Introduction to Risk Management

A systematic process for: - the identification and evaluation of pure loss exposures faced by an organization or individual - and for the selection and administration of the most appropriate technique for treating such exposures.

Risk Management- Macro

Provision of adequate infrastructure, trained personnel and capability to mitigate huge losses due to disasters natural & man made will be the main area for macro analysis by the Government. Natural disasters result in huge devastation and loss of human lives. Bhopal tragedy had put India in Guinness book of world records as one of the big tragedies of the world

Principles of risk management

The International Organization for Standardization (ISO) identifies the following principles of risk management: Risk management should: create value - resources expended to mitigate risk should generally exceed the consequence of inaction, or (as in value engineering), the gain should exceed the pain. be an integral part of organizational processes be part of decision making explicitly address uncertainty and assumptions

 be systematic and structured be based on the best available information be tailor able take into account human factors be transparent and inclusive be dynamic, iterative and responsive to change be capable of continual improvement and enhancement be continually or periodically re-assessed

Objectives of Risk Management

A risk management policy statement offers several advantages. Such a policy statement is necessary in order to have effective administration of the risk management program. The policy statement states the risk management objectives of the firm and company policy with respect to treatment of the loss exposures.

 In addition, a risk management statement has the advantage of educating top-level executives in the firm about the risk management process. Also, the written policy statement enables the risk manager to have greater authority throughout the firm. the policy statement provides a standard for judging the risk manager's performance.

Pre-loss Objectives:
Objectives before a loss occurs

Economy goal:
The firm should prepare for potential losses in the most economical way. This preparation involves an analysis of the cost of safety programs insurance premiums paid, and the costs associated with the different techniques for handling losses.

Reduction of anxiety:
Certain loss exposures can cause greater worry and fear for the risk manager and key executives. E.g. The Threat of a catastrophic lawsuit from a defective product can cause greater anxiety than a small loss from a minor fire.

Meet any legal obligations:

E.g. Government regulations may require a firm to install safety devices to protect workers from harm, to dispose of hazardous waste materials properly, ant to label consumer products appropriately. The risk manager must see that these legal obligations are met.

Post-loss Objectives
Objectives after a loss occurs Survival of the firm:
After a loss occurs, the firm can resume at least partial operations within some reasonable time period.

Continued operation:
For some firms , the ability to operate after a loss is extremely Important. otherwise business will be lost to competitors. e.g. Public utility firms must continue to provide services.

Stability of earnings:
Earnings per share can be maintained if the firm continues to operate. Otherwise, a firm may incur substantial additional expenses to achieve the goal , and perfect stability of earnings may not be attained.

Continued growth:
A company can grow by developing new products and markets or by acquiring or merging with other companies. The risk manager must consider the effect that a loss will have on the firm s ability to grow.

Social responsibility :
This objectives is to minimize the effect that a loss will have on other persons and on society. A severe loss can adversely affect employees, suppliers, creditors, and the community .