THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF INSURANCE AND SOCIAL PROTECTION

DEPARTMENT OF INSURANCE

BACHELOR OF SCIENCE IN INSURANCE AND RISK

MANAGEMENT (BIRM)

YEAR II

ACADEMIC YEAR: 2022/2023

A PROJECT REPORT ON RISK MANAGEMENT IN INSURANCE

SECTOR

NAME:

REG. NO.:

SUPERVISOR:

SUBMISSION DATE:

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 DEDICATION
I dedicate this project report to my great and Lovely Mother..

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 ACKNOWLEDGEMENT
Special thanks to the Almighty God for the gift of life and for his everlasting love and
blessings towards the completion of this work.

This work would have not been possible through my own efforts if not for the assistance
from a number of committed individuals who were ready to offer their help whenever it
was needed.

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 TABLE OF CONTENTS
DEDICATION...........................................................................................................................I

ACKNOWLEDGEMENT......................................................................................................II

CHAPTER ONE:......................................................................................................................1

1.0 INTRODUCTION..............................................................................................................1

1.1 Traditional risk management versus Enterprise risk management...................................1

1.2. The Importance of Enterprise Risk Management in Insurance.......................................1

CHAPTER TWO......................................................................................................................6

ENTERPRISE RISK MANAGEMENT IN GENERAL......................................................6

2.1. Introduction.....................................................................................................................6

2.2. Three types of risk that insurance companies may face..................................................6

2.3. The risk management framework as explained by the COSO framework......................7

CHAPTER THREE..................................................................................................................9

RISK MANAGEMENT ANALYSIS......................................................................................9

3.1. Introduction.....................................................................................................................9

3.2. Three common risks that insurance companies Face......................................................9

3.3 three key steps insurance companies in Tanzania can adopt............................................9

3.4. Challenges that may hinder insurance companies.........................................................12

CHAPTER FOUR:.................................................................................................................14

CONCLUSION AND RECOMMENDATIONS.................................................................14

4.1. Conclusion.....................................................................................................................14

4.2. Recommendations.........................................................................................................14

REFERENCE.........................................................................................................................16

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 CHAPTER ONE:

1.0 INTRODUCTION
Risk management is the process of identifying, assessing, and prioritizing potential risks and
taking appropriate actions to minimize, monitor, and control those risks. It involves analyzing
potential events or situations that could negatively impact the achievement of goals or
objectives and implementing strategies to mitigate or reduce their potential impact. Risk
management aims to improve decision-making by minimizing uncertainties and maximizing
opportunities. It is a crucial aspect of various industries and sectors, including finance,
insurance, project management, cybersecurity, and healthcare, among others.

1.1 Traditional risk management versus Enterprise risk management

1.1.1 Traditional risk management refers to the process of identifying, assessing, and
mitigating risks in a standard and established manner. It involves the systematic approach of
understanding potential risks, analyzing their likelihood and impact, and implementing
strategies to prevent or minimize their potential negative effects on an organization or
project.

Traditional risk management typically follows a set of steps, including:

1. Risk Identification: Identifying and documenting potential risks that may arise during a
specific activity, project, or within an organization.

2. Risk Assessment: Evaluating the identified risks in terms of their potential impact and
likelihood of occurrence. This may involve quantitative or qualitative analysis.

3. Risk Response and Planning: Developing strategies to either avoid, transfer, mitigate, or
accept the identified risks. This may involve implementing preventative measures,
purchasing insurance, developing contingency plans, or allocating resources to minimize the
impact of the risks.

4. Risk Monitoring and Control: Continuously monitoring and reviewing the identified risks
to ensure that the implemented risk management strategies are effective. Adjustments may be
made as needed to address new risks or changes in existing risks. Traditional risk
management is often structured and formalized, with specific roles and responsibilities

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assigned to individuals or teams within an organization. It prioritizes the identification and
mitigation of risks that may impact the organization's objectives, financial stability,
reputation, and overall performance.

1.1.2 Enterprise risk management (ERM) is a strategic approach used by organizations to

identify and manage risks that can impact the achievement of their objectives. It involves the
systematic identification, assessment, and prioritization of risks, followed by the
implementation of effective risk mitigation strategies and continuous monitoring of risks.

ERM aims to provide a holistic view of an organization's risks, considering both internal and
external factors, to minimize potential losses and maximize opportunities. It involves a
comprehensive understanding of risks across various functional areas, such as operations,
finance, human resources, technology, and compliance.

The key components of ERM typically include:

1. Risk Identification: Identifying potential risks that could hinder the organization's ability to
achieve its objectives.

2. Risk Assessment: Assessing the potential impact of each identified risk and the likelihood
of its occurrence.

3. Risk Prioritization: Prioritizing risks based on their severity, probability, and potential
impact on the organization.

4. Risk Mitigation: Developing strategies and implementing controls to minimize the

identified risks.

5. Risk Monitoring: Continuously monitoring and evaluating the effectiveness of risk

mitigation strategies and making necessary adjustments.

6. Reporting and Communication: Regularly reporting risk-related information to

stakeholders and maintaining open communication channels regarding risks within the
organization.

ERM provides organizations with a framework to proactively manage risks, enhance

decision-making processes, improve operational efficiency, and strengthen resilience in the

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face of uncertainties. It helps organizations identify emerging risks, seize opportunities, and
ensure long-term sustainability.

1.1.3 The Difference between Traditional and Enterprise Risk Management

Traditional Risk Management:

1. Scope: Traditional risk management focuses on identifying and managing risks within
specific functional areas or projects within an organization.

2. Siloed Approach: It adopts a siloed approach, where risks are managed by individual
departments or business units without much coordination or integration.

3. Limited Perspective: Traditional risk management often focuses on operational and

financial risks, neglecting strategic and emerging risks.

4. Reactive: It is primarily reactive in nature, addressing risks as they arise rather than
proactively anticipating and planning for potential risks.

5. Compliance-driven: Traditional risk management is typically driven by regulatory

compliance requirements and aims to minimize legal and financial liability.

Enterprise Risk Management (ERM):

1. Holistic Approach: ERM adopts a holistic approach, considering the entire organization
and its environment to identify and manage risks.

2. Integrated Approach: It integrates risk management across all departments and business
units, promoting collaboration and communication.

3. Comprehensive Perspective: ERM considers a wide range of risks, including strategic,

operational, financial, and emerging risks, to provide a comprehensive view of potential
threats and opportunities.

4. Proactive: ERM takes a proactive stance, emphasizing risk assessment and planning to
prevent and mitigate risks before they occur.

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5. Value Creation: ERM focuses not only on risk mitigation but also on identifying
opportunities for value creation and competitive advantage through effective risk
management.

1.2. The Importance of Enterprise Risk Management in Insurance

Enterprise risk management (ERM) is of paramount importance in insurance companies as it
enables them to navigate the complex landscape of risks inherent in their operations. Here are
ten key points highlighting the significance of ERM in insurance companies:

Effective Risk Identification: ERM allows insurance companies to comprehensively identify

and analyze risks across various functional areas, such as underwriting, claims, investments,
and regulatory compliance. This holistic approach ensures that no critical risks are
overlooked.

Enhanced Risk Assessment: ERM facilitates a thorough assessment of risks by considering

their potential impact and likelihood. It enables insurers to prioritize risks, allocate resources
efficiently, and establish appropriate risk tolerance levels, enabling informed decision-
making.

Strategic Decision-making: ERM provides insurers with a structured framework to evaluate

risks associated with new business ventures, product development, market expansions, or
mergers and acquisitions. By aligning risk management strategies with the company's overall
objectives, ERM helps make informed strategic decisions.

Capital Optimization: ERM assists insurance companies in optimizing their capital allocation.
By identifying and quantifying risks, ERM ensures that adequate reserves are maintained to
cover potential losses while avoiding excessive capital tie-up.

Regulatory Compliance: Insurance companies operate in a highly regulated environment.

ERM helps them stay compliant with regulatory requirements by identifying and addressing
potential risks associated with regulations, laws, and guidelines.

Loss Prevention and Mitigation: ERM focuses on proactive risk management, enabling
insurance companies to identify potential risks and implement measures to prevent or
mitigate them. This approach reduces the frequency and severity of losses, protecting the
company's financial stability.

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Operational Efficiency: By integrating risk management into daily operations, ERM enhances
operational efficiency. It helps identify and address operational risks, streamlines processes,
and reduces inefficiencies, leading to cost savings and improved profitability.

Reputation Protection: Insurance companies rely heavily on their reputation for business
growth and customer retention. ERM helps safeguard their reputation by addressing risks
related to fraud, misconduct, data breaches, and customer dissatisfaction.

Stakeholder Confidence: ERM fosters stakeholder confidence by demonstrating a proactive

approach to risk management. It reassures investors, policyholders, regulators, and other
stakeholders that the company has robust risk management practices in place, enhancing trust
and credibility.

Competitive Advantage: Insurance companies with a robust ERM framework gain a

competitive edge in the market. By effectively managing risks, they can offer tailored
insurance products, attract high-quality customers, negotiate favorable reinsurance terms, and
adapt more successfully to market changes.

In conclusion, ERM is vital for insurance companies as it allows them to proactively identify,
assess, and mitigate risks across their operations. By integrating risk management practices
into their strategic decision-making, insurers can enhance their financial stability, regulatory
compliance, operational efficiency, and overall competitiveness in the market.

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 CHAPTER TWO

ENTERPRISE RISK MANAGEMENT IN GENERAL

2.1. Introduction
Chapter two talks about the three types of risk that insurance companies may face, and the
risk management framework as explained by the COSO framework with examples.

2.2. Three types of risk that insurance companies may face

Insurance companies face various types of risks within their operations, which can impact
their financial stability and profitability. Here are three significant types of risks commonly
encountered by insurance companies:

Political and Regulatory Risks: International insurance companies may face political and
regulatory risks that can impact their operations and profitability. These risks include changes
in government policies, regulations, or legal frameworks that can directly affect the insurance
industry. For example, governments may impose restrictions on foreign investment or change
regulations related to capital requirements, solvency standards, or customer protection.
Additionally, political instability, such as civil unrest or regime changes, can disrupt business
activities and contractual obligations. Insurance companies need to closely monitor the
political and regulatory environment in the countries they operate in to mitigate these risks.

Currency and Exchange Rate Risks: International insurance companies operate across
borders and deal in multiple currencies. Fluctuations in foreign exchange rates can have a
significant impact on their financial performance. Insurance companies may face risks related
to fluctuations in exchange rates when converting premiums received from one currency into
other currencies, as well as when paying out claims in different currencies. These risks can
lead to foreign exchange losses, affecting their profitability. Insurers may use techniques like
hedging to manage currency risks, but they still need to carefully monitor exchange rates to
avoid potential losses.

Catastrophic and Natural Disaster Risks: International insurance companies often provide
coverage for catastrophic events and natural disasters. However, their exposure to these risks
can be magnified when operating in multiple countries. The frequency and severity of natural

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disasters vary across regions, and insurance companies must carefully assess and manage
these risks. For example, regions prone to earthquakes, hurricanes, or floods present higher
risks, and insurers may need to account for potential losses and adequately price their policies
accordingly. Managing catastrophic risks requires advanced modeling techniques, sufficient
reinsurance coverage, and robust risk management practices to ensure the company's
financial stability and ability to pay out claims in the event of a large-scale disaster.

2.3. The risk management framework as explained by the COSO

framework

The COSO (Committee of Sponsoring Organizations) framework provides a comprehensive

risk management framework widely used by organizations to establish an effective and
integrated approach to risk management. The COSO framework consists of five interrelated
components that work together to form a solid risk management foundation. These
components are:

Internal Environment: The internal environment represents the organization's risk culture
and sets the tone for risk management throughout the organization. It encompasses the
organization's risk appetite, commitment to ethical values, integrity, and the overall
governance structure. A strong internal environment fosters a risk-aware culture and provides
the necessary support for effective risk management.

Objective Setting: Objective setting focuses on establishing clear and measurable

organizational objectives. This component ensures that objectives are aligned with the
organization's mission, vision, and strategic goals. By setting objectives, organizations define
what they aim to achieve and establish a basis for identifying and assessing risks that may
hinder the achievement of those objectives.

Event Identification: Event identification involves the systematic identification and

assessment of risks that may affect the organization's objectives. It requires a comprehensive
understanding of internal and external events that could impact the organization. This
component involves techniques such as brainstorming, risk assessments, and scenario
analysis to identify and evaluate risks across various areas of the organization.

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Risk Assessment: Risk assessment involves the analysis and evaluation of identified risks to
determine their potential impact and likelihood of occurrence. This component enables
organizations to prioritize risks based on their significance and establish risk response
strategies. Risk assessment involves considering both inherent and residual risks, taking into
account the effectiveness of existing control measures.

Risk Response: Risk response focuses on developing and implementing appropriate

strategies to manage risks effectively. This component involves selecting risk responses, such
as avoiding, accepting, reducing, or sharing risks. Organizations develop risk mitigation
plans, implement internal controls, and establish monitoring mechanisms to ensure the
effectiveness of risk response strategies.

These five components of the COSO framework are supported by ongoing monitoring
activities that assess the effectiveness of the risk management process. Monitoring activities
involve regular reviews, evaluations, and communication of risk-related information. They
help ensure that risks are continuously monitored, and any necessary adjustments to the risk
management process are made promptly.

The COSO framework provides guidance for organizations to develop and implement a
robust risk management framework. By integrating these components into their operations,
organizations can enhance their ability to identify, assess, and respond to risks effectively,
ultimately improving overall performance and achieving their objectives.

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 CHAPTER THREE

RISK MANAGEMENT ANALYSIS

3.1. Introduction
Chapter three of the project talks about the nature of risks Facing insurance companies in
Tanzania, identify 3 steps insurance companies can adopt and challenges that hinder
insurance companies in Tanzania.

3.2. Three common risks that insurance companies Face

Insurance companies in Tanzania face various risks that can impact their operations and
financial stability. Here are three common risks specific to the insurance industry in
Tanzania:

Underwriting Risk: Insurance companies face the risk of underwriting loss due to factors
such as inaccurate assessment of risks, underpricing of policies, or inadequate reserves. In
Tanzania, this risk may be higher due to challenges in gathering accurate data on insured
properties or individuals, limited actuarial expertise, and a lack of historical claims data.
Additionally, fraudulent claims may further contribute to underwriting risk. To mitigate this
risk, insurance companies need to enhance their underwriting and risk assessment processes,
invest in adequate training for underwriters, and implement robust fraud detection measures.

Investment Risk: Insurance companies typically invest the premiums received from
policyholders to generate returns and meet future policy obligations. However, in Tanzania,
insurance companies face several investment risks due to economic and regulatory factors.
These include limited investment opportunities, high inflation rates, currency fluctuations,
political instability, and a weak financial market. These risks can lead to lower investment
returns, impairments to investment portfolios, and liquidity challenges. Insurance companies
can mitigate investment risk by diversifying their investment portfolios, adopting prudent
investment strategies, and continuously monitoring the economic and regulatory
environment.

Regulatory and Compliance Risk: Insurance companies in Tanzania face regulatory and
compliance risks due to the complex and evolving regulatory framework. This includes

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compliance with capital adequacy requirements, solvency standards, reporting obligations,
and consumer protection regulations. Failure to comply with these regulations can lead to
penalties, reputational damage, and even license revocation. Insurance companies need to
invest in robust compliance frameworks, monitor and adapt to changes in regulations, and
establish internal controls to ensure compliance. Additionally, maintaining strong
relationships with regulatory bodies and participating in industry associations can help to stay
updated on regulatory developments and best practices.

3.3 three key steps insurance companies in Tanzania can adopt

Insurance companies in Tanzania can adopt the following three key steps to enhance their
operations and mitigate risks:

Digitization and automation: Insurance companies in Tanzania can adopt digitization and
automation to streamline their operations and improve efficiency. This includes
implementing digital platforms and online portals to allow customers to purchase and manage
policies, submit claims, and access information easily. By digitizing their processes,
insurance companies can reduce paperwork, minimize errors, and provide faster and more
convenient services to their customers.

Digitization and automation can help insurance companies in Tanzania shift from traditional
manual processes to digital systems. By investing in robust technology solutions, such as
customer relationship management (CRM) systems and policy administration systems,
insurance companies can automate various processes such as policy issuance, premium
calculations, and claims management. This will not only reduce manual errors but also
enhance overall productivity and customer satisfaction.

By offering online portals and mobile applications, insurance companies can make it easier
for customers to access and manage their policies, submit and track claims, and receive
instant updates. Furthermore, digitization also enables insurance companies to collect and
analyze data, leading to better risk assessment, personalized products, and improved
customer-centric approaches.

Product customization: Insurance companies in Tanzania can adopt product customization

to meet the specific needs and preferences of their customers. This involves offering tailored
insurance solutions that cater to different customer segments and industries. By

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understanding customer requirements and risk profiles, insurance companies can design
unique policy features, coverage options, and pricing structures.

Tanzania has a diverse market with various sectors and industries, each having unique risks
and insurance needs. By offering customized products, insurance companies can provide
more relevant and comprehensive coverage to customers. For example, a farmer may require
crop insurance that protects against specific agricultural risks, while a manufacturing
company may need bespoke coverage for its specialized machinery. By focusing on product
customization, insurance companies can develop strong customer relationships, enhance
loyalty, and differentiate themselves from competitors. Customized products also enable
insurance companies to adequately assess risks and price policies accordingly, minimizing
the chances of under-insurance or over-insurance.

Use of alternative distribution channels: Insurance companies in Tanzania can adopt

alternative distribution channels to reach a broader customer base and increase market
penetration. This includes partnering with various entities, such as banks, micro finance
institutions, retail chains, and mobile network operators, to offer insurance products through
their existing distribution networks.

In Tanzania, insurance penetration remains relatively low, and one key reason is limited
access to insurance services. By leveraging alternative distribution channels, insurance
companies can reach untapped customer segments and facilitate easier access to insurance
products. For instance, partnering with banks can enable insurance companies to offer
insurance products as add-ons to banking services or disburse insurance claims through bank
accounts.

Similarly, collaborating with mobile network operators can allow insurance companies to
provide micro-insurance products that can be purchased and managed through mobile
platforms. This not only expands the customer base but also increases convenience and
affordability, particularly for individuals in remote areas or with limited access to traditional
insurance channels.

Overall, adopting digitization and automation, product customization, and alternative

distribution channels are key steps that insurance companies in Tanzania can take to

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strengthen their operations, provide better customer experiences, and drive growth in a
rapidly evolving market.

3.4. Challenges that may hinder insurance companies

1. Regulatory changes: Insurance companies face the challenge of constantly adapting to
changing governmental regulations and compliance requirements. These changes can impact
the way insurance policies are offered, sold, and serviced.

2. Technological advancements: With the rise of digital technologies, insurance companies

need to continually invest in technology and innovation to remain competitive. This includes
upgrading legacy systems, implementing new software solutions, and addressing issues
related to data security and privacy.

3. Evolving customer expectations: Consumer behaviors and expectations are changing

rapidly, driven by factors such as online shopping, mobile apps, and personalized
experiences. Insurance companies face the challenge of keeping up with these expectations
and providing seamless digital experiences while also maintaining their traditional methods
of customer service.

4. Growing competition: The insurance industry has become highly competitive, with the
entry of several new players such as insurtech startups. This puts pressure on established
companies to innovate, develop new products, and provide competitive pricing to retain their
market share.

5. Fraud and risk management: Insurance companies contend with fraudsters who may
attempt to submit false claims or engage in other fraudulent activities. Detecting and
managing these risks requires advanced analytics and sophisticated fraud prevention
techniques.

6. Aging workforce: The insurance industry is facing a talent gap as many experienced
professionals retire, leaving a shortage of skilled workers. Attracting and retaining young
talent, especially in specialized areas such as data analytics or technology, presents a
challenge for insurance companies.

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7. Economic instability: Economic fluctuations and uncertainties can impact insurance
companies' profitability and investment portfolios. Insurance companies need to continually
monitor and manage their risks to ensure their financial stability.

8. Increasing medical costs: In the healthcare insurance sector, rising medical costs and a
growing aging population make it challenging for insurance companies to provide affordable
coverage and maintain profitability.

9. Natural disasters: Insurance companies face challenges in managing the financial impact of
natural disasters such as hurricanes, floods, and earthquakes. These events can lead to a surge
in claims, reinsurance costs, and overall financial instability for the company.

10. Cybersecurity threats: Insurance companies handle and store a significant amount of
sensitive customer data, making them an attractive target for cybercriminals. Protecting
customer data and preventing cyber attacks are crucial challenges for insurance companies
today.

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 CHAPTER FOUR:

CONCLUSION AND RECOMMENDATIONS

4.1. Conclusion
Risk is inescapable, meaning the Insurance sector must do everything in their power to
mitigate it. Risk management is a challenge that many companies struggle to rise to. Meeting
this challenge demands a clear understanding of the different types of Enterprise risk to look
for and the technologies that will help you overcome them. Although it might seem simple on
its face, this process requires companies to expend a significant amount of resources,
financially and otherwise. Therefore, the best way to conserve resources and achieve
compliance that much faster is to automate compliance risk management.

To combat the most visible risk of fraud, regulators have implemented more stringent rules,
and Financial organizations must be prepared to meet the growing compliance demand these
demands will not be easily met with manual methods. Adapting your manual processes, tools,
and strategy with automation is not an easy or necessarily quick process.

The following are the recommendations

4.2. Recommendations
Recommendations to Insurance:

The good news is that although cyberattacks have become more sophisticated, so, too, has
the technology used to combat them. Insurance can now use artificial intelligence to
perform rapid pattern recognition analytics across millions of questionable activities and
filter out much of the noise. This technology can also be used to automate essential
cybersecurity tasks,.

Just as AI helps prevent cybersecurity breaches and false positives, it can also help with
fraud and identity theft. Using AI, Insurance have the ability to detect potential incidents of

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fraud and identity theft to a far more refined degree than ever before. This has the dual
benefit of preventing customers from experiencing the nightmare that is identity theft, as
well as eliminating false positives. Again, this process can be automated, which streamlines
security efforts and comes at a huge cost savings to insurance. Similarly, AI and
automation can be used in conjunction to quickly detect and shut down instances of fraud,
thereby protecting insurance from financial exposure and reputational risk.

Another key way insurance can save money is by utilizing cloud technology. Cloud
computing can introduce efficiencies that lead to substantial cost savings, such as
leveraging powerful analytics to cut costs on marketing and time to market for new
products.

The most efficient way to get started is for insurance to refresh their existing offerings and
rejuvenate their portals in order to meet rising customer expectations. From there, it’s in a n
insurance company’s best interest to partner with a consulting firm and systems integrator
that can introduce new technologies that will enable it to meet different challenges and
evolve its business.

Recommendations to IFM Students

IFM students should learn diligently on matters concerning the insurance company so that
they can be able to solve any major problems presented. Risk management is a very major
issue in Insurance matters and many financial institutions, and so if IFM students plan to
become better professionals they should learn more about it.

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REFERENCE

Hubbard, Douglas (2009). The Failure of Risk Management: Why It's Broken and How to Fix
It. John Wiley & Sons. p. 46.

ISO/IEC Guide 73:2009 (2009). Risk management — Vocabulary. International Organization

for Standardization.

ISO/DIS 31000 (2018). Risk management — Principles and guidelines on implementation.

International Organization for Standardization.

ISO 31000:2018 - Risk management - A Practical Guide (1 ed.). ISO, UNIDO. 2021. ISBN
978-92-67-11233-6. Retrieved 17 December 2021.

"Risk Manager" Society for Human Resource Management

"What Are Risk Analysts & Risk Managers?", CFA Institute

Dionne, Georges (2013). "Risk Management: History, Definition, and Critique: Risk
Management". Risk Management and Insurance Review. 16 (2): 147–166.
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"The ascent of risk". www.pmi.org. Retrieved 2021-12-13.

"Target fixation in risk management. Arguments for the bright side of risk". Stefan Morcov.
2021. Retrieved 2021-12-13.

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Morcov, Stefan (2021). Managing Positive and Negative Complexity: Design and Validation
of an IT Project Complexity Management Framework. KU Leuven University. Available at
https://lirias.kuleuven.be/retrieve/637007

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