separated out from the multitude of risk areas facing the organisation, so that they could have special attention.
Suppose, for example, that one was looking at a water supply organisation where the key objective was identified as the supply of water which was safe to drink. Attention would now be focused on two aspects: continuity of supply, and safety of the product. Both of these would undoubtedly have received attention previously but they would now be singled out for a really rigorous risk analysis, with a view to identifying additional risk mitigation options. In other words, managing strategic risk is all about focusing on the risks which really matter, even if they cannot be precisely measured. Only once this has been done should attention pass to the large number of other important risks facing the business.
Proper risk mitigation
Is all this activity on RAMP and strategic risk management worthwhile? The answer must surely be an unqualified yes. There is a growing list of activities which have gone wrong in a big way in recent years. These include the Heathrow tunnel collapse, Baring’s Bank, the Dome, government computer schemes, Railtrack, defence equipment failures, late delivery of air traffic control software, excess hospital deaths, the Equitable Life affair, Concorde, and the failure of many dot.com companies. In all these cases there has been a tragic and often unnecessary waste of resources, or even loss of life. Many of these problems need not have occurred if there had been adequate study of the risks involved, leading to proper risk mitigation. Naturally, some risk will always remain, even after mitigation, and it is by taking these risks knowingly, and in a controlled way, that profits will be made.

What part can actuaries play?
As professionals who are trained in both risk and finance (and the interaction of the two), actuaries can make a unique contribution to the risk management process by ensuring that a logical and systematic approach is adopted, and identifying the important aspects that need to be considered by decision-makers. At a more detailed level, actuaries can help by carrying out scenario analysis, building stochastic models, assisting experts to quantify their opinions on probability distributions of risk factors, making net present value calculations using discounted cashflow techniques, obtaining probability distributions of net present values, carrying out sensitivity analyses, applying real options techniques, recommending appropriate discount rates, ensuring that estimated cashflows have been determined logically, and identifying the potential for risk mitigation through insurance. There are also more specialised opportunities for actuaries in credit risk and alternative risk transfer. Although many of the ways in which actuaries can play a part involve at least a numerical approach, and sometimes complex mathematics, risk management is essentially a very practical subject. What matters is arriving at sensible action plans and recommendations, in conjunction with other professionals involved in the project or business.
Work on risk management is gathering momentum in both the public and private sectors and there is a splendid opportunity at present for consulting actuaries, in particular, to become more involved.