Risk and Risk Management

Concept of Risk 
   Risk arises out of uncertainty Possibility of adverse results flowing from any occurrence. It is possibility of an outcome being different from the expected. For risk to exist there must be at least two possible outcomes
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Risk and Risk Management

Concept of Risk  

 If loss is certain there is no risk. At least one possible out come must be undesirable. Loss in general accepted sense is something is lost, or a gain smaller than the gain that was possible.

10/9/2010

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Risk and Risk Management

Definition of Risk
³Risk is a condition where there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for´
There is no requirement that the possibility is immeasurable, only that it must exist.
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Risk and Risk Management Definition of Risk«.Cont¶d 
Our purpose is to relate risk to insurance; 

Our focus is on risk, which entails the possibility of financial loss.  Financial loss means decline in or disappearance of value due to a contingency.  Thus if a loss of value is intended or if it is certain, it is not a risk within the context of the definition.
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³Risk is the probability of a material deviation from an anticipated outcome´ 10/9/2010 5 .Risk and Risk Management Definition of Risk -beyond insurance It focuses on accident-centered risks of loss.

a mathematical quantity that can be measured. » 10/9/2010 Source: www.only if there is a goal «.insurancetranslation.com 6 . calculated or estimated. Risk is a probability. either downward losses or upward gain 3. Risk exists only if an objective exists.Risk and Risk Management Definition of Risk -beyond insurance Thus risk has 3 crucial implications: 1. Risk refers not just to probabilities of losses or gains. 2. but probabilities of deviation.a planned future state.

greater is the probability of an adverse deviation from what is hoped for and therefore greater is the risk. The higher the probability of loss. 10/9/2010 7 . greater the risk.Risk and Risk Management Degree of Loss/value of loss If risk is uncertainty. greater the uncertainty.

Risk and Risk Management Degree of Loss/value of loss The mathematical value of a risk at any point of time is the probability of the loss materializing multiplied by the amount of potential or anticipated loss. 10/9/2010 8 .

g.Peril and Hazard  Risk is uncertainty of loss. 10/9/2010 9 . etc.Risk and Risk Management Risk .. embezzlement. a known embezzler hired as an accountant).  Peril is a source of loss (fire.)  Hazard is a condition which increases the likelihood of loss (e. windstorm.

Risk and Risk Management Peril and Hazard Peril : is cause of loss. 10/9/2010 10 . collision is a peril that causes the automobile accident and loss. Hazard: is condition for loss foggy weather is the hazard that creates the peril of collision.

Moral Hazard 3. Physical Hazard 2. Morale Hazard 10/9/2010 11 .Risk and Risk Management Types of Hazard 1.

10/9/2010 12 .Risk and Risk Management Types of Hazard «Cont¶d Physical Hazard: Physical conditions which that increase that increasse the likelihood of a peril occurring.

Risk and Risk Management Types of Hazard «.Cont¶d Moral Hazard : Human behaviour that increase the exposure of individuals to potential perils is moral hazard depending on the intentions of the person. 10/9/2010 13 . Increase in the probability of loss that result from dishonesty in the character of the insured person.

Morale hazard reflects the careless attitude towards the occurrence of loss.Cont¶d Morale Hazard : Attitude towards losses that it will be paid by insurance. 10/9/2010 14 .Risk and Risk Management Types of Hazard «. than borne by the individual.

10/9/2010 15 . Writing business in different geographical locations. An insurer would achieve spread of risk by: 1. 2.Risk and Risk Management Spreading of Risk There are various methods to achieve spreading or ³averaging´ of risks. Writing different classes of insurance business.

4. Have larger capital resources and write larger volumes of business to have larger spread.Risk and Risk Management Spreading of Risk«cont¶d 3. by Reinsurance 10/9/2010 16 .

Risk and Risk Management Spreading of Risk«cont¶d 5. 6. By entering into risk pools for certain risks. By spreading risk over a longer period of time. 10/9/2010 17 .

consumer taste 18 .Dishonesty 10/9/2010 Dynamic Risk Losses due to change in economy Affects large number of indivuduals Less predictable than static risk Do not occur with a precise degree of regularity Eg: Change in price level.Risk and Risk Management Static Risk Losses without change in the economy Affects small number of individuals Is predictable Occurs with a degree of regularity Eg: Perils of nature.

Fundamental Risk Risk and Risk Management Particular Risk Losses that are impersonal in origin Losses arising out of individual and consequences events Affect large segment or overall population Caused by conditions beyond the control of individuals Society has the responsibility to deal with the losses by mechanism of social insurance Eg: Unemployment. Earthquake 10/9/2010 Affects individuals rather than groups Caused directly by acts of individuals Private insurance is the convenient mechanism to deal with this risk Eg: Burning of Houses. War. bank robbery 19 . Inflation.

Eg: gambling and stock market investments This type of risk is not insurable. thus. Speculative risk affords the opportunity for gain as well as the possibility of loss. 10/9/2010 20 .Risk and Risk Management Pure and Speculative Risk Pure risk has the possibility of loss only. it is insurable.

The insured event must be accidental. The insured must have an insurable interest in the subject of coverage. The insured loss must have a definite time and place. 3. 10/9/2010 21 . 2.Risk and Risk Management Insurable Risk A risk that meets the following criteria: 1.

10/9/2010 22 . The insured risks must belong to a sufficiently large group of homogeneous exposure units to make losses predictable. The risk must not be subject to a catastrophic loss where a large number of exposure units can be damaged or destroyed in a single event. 5.Risk and Risk Management Insurable Risk«Cont¶d 4.

7. The chance of loss must be calculable. 10/9/2010 23 .Risk and Risk Management Insurable Risk«Cont¶d 6. The coverage must be provided at a reasonable cost.

Risk and Risk Management Uninsurable Risk A risk where there is no insurable interest. A risk where the potential for loss is so great it does not meet the definition of insurance. A risk where insurance is prohibited by public policy or is illegal. 10/9/2010 24 .

Risk and Risk Management Methods for treating risk There are established and tested techniques by which risks may be controlled. Nevertheless. in some situations risk avoidance is both possible and desirable. Such a choice is not always possible. it may require giving up some important advantages. or if possible.A risk may be avoided by not accepting or entering into the event which has hazards. 1) AVOIDING RISK . 10/9/2010 25 .

It is possible to spread the risk of loss to property and persons. then.Risk and Risk Management Methods for treating risk«. storing the duplicate copies elsewhere is an example of spreading the risk.Cont¶d 2) SPREADING RISK . A small fire in a single room can destroy the entire records of a department's 10/9/2010 26 . Duplication of records and documents and.

or certainly controlled by using a well-planned loss prevention program. this statement provides the guide for the control of risk."An ounce of prevention is worth a pound of cure. 10/9/2010 27 .Risk and Risk Management Methods for treating risk«cont¶d 3) LOSS PREVENTION OR REDUCTION OF RISK . Today. Risk may be reduced." according to an old saying. eliminated.

Some risks have to be retained because insurance cannot be purchased or the cost of insurance is not economically sound. Therefore. Examples of these types of risks would be: earthquake. war. 10/9/2010 28 . wear and tear etc. some risks should be retained. ASSUMPTION OR ACCEPTANCE OF RISK Constant vigilance is needed to avoid accepting risks unintentionally through unawareness of the exposure.Risk and Risk Management Methods for treating risk «Cont¶d 4) RETENTION. accidental breakage. or accepted. assumed. flood.

Risk may be transferred contractually to others. 10/9/2010 29 .Risk and Risk Management Methods for treating risk«cont¶d 5) TRANSFER OF RISK TO INSURANCE CARRIERS OR OTHERS . For example. when leasing facilities from others. the lease could require the lessor to assume all property and liability losses.

10/9/2010 30 .Risk and Risk Management Management of Risk The term risk management applies to a number of diverse disciplines. To bankers and financial officers it is sophisticated use of techniques of currency hedging and interests swaps. To safety professionals it means reducing accidents and injuries. To insurance buyer and seller it is coordination of insurable risk and the reduction of insurance cost.

Risk and Risk Management Definition of Risk Management The process of defining and analyzing risk. whilst still achieving business goals 10/9/2010 31 . and then deciding on the appropriate course of action in order to minimize risk.

Risk and Risk Management Definition of Risk Management The optimal allocation of resources to arrive at cost affective investment in defensive measures within an organization .It minimizes both cost and risk 10/9/2010 32 .

10/9/2010 33 . profitability.Risk and Risk Management Definition of Risk Management A variety of activities undertaken by an organization to control and minimize threats to the continuing efficiency. and success of its operations.

developing a strategy to ameliorate appropriate individual risks until the overall level of risk is reduced to an acceptable level. if this is excessive.Risk and Risk Management Definition of Risk Management The process of determining the maximum acceptable level of overall risk to and from a proposed activity. then using risk assessment techniques to determine the initial level of risk . 10/9/2010 34 .

 Includes taking out insurance against financial loss or legal liability and  Introducing safety or security measures.  Deciding what action can be taken to eliminate or reduce risk and deal with the impact of unpredictable events causing loss or damage.  The assessment of potential impacts on the business.Risk and Risk Management Process of Risk Management  Identification and analysis of risks to which the organization is exposed. 10/9/2010 35 .

Some equate risk management with disaster recovery. but certainly not the only one. Most people equate risk management with insurance. Insurance is one aspect of risk management. Insurance and disaster recovery are necessary parts of risk management 10/9/2010 36 .Risk and Risk Management Risk Management v/s Insurance Mgt Risk management deals with insurable and uninsurable risks and the choice of the appropriate techniques for dealing with them.

37 . Insurers found results were enhanced by encouraging customers to exercise reasonable 10/9/2010 care and by rewarding good performance. Its early focus was on protecting against catastrophe and evolved to protecting unaffordable potential losses.Risk and Risk Management Development of Risk Management In the 1970 and 80's risk management started to gain momentum . It derives its origins from the insurance industry.

quality of process and quality of action. Risk management has become a universal management process involving quality of thought. 10/9/2010 38 .Risk and Risk Management Development of Risk Management Risk management evolved from natural intuition and analytical thinking into a more formal process of controls in place to influence outcomes.

organizations have reduced their reliance on the conventional techniques They have realized insurance did not meet all organizational needs And internal activities could control the impact of risk and uncertainty of the organization.it is still widely used But. 10/9/2010 39 .Risk and Risk Management Development of Risk Management The main function of risk management was insurance buying.

Risk and Risk Management Development of Risk Management Technical and financial aspects of risk management are integrated under one function. Most large medium organizations adopt risk management techniques because of their benefits and legislation compliance 10/9/2010 40 .

Risk and Risk Management Decisions of dealing with risk To retain the risk To deal with the risk through loss prevention To transfer the risk through insurance 10/9/2010 41 .

Cost could be paid out of current income and cost is less than the insurance premium. Events of high frequency and low severity fall in this category. 10/9/2010 42 .Risk and Risk Management Decision to retain risk Could be with or without a reserve or fund.

Risk and Risk Management Decision to deal through loss prevention To take preventative steps to eliminate loss as far as possible. 10/9/2010 43 . To anticipate risk and take steps to ensure that incidence of risk is minimum. If risk happens take steps to minimise the effect of loss.

Risk and Risk Management Decisions to transfer risk This is to transfer financial effects of risk to other party. This exchanges uncertainty with certainty. Insurance is a risk transfer mechanism. 10/9/2010 44 .

Rely on the entire decision making process on insurance agent or brokers. 10/9/2010 45 . Mistake of buying too little or too much.Risk and Risk Management Buying Insurance One of the techniques for dealing with pure risk.

Risk and Risk Management Alternative to buying insurance Captive insurance company. 10/9/2010 46 . Risk retention group. Risk sharing pools Self insurance.

Risk and Risk Management Thank you! 10/9/2010 47 .

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