Approach


PHILOSOPHY: TURN RISK INTO A CHOICE

Mission

Pillars

Pirelli’s Enterprise Risk Management model forms part of three key phases in the decision making process:

  • strategic planning (medium/long term);
  • operational planning (annual and quarterly);
  • new investment projects.

It is worthwhile noting that the Enterprise Risk Management model goes beyond the strategic, operative planning and analysis of investment projects through a continuous monitoring and management of operational risks.



Risk analysis and risk measurement accompany the medium/long term planning process that is concluded with the presentation of the three-year plan to the investors.

The methodology adopted is structured into three macro-phases:

(i) identification of priority risk events;

(ii) risk analysis;

(iii) risk management.


The Strategic Risks Committee defines the risk analysis methods and establishes the metrics to measure the risk events, in particular:

  • the economic and financial reference parameters to measure the risks and their impacts (PBIT, Cash Flow);
  • the probability scales;
  • the references to assess the maturity level of the existing risk management systems (referred to the level of protection from risk in relation to the existence of management and control procedures/processes, monitoring/reporting tools and the responsibility and "ownership" of the defined risk).

The identification of the priority risk areas and the respective assessment in terms of the potential impact and the probability of occurrence are guided by the Region based on the objectives and the business plan's strategic guidelines (key value driver). The central functions coordinate the analysis of the risks which are monitored centrally, for example: raw materials and exchange rates; statistical inference techniques are applied to some risk events which are especially significant for Pirelli to build possible development scenarios as an alternative to the scenarios considered when the industrial plan was defined in order to evaluate the "strength" of its assumptions and the possible impacts on the expected results.

The use of quantitative metrics to measure the impact permits an aggregation of the risks and a representation of the Group's overall exposure to risk (so-called Profit@Risk).

The Strategic Risks Committee assures that the following aspects are defined in relation to the so-called Profit@risk:

  • the target levels of exposure to priority risks;
  • the risk management strategies, in line with the existing risk appetite (transfer, reduce, eliminate, mitigate the risk);
  • the plans of action and the "management" policies to maintain the levels of exposure within the "target" limits.

The Board of Directors takes into account the quantified risks and opportunities during the phase to approve the plan and verifies that the volatility of the economic and financial results falls within the defined tolerance threshold.

The causes of risk and the existing risk management structure are analysed in relation to the most significant risk events, in terms of the following aspects:

  • the target levels of exposure to priority risks;
  • the risk management strategies, in line with the existing risk appetite (transfer, reduce, eliminate, mitigate the risk);
  • the plans of action and the “management” policies to maintain the levels of exposure within the “target” limits.

The Board of Directors takes into account the quantified risks and opportunities during the phase to approve the three-year plan and verifies that the volatility of the economic and financial results falls within the defined tolerance threshold.

The causes of risk and the existing risk management structure are analysed in relation to the most significant risk events, in terms of the following aspects:

  • risk management strategies, policies and processes;
  • organisational protections;
  • supporting monitoring/reporting tools and information systems in order to define targeted risk mitigation plans.

The three-year plan targets and the strategic choices which the plan reflects are also submitted to "stress tests" to verify the Group's economic, financial and equity "capacity" at the occurrence of uncertainty phenomena which cannot be readily "weighed" using probabilistic factors.
The Group's overall exposure to priority risks and the respective mitigation strategies and actions are contained in the Annual Risk Assessment and Management Plan.
The Risk Officer assures the implementation of the agreed mitigation plans and the on-going monitoring of the exposure to priority risks and the Risk Officer can also propose a redefinition of the current recovery plans (if they are inadequate) and an analysis of any possible emerging risks.

Last Revised: 15 Nov 2013