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Risk Management-A Balancing Act

Risk Management-A Balancing Act

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Published by Pillai Sreejith
Risk Management is always a balancing act!! Balancing will be between cost and benefit; between insurance and loss prevention. This presentation can be used to demonstarte in terms of money that the right combination of loss prevention and insurance is most often provides the right balance!!
Risk Management is always a balancing act!! Balancing will be between cost and benefit; between insurance and loss prevention. This presentation can be used to demonstarte in terms of money that the right combination of loss prevention and insurance is most often provides the right balance!!

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Published by: Pillai Sreejith on Jun 01, 2008
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05/09/2014

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RISK MANAGEMENT - A BALANCING ACT

Pillai Sreejith
pillai_sreejith@hotmail.com

Risk (Science) & Management (Art)
Investigation & understanding the broad range of risks in relation to the organization's objective Development of the ability to communicate, articulate and manage the identified risks

“Today’s total Risk Manager is the person who can combine art with science to master the challenges & opportunities of a fastpillai_sreejith@hotmail.com changing world”

RISKS- A Fact File
 The word, Risk has been derived from the Latin word, ‘Risicare’, which means ‘dare’  The lexicon defines Risk as threat or vulnerability  Risk Management (RM) emerged basically as a financial discipline  RM is popular analytical method for optimizing insurance coverage  RM is globally 50 years old
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And interestingly,

RISK is a difficult concept to define!!!!
(Risk is generally perceived with negative effects but it also signifies opportunity & growth)
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Types of Risks
µ Financial Risks µ Operational Risks µ Physical Risks µ Strategic Risks µ Reputation Risks µ Business Risks
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RM Scenario in India
• Still in its infancy • Mostly practiced in the Financial & Insurance sectors • BCP (Business Continuity Planning) is gaining importance
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CASE STUDY
“The Interdependence Between Insurance & Loss Prevention”
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The Investment Project
• A company invested 300,000 Pounds in setting up a manufacturing plant • The management estimated net cash flow of 90,000 Pounds & 12% net return per annum • To compensate for the dynamic business risks associated with the project, the company decided that it must earn at least 12% net on the capital invested
pillai_sreejith@hotmail.com

Case Study Approach
• An overly simplistic approach adopted • Objective of this case study “How Investment Decisions can be affected by Risk Management considerations” • Factors not considered
– – – – – Risk Transfer Methods Deductibles Premium Discounts Business Interruption Losses (LOP) Liabilities
pillai_sreejith@hotmail.com

Appraisal of Project- Risk Management Considerations
RM Strategy Ignore Pure Risks No RM strategy (Pound)
300,000 90,000 NIL NIL 30,000

Account for Pure Risk No RM strategy (Pound) 300,000 90,000 3000 NIL 28,500 58,500

Protect Pure Risk No Insurance (Pound)

Insure Pure Risk No Protection (Pound)

Insure and Protect (Pound)

Capital Cost Gross Return Uninsured Loss Insurance Premium Tax Net return

345,000 90,000 1,800 NIL 26,850 61,350

300,000 90,000 NIL 5,000 27,500 57,500

345,000 90,000 NIL 3,000 26,250 60,750

60,000

Rate of Return

15.2%

14.5%

12.0%

14.0%

11.9%

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Conclusion
§In evaluating investment projects, companies mostly omit risk management considerations

  If the company is ‘risk averse’, it would probably would not be prepared to accept the degree of variability in its annual results as shown in case 1

pillai_sreejith@hotmail.com

Insurance & Risk Management
• Insurance could be part of a comprehensive RM (Risk Financing) plan • A good risk means a healthy bottomline to both the insured and the insurer • It is logical that the insurer promote loss control programme for insured as part of their BCP (Business Continuity Plan)
“For every 1 rupee insurance, there is 8 rupee non-insured losses” pillai_sreejith@hotmail.com

RISK MANAGEMENT is not GAMBLING !!!
Making Risk Management Decisions Without Reasonable or Prudent Assessment could lead to business failure!!
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“Retention of Risk is Business”
RISK RETENTION/ TRASFER IS FINALLY A TOP MANAGEMENT JUDGEMENT
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CONVERTING THREAT INTO OPPORTUNITY !!

“Consider identified risks as opportunities to improve & not as pillai_sreejith@hotmail.com threats”

Aftermath of a ‘Bush Fire’ in California

Ice Plants

“Managing Risks Better Than their Neighbors”
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Ideal Risk Management 
Holistic 

Dynamic (Pro-Active) 

Balanced Cost & Benefit
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More on Risks…….
• “Risks reduce the value of a firm to its shareholders. Whether a firm bears a risk or transfers it, risk has a cost, and a firm’s risk management effort is being judged by its ability to manage capital efficiently”

pillai_sreejith@hotmail.com

•INSURANCE •BENEFIT

•LOSS PREVENTION •COST

Courtesy: The pictures used in the presentation are from various web sites.

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