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Nature and scope of risk management meaning and definition of risk risks arise due to uncertainties in regard to cost,

loss or damage. The loss or damage may be related to financial loss or non-financial loss. Definition of risk it is the possibility of loss or damage. The possibility is between 0 and 1. Peril A peril is the cause of loss. Eg. Fire, wind, storm, theft. Hazard It is a condition that may create or increase the chance of loss arising from a given peril or under a given condition. Hazards can be classified into the following three categories: 1. Physical Hazards - it consists of those physical conditions that increase the chance of loss from any peril. For example, premises for bad repair proposed for public liability insurance. 2. Moral hazards it refers to the increase in probability of loss that results from dishonesty in the character of the insured person. An extreme illustration of bad moral hazard is the person who effects a policy of insurance in order to make a profit by means of false and exaggerated claims. 3. Morale hazard- the term Morale refers to a mental condition or the attitudes of individual and groups which determines their willingness to corporate. It may be reflected in a careless attitude to word the occurrence of loss or in an indifference or the cost of restoring damage. It increases both the frequency and severity of loss has went such loss is covered by insurance. Classification of risk 1. financial and non-financial risks -any a risk concerned with financial loss is stormed as financial risk. Badly defined financial risk encompass the risk of possible insolvency and variability in the earnings available to shareholders. It is avoidable to the extent that management have the freedom to decide to borrow or not to borrow funds. Risks other than financial consequences are called non-financial risks. 2. static and dynamic risks 3. fundamental and particular risks 4. pure and speculative risks

pure risk can also be classified further into

1. 2. 3. 4.

personal risk property risk liability risk other risk

financial and non-financial risks -any a risk concerned with financial loss is stormed as financial risk. Badly defined financial risk encompass the risk of possible insolvency and variability in the earnings available to shareholders. It is avoidable to the extent that management have the freedom to decide to borrow or not to borrow funds. Risks other than financial consequences are called non-financial risks. Static risk involves losses resulting from the destruction of an asset or changes in its possession as a result of dishonesty or human failure. Such risk allies even if there were no changes in the economic environment. Static risks are most fit able to treatment by insurance. Example-death of responsible officer. Dynamic risk involve losses mainly concerned with financial loss. It occurs resulting from the causes relating to changes in price level, consumer wants and needs, in common, output and development of technology. Example-foreign exchange losses, bad publicity, worker compensation claims, loss of production and assets. fundamental and particular risk fundamental risk is also termed as group risk. It involves those losses that occur as a result of the causes or problems relating to major factors such as changes of economic, social, cultural and political environment. The consequences of the fundamental risk severely affect the whole population. Particular risk-it involve losses that occur resulting from individual events. Example-burning of the house and robbery of the bank. Pure risk- the concept pure risk the first to those situations that involve the chances of loss or no loss. Speculative risk means those risks which involve a situation where and there is a possibility of gain. The nature of insurable risk refers to the losses involved relating to only pure risk and not against speculative risk, because speculative risk is mainly concerned with the nature and possibility of gain. 1. Personal risk-uncertainties arising out of human elements. Example-pre mature death, dependent old-age, sickness or disability, unemployment.

2. Property risk it refers to direct loss/consequential loss. Exampleloss of the property, loss of use of the property and additional overhead expenses caused by loss of property. 3. Liability risk-it is concerned with those losses which result from unintentional injury to other persons or damages to their property through negligence or carelessness. 4. The risks arising from failure of others- any loss the dockers resulting from failure of another person to meet an obligation.

Methods of handling risk The following methods are usually adopted for handling risks 1. prevention of risk or avoiding of risk 2. reduction of risk

3. sifting of risk or transferring of risk 4. acceptance of risk 5. spreading of risk 1. prevention of risk or avoiding of risk a. losses from depth, shoplifting can be minimised by giving training to employees, burglar alarms, watchmen, CCTV camera etc. b. loss from fire, whether change can be completely avoided by constructing a fire proof building for stocking products. 2. reduction of risk a. lost on account of market change can be minimised by market research b. by keeping control in a process environment 3. sifting of risk or transferring of risk a. many natural risk of losses can be avoided through insurance 4. acceptance of risk a. some risks are accepted in ignorance b. some risks are accepted intentionally-where the degree of risk is less or possible losses small 5. spreading of risk-it is also called as averaging of risks

Management of risk risk insurance management process 1. The risk insurance management objectives

2. 3. 4. 5. 6. 7.

risk identification risk analysis risk assessment taking corrective action risk evaluation risk control a. risk transfer b. risk retention

Risk management objective- example-protecting employees from accident, effective utilisation of resources. The purpose of selection of risk- it is to deter mined whether the degree of risk presented by an applicant for insurance is commensurate with the premium charged for poor son in this category or some additional premium should be charged or the applicants proposals would be rejected. From the insurance point of view the purpose of selection are as follows 1. To determine whether the proposals would be accepted or not 2. to determine the rate of premium to be charged from the assured 3. to determine the risks and premium according to the classification of risks 4. to avoid any discrimination on the part of the lives assured 5. to check NT selection or adverse selection which means select some of the person for insurance who are not insurable and charging of lesser premium for those who are to be charged higher premium. Sources of risk there are several sources of risk information available. 1. Proposal form-it may be application form or personal statement 2. medical examiner's report 3. development officers, agents, and brokers report 4. Field officers report 5. medical information bureau report 6. private agency report 7. business associates report 8. commercial credit investigation bureau Risk identification Important tools used in risk identification are 1. insurance policy checklist 2. risk analysis questionnaire

3. analysis of financial statement 4. hundred and operability study 5. physical inspection of the operations 6. flowcharts 7. organizational chars 8. management information system 9. procedure manuals 10. insurance policies 11. maintenance records 12. plans of specific premises 13. loss records 14. plus maps, photographs etc. Principles of risk insurance management 1. principles of risk identification 2. principle of risk analysis 3. principles of risk assessment 4. principles of taking corrective decisions 5. principles of evaluation 6. principles of alternative course of action 7. principles of risk control 8. principles of risk retention 9. principles of risk transfer 1. Principles of risk identification- proper identification of risk is essential to achieve the several objectives of risk management. 2. Principles of risk assessment a. frequency of risk b. monitory cost of financial severity c. human cost in terms of pain and suffering d. purpose of the assignment e. nature of the risk f. description of the project g. resources involved or affected h. scale of the impact i. benefits of the hazard j. mitigating factors k. contingency plans l. limitations of the assessment m. conclusions and recommendations n. excellent taken 3. principles of taking corrective decisions a. to retain risk b. to involve with the risk through loss prevention effective alternative solutions applied for prevention of loss

4. 5. 6.

7. 8.

c. to transfer the risk through insurance and this must be followed by the selection of an insurer principles of evaluation- finding the best alternative course of action for handling risk principles of alternative course of action - the final choice from among the several alternatives principles of risk control a. carrying out a supplier assessment b. inspecting during manufacture c. investigating complaints d. improved detection e. minimising the opportunity to steal principles of risk retention principles of risk transfer

Types of insurance organizations 1. proprietary or individual insurers 2. partnership insurer 3. joint stock companies 4. mutual insurers 5. corporative insurance organization 6. Lloyds Association of underwriters 7. state insurance 8. light insurance Corporation and general insurance Corporation 9. employee state insurance Corporation 10. deposit insurance Corporation Scope of insurance management 1. property insurance 2. liability insurance 3. workmen's compensation insurance 4. pension 5. group life 6. hospitalization 7. auto Mobil insurance 8. accounts received insurance 9. consequential loss insurance- in case a power plant spoilage of property due to the lack of power, heat, light, steam etc. 10. contingent business interrupts on insurance-protects the form against interruption of its business due to fire or other insured perils 11. credit insurance 12. electronic data-processing insurance 13. motor cargo insurance

14. 15. 16. 17. 18. 19. 20.

Marine insurance powerplant insurance valuable papers insurance Manufacturers output insurance export credit insurance Fire legal liability insurance employers liability insurance

Nature of insurance business Classification of insurance Insurance can be classified into two broad categories 1. life insurance

2. nonlife insurance a. general insurance i. marine insurance ii. Fire insurance iii. personal accident insurance iv. vehicle insurance b. miscellaneous insurance i. fidelity guaranty insurance ii. crop insurance iii. burglary insurance iv. flood insurance v. Cattel insurance vi. cash in transit insurance Life insurance- it is a contract whereby the insurer in consideration of a premium paid either in a lump sum or in a perodical instalments undertakes to pay an annuity or a certain sum of money, either on the death of the insured or on the expiry of a certain number of years, whichever is the earlier. Marine insurance - it is a contract of insurance under which the insurer undertakes to indemnify the insured against losses incidental to marine adventure. It may cover loss or damages to the ship, cargo, freight, vessels all any other subject of a marine adventure. Fire insurance - it is a contract of agreement between the insurer and the insured whereby the insurer undertakes to indemnify the insured for destruction or damage to property caused by fire or other specified perils during an agreed period of time, in return for payment of the premium in lump sum or by instalments. Motor vehicle insurance- it falls under general insurance. Its importance increasing day by day in motor insurance the owners liability to compensate people who were killed or injured road through the negligence of the motorist or drivers is passed on to the insurance company. Personal accident insurance-it is a contract of insurance which provides an absolute protection against death or disability arising is solely and directly from accident caused by violent external and visible means. Fidelity guaranty insurance- it is a type of contract of insurance and also a contract to guarantee to which the general principles of insurance apply. Fidelity guaranty does not mean the guarantee of the employee's honesty. But it guarantees the employer for any damages or loss resulting from the employee's dishonesty or disloyalty.

Crop insurance- a contract to provide a measure of financial support to farmers in the event of crop failure due to draught or flood. Burglary insurance- the loss of damages of household goods and properties and personal effects due to theft, larceny, burglary, housebreaking are covered. Cattle insurance- a sum of money is secured to the steward in the event of death of animals like bulls, buffalos, cows etc. cash in transit insurance- it covers the insured against any loss in the event of money being stolen from his business premises while it is being carried from or to the bank.

General insurance establishment of general insurance Corporation of India (GIC) General insurance was nationalised by the passing of the general insurance business (nationalisation) act 1972. Owner and nationalisation