MODULE 1

INTRODUCTION TO RISK MANAGEMENT

INTRODUCTION TO RISK
Definition of Risk:

The risk is the outcome of an action taken or not taken, in a particular situation
which may result in loss or gain. It is termed as a chance or loss or exposure to
danger, arising out of internal or external factors that can be minimized through
preventive measures.
Such a risk may include the probability of losing the part or whole investment.
Although the higher the risk, the higher is the expectation of returns, because
investors are paid off for the additional risk they take on their investments. The
major elements of risk are defined as below:

 Systematic Risk: Interest Risk, Inflation Risk, Market Risk, etc.

 Unsystematic Risk: Business Risk and Financial Risk.

Uncertainty

 Uncertainty is always confused with risk. Uncertain refers to a situation

where the outcome is not certain or unknown. It is characterized by doubt,
based on the lack of knowledge about what will or will not happen in
future.

 Uncertainty is opposite of certainty where are assure of outcome of what

will happen

 Decision under uncertain situations is very difficult for the decision maker .
It all depends upon the skill, the judgment and luck.

 Uncertainty being a perceptual phenomenon implies different degrees to

different person. Eg. A student who studied well and wrote the
examination, the uncertainty of the result is different to that of a student
who did study well

 By the term uncertainty, we mean the absence of certainty or something

which is not known. It refers to a situation where there are multiple
alternatives resulting in a specific outcome, but the probability of the
outcome is not certain. This is because of insufficient information or
knowledge about the present condition. Hence, it is hard to define or
predict the future outcome or events.
  Uncertainty cannot be measured in quantitative terms through past
models. Therefore, probabilities cannot be applied to the potential
outcomes, because the probabilities are unknown

Comparison B/W risk & uncertainty

Basis for Comparison Risk Uncertainty

The probability of winning or losing Uncertainty implies a situation where the future
Meaning
something worthy is known as risk. events are not known.

Ascertainment It can be measured It cannot be measured.

Outcome Chances of outcomes are known. The outcome is unknown.

Control Controllable Uncontrollable

Minimization Yes No

Probabilities Assigned Not assigned

Categories of risk/types
Risk Fundamental: It is defined in which effect the entire economy or large no. of
persons or groups within the economy.

 Particular Risk: It effects only the individuals not the the entire community.

 Enterprise Risk: It is a relatively new term that encompasses all major risk faced
by a business norm.

 Speculative Risk: It is situation in which either profit or loss is possible.

 Pure Risk: It is defined as a situation in which there are only the possibility of
loss and no loss.

There is a possibility of loss or no loss. There is no gain to individual or

organisition. These risks are insurable. It has inherent advantages to the economy
or socity.

There are different types of risk exist which are as follows:

 Personal Risk: It directly effects an individual.

 Property Risk: Under this risk contains direct loss and indirect loss.

 Direct loss: It is a financial loss that results from the physical damage
,destruction or theft of the property.

 Indirect loss: It is the financial loss that results indirectly from the occurrence of
the direct physical damage or theft.

 Liability Risk: It is another type of pure risk that most person face under legal
system, that one can be held legally liable for something that results in bodily
injury or property damage.

OR
1. Financial and Non Financial Risks

2. Individual and Group Risks

3. Pure and Speculative Risks

4. Static and Dynamic Risks

5. Quantifiable and Non Quantifiable Risks

1. Financial Risks : Exposed to the financial losses from the occurrence of the

events

Non-Financial Risks: When financial loss does not exists, the situation can be
referred to a non-financial risk

2. Group Risks - affects the economy, macro basis, impersonal in origin - Affect
social segment or entire population

Individual Risks

These risk are confined to individual identities or small group Ex: Theft, Robbery,
Fire etc.

Some of these are insurable

Fire insurance may be bought by an individual to prevent against the adverse

consequences of fire

Risk factors: Socio economic, Political, Natural Calamities. Ex: Earthquakes,

Floods, Wars, Unemployment, 11th September event etc.

Social insurance Prg. May be undertaken by the govt. to handle fundamental risk.

3. Pure Risk: There is a possibility of loss or no loss. There is no gain to individual

or organisition. These risks are insurable. It has inherent advantages to the
economy or socity.

Speculative Risk
There is a possibility of gain or loss. These are not insurable. Highly damaging in
nature.

Ex: invest in a stock market or loss.

4. Dynamic Risk: Resulting from the changes in the economy or environment.

Risk Factor: Macro Economic, inflation, technology, income level.

Difficult to quantify and these are not insurable.

Static Risk: More or less predictable and not affected by economic conditions. Ex:
Possibility of loss in business, unemployment due to non-professional
qualification.

5. Quantifiable Risks: This can be measured in financial terms.

Non Quantifiable Risks: Can’t be measured in financial terms like tension, loss of
peace etc.

Sources of Risk identification

Risk identification
Identifying risks is the first and perhaps the most important step in the risk
management process. It involves generating a comprehensive list of threats and
opportunities based on events that might enhance, prevent, degrade, accelerate
or delay the achievement of your objectives. If you don’t identify a risk, you can’t
manage it. It’s also important to scan the environment from time to time to
identify new and emerging risks, as the department’s exposure to risk may be
constantly changing.

Sources of Risk Identification:

Brainstorming
Brainstorming is done with a group of people who focus on identification of risk
for the project.

Issues logs:

Record of issues faced and the actions taken to resolve them. Any issues that
were formally identified as risks should be analysed.

Audit reports

Independent view of adherence to regulatory guidelines including a review of

compliance preparations, security policies, access controls and management of
risks.

Business Impact Analysis(BIA)

Detailed risk analysis that examines the nature and extent of disruptions and the
likelihood of the resulting consequences.

Internal & external reviews

Reviews undertaken to evaluate the suitability, adequacy and effectiveness of the

department’s systems, and to look for improvement opportunities.

Swot Analysis (STRENGTH, Weakness, Opportunities And Threats)

 Strengths and weaknesses are identified for the project and thus, risks are
determined.
 Commonly used as a planning tool for analysing a business, its resources
and its environment by looking at internal strengths and weaknesses; and
opportunities and threats in the external environment

PESTLE (Political, Economic, Sociological, Technological, Legal, Environmental):

Commonly used as a planning tool to identify and categories threats in the

external environment (political, economic, social, technological, legal,
environmental)

Scenario analysis
Uses possible (often extreme) future events to anticipate how threats and
opportunities might develop.

Surveys/Questionnaires

Gather data on risks. Surveys rely on the questions asked.

Interviewing

 An interview is conducted with project participants, stakeholders, experts,

etc to identify risks.
 Discussions with stakeholders to identify/explore risk areas and detailed or
sensitive information about the risk.

Stakeholder analysis

Process of identifying individuals or groups who have a vested interest in the

objectives and ascertaining how to engage with them to better understand the
objective and its associated uncertainties

Working groups

Useful to surface detailed information about the risks i.e. source, causes,
consequences, stakeholder impacted, existing controls

Corporate knowledge

History of risks provide insight into future threats or opportunities through:

•Experiential knowledge –collection of information that a person has

obtained through their experience.

•Documented knowledge –collection of information or data that has been

documented about a particular subject

. •Lessons learned–knowledge that has been organised into information that

may be relevant to the different areas within the organisation.
Process analysis

An approach that helps improve the performance of business activities by

analysing current processes and making decisions on new improvements.

Other jurisdictions

Issues experienced and risks identified by other jurisdictions should be identified

and evaluated. If it can happen to them, it can happen here.

Root Cause Analysis

Root causes are determined for the identified risks. These root causes are further
used to identify additional risks.

Swot Analysis (STRENGTH, Weakness, Opportunities And Threats)

Strengths and weaknesses are identified for the project and thus, risks are
determined.

Commonly used as a planning tool for analysing a business, its resources and its
environment by looking at internal strengths and weaknesses; and opportunities
and threats in the external environment

Checklist Analysis

The checklist of risk categories is used to come up with additional risks for the
project.

Assumption Analysis

Identification of different assumptions of the project and determining their

validity, further helps in identifying risks for the project.

Outputs to Identify Risks

This process of Risk Identification results in creation of Risk Register.

Delphi Technique

A team of experts is consulted anonymously. A list of required information is sent

to experts, responses are compiled, and results are sent back to them for further
review until a consensus is reached.

Risk Register

 Provide a foundation for evaluating existing risks and their potential risk to
an objective.
 A Risk Register is a living document that is updated regularly throughout
the life cycle of the project. It becomes a part of project documents and is
included in the historical records that are used for future projects.

The risk register includes:

 List of Risks
 List of Potential Responses
 Root Causes of Risks
 Updated Risk Categories

Risk Identification Process

Risk identification is a process for identifying and recording potential project risks
that can affect the project delivery. This step is crucial for efficient risk
management throughout the project. The outputs of the risk identification are
used as an input for risk analysis, and they reduce a project manager's
uncertainty. It's an iterative process, meaning it goes through phases or steps,
that needs to be continuously repeated throughout the duration of a project. The
process needs to be rigorous to make sure that all possible risks are identified.

An effective risk identification process should include the following steps:

1. Creating a systematic process: The risk identification process should begin

with project objectives and success factors.
 2. Gathering information from various sources: Reliable and high-quality
information is essential for effective risk management.
3. Applying risk identification tools and techniques: The choice of the best
suitable techniques will depend on the types of risks and activities, as well
as organizational maturity.
4. Documenting the risks: Identified risks should be documented in a risk
register and a risk breakdown structure, along with their causes and
consequences.
5. Documenting the risks identification process: to improve and ease the risks
identification process for future projects, the approach, participants and
scope of the process should be recorded.
6. Assessing the process effectiveness: to improve it for future use, the
effectiveness of the chosen process should be critically assessed after the
project is completed.

RISK MANAGEMENT

Risk management is the process of identifying, assessing and controlling threats

to an organization's capital and earnings. These threats, or risks, could stem from
a wide variety of sources, including financial uncertainty, legal liabilities, strategic
management errors, accidents and natural disasters.

Every business and organization faces the risk of unexpected, harmful events that
can cost the company money or cause it to permanently close. Risk management
allows organizations to attempt to prepare for the unexpected by minimizing risks
and extra costs before they happen

Important benefits of risk management include:

 Creates a safe and secure work environment for all staff and customers.
 Increases the stability of business operations while also decreasing legal
liability.
 Provides protection from events that are detrimental to both the company
and the environment.
 Protects all involved people and assets from potential harm.
 Helps establish the organization's insurance needs in order to save on
unnecessary premiums.
Risk management strategies and processes

All risk management plans follow the same steps that combine to make up the
overall risk management process:

 Establish context. Understand the circumstances in which the rest of the

process will take place. The criteria that will be used to evaluate risk should
also be established and the structure of the analysis should be defined.
 Risk identification. The company identifies and defines potential risks that
may negatively influence a specific company process or project.
 Risk analysis. Once specific types of risk are identified, the company then
determines the odds of it occurring, as well as its consequences. The goal of
risk analysis is to further understand each specific instance of risk, and how
it could influence the company's projects and objectives.
 Risk assessment and evaluation. The risk is then further evaluated after
determining the risk's overall likelihood of occurrence combined with its
overall consequence. The company can then make decisions on whether
the risk is acceptable and whether the company is willing to take it on
based on its risk appetite.
 Risk mitigation. During this step, companies assess their highest-ranked
risks and develop a plan to alleviate them using specific risk controls. These
plans include risk mitigation processes, risk prevention tactics and
contingency plans in the event the risk comes to fruition.
 Risk monitoring. Part of the mitigation plan includes following up on both
the risks and the overall plan to continuously monitor and track new and
existing risks. The overall risk management process should also be reviewed
and updated accordingly.
 Communicate and consult. Internal and external shareholders should be
included in communication and consultation at each appropriate step of
the risk management process and in regards to the process as a whole.

MODULE – 2

INSURANCE BUSINESS
Concept of insurance
Insurance:

 INSURANCE is a practice or arrangement by which company or

government agency provides a guarantee of compensation for specified
loss, damage, illness or death in return for a payment of a premium.
 Insurance is a means of protection from financial loss.
 Insurance may be defined as form of contract between two parties (namely
insurer and insured or assured) whereby one party (insurer) undertakes in
exchange for a fixed amount of money (premium) to pay the other party
(Insured), a fixed amount of money on the happening of certain event
(death or attaining a certain age in case of life) or to pay the amount of
actual loss when it takes place through the risk insured (in case of property)
 Insurance is defined as a contract, which is called a policy, in which an
individual or organisation receives financial protection and reimbursement
of damages from the insurer or the insurance company. At a very basic
level, it is some form of protection from any possible financial losses.


Importance of insurance

 Provides protection against occurrence of uncertain events.

 Co-operative method of spreading risks.
 Facilitates international trade.
 Serves as an agency of capital formation.
 Financial support.
 Medical support.
 Source of employment.

Nature of Insurance
Following are the main characteristics of insurance which are applicable
to all types of insurance (life, fire, marine and general insurance).

1. Sharing of Risks - Insurance is a device to share the financial

losses which may occur to individual or his family on the happening of
certain events
2. Co operative Device – Insurance is a co-operative device to
spread the loss caused by a particular risk over a large caused by a
particular risk over a large number of persons who are exposed to it and
who agree to insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There
are several methods of valuing the risk. Higher the risks, higher will be
premium
4. Payment on Contingency -If the contingency occurs, payment is
made; payment is made only for insured contingency. If there is no
contingency, no payment is made. In life insurance contract, payment is
certain because the death or the expiry of term will certainly occur. In
other insurance contract like fire, marine, the contingency may or may
not occur
5. Amount of Payment of Claim - The amount of payment depends
upon the value of loss occurred due to the particular insured risk. The
insurance is there upto that amount. In life insurance insurer pay a fixed
sum on the happening of an event or within a specified time period.

Example – In fire insurance, if fire occurs and half the property is

destroyed, but the whole property is insured, then payment of claim
will be made only for that half building that is destroyed not the
whole amount of insured.

6. Insurance is different from Charity - In charity, there is no

consideration but insurance is not given without premium
7. Large number of Insured Person - Insurance is spreading of
loss over a large number of persons. Larger the number of persons, lower
the cost of insurance and amount of premium and incase lower the
number of persons, higher the cost of insurance and amount of premium.
8. Insurance is different from Gambling - In gambling, there is
no guarantee of gain, by bidding the person expose himself to risk of
losing. Whereas in insurance, by getting insured his life and property, he
protects himself against the risk of loss.

Characteristics of Insurance:

One can easily differentiate these characters of insurance as below:

1. Any Insurance is a contract between insurer and insured for compensating the
losses.

2. For any insurances contract not only premium is charged but it also obligatory
to pay the premium in time.

3. Payment to insured in the event of loss as per the agreement and terms of
policy purchased by the insured.

4. Insurance is a simple contract based on good faith.

5. Insurance contract is one that provides benefits to both the insurer as well as
insured. In other words it is a contract for mutual benefits.

6. All other contracts are based on present day situation whereas an insurance
contract is one for compensating future losses.

7. The insurance concept being based on pooling funds by many and distributing
among few for their losses is a social security also.

Type of insurance
Life insurance-:

 Life insurance is a contract between the policy owner and the insurer,
 Where the insurer agrees to reimburse the occurrence of the insured
individual’s death or other event such as terminal illness or critical illness.
 The insured agrees to pay the cost in terms of insurance premium for the
service.
 Specific exclusions are often written in the contract to limit the liability of
the insurer.
 For example-: claims related to suicide, fraud , war and civil commotion is
not covered.
 Life insurance is a contract under which one person, in consideration
of a premium paid either in lump sum or by monthly, quarterly, half
yearly or yearly installments, undertakes to pay to the person (for
 whose benefits the insurance is made), a certain sum of money either
on the death of the insured person or on the expiry of a specified
period of time.

General Insurance: The general insurance includes property insurance,

liability insurance and other form of insurance. Property insurance includes
fire and marine insurance. Property of the individual and business involves
various risks like fire, theft etc. This need insurance Liability insurance
includes motor, theft, fidelity and machine insurance

Type of General Insurance policies available are -

-          Health Insurance
-          Medi- Claim Policy
-          Personal Accident Policy
-          Group Insurance Policy
-          Automobile Insurance
-          Worker’s Compensation Insurance
-          Liability Insurance
-          Aviation Insurance
-          Business Insurance
-          Fire Insurance Policy
-          Travel Insurance Policy
3.    Social Insurance: Social insurance provide protection to the
weaker sections of the society who are unable to pay the premium. It
includes pension plans, disability benefits, unemployment benefits,
sickness insurance and industrial insurance.
General insurance -:
 insuring anything other than human life is called as general insurance.

 Examples are insuring property like house and belongings against accidental damage or theft.
 Injury due to accident or hospitalization for illness and surgery can also be insured.

 General insurance or non- life insurance policies, including automobiles and homeowners
policies, provide payments depending on the loss from a particular financial event.