EVOLUTION OF RISK MANAGEMENT

Risk Management

Risk management is a scientific approach to the problem of dealing with the pure risks
by anticipating possible accidental losses facing individuals and organizations and
implementing procedures that minimize the occurrence of loss or the financial impact of
the losses that do occur.

RISK

From ancient Italian which means

“RISICARE” “TO DARE”

Risk is an option, and not fate.

Our freedom of choice depends from the actions we dare to take.

TO DARE IS STILL THE BEST WAY TO LIVE

How it all began….

Year of 1654- The Paradox of Mere’s

 The gallant knight rider Mere, with an intense liking for games, dared the renowned
mathematician Blaise Pascal to make sense of an enigma that had been revealed by Paccioli 200
years before. He wanted to find a way on how to split a bet on a game that had been
interrupted when one player was winning.
 Pascal collaborated with Pierre de Fermat and the result of that teamwork was intellectually
stunning.
 With time, more mathematicians developed the probalibility theory into a formidable
instrument to:
A. Manage
B. Decode
C. Handle communication

17th Century

 Shipping insurances had transpired as a foreshadowing and cutting-edge business in London.

 Gottfried von Leibniz said: “Nature establishes standards that originate the return of events, but
only in the majority of cases; leading Bernoulli to create the Law of the Big Numbers and
statistical sampling.
 Abraham de Moivre exhibited the normal distribution – also known as bell curve - and
discovered the concept of standard deviation. That established the base concept for the Law of
the Averages.
Thomas Bayes

 Created a gigantic spike in statistics by presenting just how to construct decisions by

incorporating or combining latest material evidence with long standing erstwhile information.
 Bayes Theorem

Harry Markowitz demonstrated mathematically why putting all eggs in the same basket is an
unacceptable and risky strategy and that diversification is the best alternative.

 Modern Portfolio Theory

 RISK MANAGEMENT

Process to:

Rank the
Identify all Monitor
Assess the risks in
relevant risks and do
risks order of
risks the necessary report
priority

Followed by:

Coordinated and economical use of resources to:

Minimize Monitor Control

The Probability and/or Impact of Unfortunate Events

 RISK MANAGEMENT: WHY DO WE NEED IT?
1. Supports, Promotes
2. Effective Risk Management is a professionally recognized valued proficiency
3. May be a lawful and legal requirement varying upon the industry or sector.
4. It allows management to prepare itself for whatever risk it ventures.
5. Availability of resources are limited.
6. Risk Management process is well-established (based on Risk Management process standards)

Nowadays, risk management is an essential segment of business planning.

Risk Management: What Does it Include?

Risk Management Planning

Risk Identification

Qualitative Risk Analysis

Quantitative Risk Analysis

Risk Response Planning

Risk Monitoring and Control
Risk Management: How is it Done in a Project? 10 Steps:

Make Risk Management part of your project

Identify risks early in your project

Communicate about risks

Consider both threats and opportunities

Clarify ownership issues

Analyze risks

Prioritize Risk

Plan and implement risk responses

Register project risks

Track risks and associated tasks

Misconceptions About Risk Management

2. The risk
1. The risk management management
concept is applicable approach seeks to
principally to large minimize the role of
organizations. insurance.

Risk Management: Benefits

Effective activities
A reduction in the need for crisis management
A universal application can be used by any organization
Proactive (looking for problems and opportunities in advance)
Cost Effective (easy and inexpensive to do; reduces costs associated with problems)
Compliance (following whatever rules may be in place)
 Duties and Responsibilities of the Risk Manager

Assist in Developing Risk Management Policy

Risk Identification and Measurement

Selecting Risk Financing Alternatives

Negotiate Insurance Coverage

Managing Claims

Internal Administration

Communicating with Other Managers

Accounting

Administer Risk Functions

Loss Prevention

Managing Employee Benefits

Position in the Organization

 There is a growing school of thought that says the risk manager should be in a less specialized
department, reporting to an executive VP or to the president to illustrate the company-wide
scope of risk management activities.
 The Non-professional Risk Manager

 The non-professional risk manager should understand & appreciate the principles of risk
management.

 must know enough about risk management to recognize whether his advisers are any good.

 must know enough about risk management and insurance to know when help is needed and
must be able to determine if help is any good.