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INDEX

Particulars

1. What is Risk?

2. Classification of Risk

3. Iceberg of Losses

4. Risk Management

a. Introduction

b. Meaning and Objectives

c. Advantages of Risk Management

d. Development of Risk Management

e. Role of insurance in Risk Management

5. Risk Management Process

a. Risk Analysis

b. Risk Control

c. Risk Transfer

d. Risk Financing

e. Rolling Review

6. Contribution of Risk Management to the business

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7. Case Study

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 WHAT IS RISK??

 Risk is defined as the chance of having a loss due to

occurrence of an event.

 The risk is always associated with the loss aspects since

the word itself has the association of DANGER OF LOSS.

 The definition can be “PROBABAILITY OF THE

OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN.

 Economic risk (referred simply as risk) is the possibility of

losing economic security. Most economic risk derives from
variation from the expected outcome.

 Modern society provides many examples of risk. A

homeowner faces a large potential for variation associated
with the possibility of economic loss caused by a house
fire. A driver faces a potential economic loss if his car is
damaged. A larger possible economic risk exists with
respect to potential damages a driver might have to pay if
he injures a third party in a car accident for which he is
responsible.

 Historically, economic risk was managed through informal

agreements within a defined community. If someone’s
barn burned down and a herd of milking cows was
destroyed, the community would pitch in to rebuild the
barn and to provide the farmer with enough cows to
replenish the milking stock. This cooperative (pooling)
concept became formalized in the insurance industry

 Under a formal insurance arrangement,

each insurance policy purchaser (policyholder) still
implicitly pools his risk with all other policyholders.
However, it is no longer necessary for any individual

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policyholder to know or have any direct connection with
any other policyholder

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 CLASSIFICATION OF RISKS

SPECULATIVE RISKS

 Operation of this leads to profit /loss

 Leads to speculation like investment of capital in a new

venture

 Operation is desired

PURE RISKS

 These do not change with the risk

 The operation of these perils does bring in loss/damage to

property/assets/ liability

 Not desired

DYNAMIC RISKS

 Changes with the change in fashion, buying behaviour,

trends, technology etc

 It denotes dynamic nature of the customer behaviour and

the products they like to own or use

 If an organization is not prepared then it may go out of

existence

STATIC RISKS

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  Like pure risks these risks remain static and do not change
due to other reasons like that of dynamic risks

 The operation of these risks always bring about losses

 Operation is not desired

 May result in partial or total cessation of activities

PARTICULAR RISKS

• Risks which relate to one or few firms, factories or

organizations only

• Losses are suffered by one or few more members of the

society

FUNDAMENTAL RISKS

 Relates to the society at large

 Losses are suffered by large section of the

society/nation(s)

 Losses may be due to natural catastrophes, riots,

epidemics etc

ACCEPTABLE RISKS

• Potential loss may be so minimal that some risks are

acceptable

• These risks are acceptable without any prevention being

taken

NON-ACCEPTABLE RISKS

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• Major risks are non-acceptable

• Ways are to be found to reduce, avoid or transfer the risk

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 ICEBERG OF LOSSES

INSURED LOSSES & UNINSURED LOSSES

Insured losses are the costs that are generally covered by an

insurance policy.

Uninsured losses are simply the costs that are not covered by
any insurance policy.

Example of losses that could possibly occur:

• Loss of Life/Health

• Loss of Motor vehicle

• Loss of Property

• Loss of Goods in transit

• Loss due to accident, sickness and unemployment

• Loss of Goodwill

• Loss of Market

• Loss of customers

• Loss of shareholder value

• Loss of key employees

• Loss of costs incurred

• Loss due to frauds

• Loss on investment

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 

RISK MANAGEMENT

INTODUCTION
Every organization is exposed to various risks. While many of
them are pure risks like fire, explosion, chemical release etc.,
some of them are speculative. Pure risks are handled as
operational and safety issues by professionals and finance
personnel have to address the risks arising out of failure of
above operational and safety measures. Together they need to
ensure that the organization is able to withstand any risks or
failure of systems and can continue its operations without
much struggle.

Risk Management and insurance planning is required for any

organization to review their risk management strategies and to
opt for risk transfer measures like availing insurance cover etc.
Many a times the coordination between the technical or
operational departments and finance department is difficult
and an unbiased study on technical risk management measures
adopted and insurance practices followed will help
the management of the organization to manage
the risk effectively and profitably.

DEFINITION
Risk Management is defined as the systematic way of ensuring
protection of business resources and income against losses so
that the aim , goals and vision of the company can be reached.

Thus Risk Management creates stability and contributes to

growth and assures profitability of the Organization.

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OBJECTIVES
Broadly the Risk Management studies are conducted with the
following objectives

• To carry out a systematic, critical appraisal of all potential

risks involving personnel, plant, services and operations
(risk identification, assessment and control) and

• To review the insurance coverage and to identify areas of

coverage to optimize the risk exposure

ADVANTAGES OF RISK MANAGEMENT

Risk management provides a clear and structured approach to

identifying risks. Having a clear understanding of all risks allows
an organization to measure and prioritize them and take the
appropriate actions to reduce losses. Risk management has
other benefits for an organization, including:

• To achieve the objectives of the Organization

• To ensure that the goals short term and long term are
achieved without any disruption or delay

• To have knowledgeable of insurance arrangements and

have considered decisions on insurances to be availed

• Saving resources: Time, assets, income, property and

people are all valuable resources that can be saved if
fewer claims occur.

• Protecting the reputation and public image of the

organization.

• Preventing or reducing legal liability and increasing the

stability of operations.

• Protecting people from harm.

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 • Protecting the environment.

• Enhancing the ability to prepare for various

circumstances.

• Reducing liabilities.

• Assisting in clearly defining insurance needs.

An effective risk management practice does not eliminate risks.

However, having an effective and operational risk management
practice shows an insurer that your organization is committed
to loss reduction or prevention. It makes your organization a
better risk to insure.

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DEVELOPMENT OF RISK MANAGEMENT
 The Industries / Business houses want to have incident
free/ accident free working to achieve their objectives

 For this purpose it is necessary to understand the loss

producing events , the nature of losses/ extent of losses to
come up with the loss control measures. EXPOSURE
ANALYSIS

 Risk Management aims to help the owners to have control

on loss incidents and to reduce the extent of losses by
proper study of the exposures and actions to be taken to
control the same

ROLE OF INSURANCE IN RISK MANAGEMENT

 Insurance is a valuable risk-financing tool.

 Few organizations have the reserves or funds necessary to

take on the risk themselves and pay the total costs
following a loss. Purchasing insurance, however, is not risk
management. A thorough and thoughtful risk
management plan is the commitment to prevent harm.

 Many risks are not insurable, including brand integrity,

potential loss of tax-exempt status for volunteer groups,
public goodwill and continuing donor support.

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 RISK MANAGEMENT PROCESS

HOW THE LOSS IS CAUSED?

 Loss is caused by the operation of perils which refers to
the causes for the losses

 Loss or damage is caused by the operation of perils such

as fire, explosion, flood, storm etc

 The loss potential (extent of loss) depends on conditions

which are favourable for the incident to assume large
proportions. This is known as hazard or potential of the
loss. More the potential severe will be the extent of loss

 PERIL ( CAUSE)----------------LOSS(EFFECT)

HAZARD

CAUSES OF LOSSES
 Perils- such as fire, explosion etc

 Human factors- such as negligence, carelessness,

inadequate training, inadequate supervision, lack of
proper systems and controls

 Inadequate maintenance ( predictive/ routine/ annual

maintenance)

 Failure of Plant/ machinery due to breakdowns (failure of

safety devices)

 Natural perils such as flood, cyclone, earthquake,

landslide, rockslide & subsidence

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  Extraneous: Accidents involving Gas or chemical in
nearby units

TYPES OF LOSSES
 Property losses- losses which can happen to the Assets

 Pecuniary losses- Financial Loss which can be caused by

business interruption due to the loss to the assets,
financial loss due to infidel acts of employees,
storekeepers and other employees

 Liability losses- Loss to the Third Party property or third

party personnel due to activities of the Organisation

 Personal injuries- accidents resulting in fatal or non-fatal

injuries to the employees

HAZARD
Hazard is defined as conditions existing which are favourable
for the loss becoming severe

CLASSIFICATIONS OF HAZARD

• Physical hazard- Relating to physical properties.

• Moral hazards -Relating to the moral behavior of the

clients

• Morale hazard -Relating to the morale & working

conditions of the employees & employer-employee
relationships

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 STEPS IN RISK MANAGEMENT PROCESS

I. RISK ANALYSIS- RISK IDENTIFICATION

AND RISK EVALUATION (RISK
MEASUREMENT) (RISK QUANTIFICATION)

• Risk analysis is the process of identifying and evaluating

risk factors, present or anticipated, and determining both
the probability and the impact of identified risk factors.

• It is a preliminary step in establishing a risk management

strategy, which is intended to increase the possibility that
the application development project produces the desired
outcome while minimizing risk factors.

• It entails both preventive and corrective actions to each of

the identified risk factors, particularly those with a
medium to high rating level.

RISK ANALYSIS- METHOD

 List all possible risk

 Investigate by

 Study

 Inquiry

 Document review

 Physical Inspection

 Analyze each risk

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RISK EVALUATION

Methods available are

• Study of Organizational charts/ balance sheets, accounting

records

• Process flow diagrams, P & I diagrams

• Input- output analysis- contribution from various sections,

inter-dependencies

• Study of completed checklists

• Threat analysis- Denial of access, Loss of services

EVALUATION METHODS

• INPUT – OUTPUT ANALYSIS

To trace the flow of goods and services to identify the

contribution of parts of organization to the total earnings
and to analyze exposures.

• EVALUATION OF RISKS-THREAT

o Analyze the threats to business

o Denial of Access- Chemical leakage, collapse of

nearby buildings, strike, picketing, damage to
water/sewer mains, government restrictions

o Loss of Services- Water, power, rains, floods,

cyclones

RISK HANDLING METHODS

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ADOPTION OF LOSS CONTROL MEASURES

• Loss control measures involve the nature of the devices

utilized and the human factor

 For any system to be effective the employees concerned

need to be properly trained and knowledgeable.

 The Management needs to ensure that the systems

employed are in good working order the employees are
regularly trained.

II. RISK AVOIDANCE-RISK CONTROL (RISK

MINIMIZATION)

RISK AVOIDANCE
• This is also known as Risk Elimination

• Identify the risk and if possible avoid the risk by

eliminating the source

• It is like avoiding a location due to seismic activity in the

area

• Ex:- Avoiding a low lying location which is susceptible for

flooding

RISK CONTROL/PLANNING

Risk planning and control, as a shared or centralized activity

must accomplish the following tasks:

 Identify concerns that can impact the project

implementation

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  Identify risks, review/assess their intensity and document
the risk owners.

 Evaluate the risks with reference to probability of their

occurrence and possible consequences

 Assess the plausible options for accommodating the

recognized risks

 Prioritise the efforts required for managing the risks

 Develop/discuss and adopt risk management plans

 Authorize the implementation of the risk management

plans

 Monitor the risk management efforts and

 Initiate the remedial actions as considered necessary

III. RISK TRANSFER

 Risk transfer involves payment by one party (the

transferor) to another (the transferee, or risk bearer).

 The transferee agrees to assume a risk that the transferor

desires to escape.

TOOLS OF RISK TRANSFER

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  Incorporation

 Diversification

 Hedging

 Insurance

IV. RISK RETENTION-RISK FINANCING

 To keep the costs under control, after analyzing the risks

the Management, may decide to retain some of such
losses to its account.

 Once a decision is taken , then necessary provision needs

to be made to avoid such a loss ,if happens, eating into
the operating budget

 Special contingency funds are therefore to be created for

this purpose

V. ROLLING REVIEW

In identifying, prioritising and treating risks, organisations make

assumptions and decisions based on situations that are subject
to change, (e.g., the business environment, trading patterns, or
government policies).

The initial assessment made of the existence and level of risks

must be evaluated on a regular basis.

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You need to measure the effectiveness of risk profiles and
update as necessary.

• Reliable reporting of examination results

• Compliance measurement activities

• Feedback from the business community

• Results analysis and data comparisons

• To determine the accuracy of planning assumptions and

the effectiveness of the measures taken to treat the risk.

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CONTRIBUTIONS OF RISK MANAGEMENT TO
THE BUSINESS

 Achievement of objectives/ goals

 Reduced anxiety due to losses are of reasonable

magnitude and does not cause serious loss situations

 Goodwill is maintained by meeting the obligations

 The business is able to survive competition

 Successful and continued operations

 Resultant growth and sustained earnings

 Better care for employees and society at large

 Reduction of expenses

 Better relationships between customers, suppliers,

employees

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 A CASE STUDY
CHEMICAL PLANT

1. Site selection

2. Improper Layout

a. location of the plant in the downwind direction.

b. higher transportation cost.

c. process area very close to the public living.

d. wrong material selection.

3. Risk assessment

a. storage

b. fire protection

c. toxicity

d. hazard index rating

e. fire and explosion hazard

f. compatibility

4. Process safety management

a. reliability assessment of process

b. equipment

c. safety trips and interlocks

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 d. quality testing tools

e. removal of fugitive

f. emissions

5. Electrical safety

a. no hazard classification and proper

b. electrical fittings

c. protection against static electricity

d. lightening arrestor

6. Safety Audits

a. conceptual stage

b. extension stage

c. commissioning and trial run

d. operation stage

e. periodic

7. Emergency Planning

a. on site

b. off site

c. integral multidisciplinary disaster approach

8. Training

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 9. Implementation

The best / successful project would be:

Get suggestions - as many as possible

Assess risk integrated with business planning

and evaluate
Subject them to critical review
Set priorities based on the
requirements

Choose the project

If the risk is high

If Manageable

Proceed

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