CHAPTER 1: INTRODUCTION TO RISK MANAGEMENT

Minh Phuc Nguyen, Division of Logistics and Supply Chain Management

School of International Economics and Business, Foreign Trade University
Risk
 Definition

 “Atits most general level, risk is used to describe any situation where there is
uncertainty about what outcome will occur.” (Gupta, 2009, p.3)

 “Riskis a condition in which there is a possibility of an adverse deviation

from a desired outcome that is expected or hoped for.” (Vaughan, Emmett J.,
and Therese Vaughan, 2007)
Risk
 One situation is riskier than another if it has greater:
 Expected losses;
 Uncertainty.

Risk is costly
 Risk is the reason, loss is the consequence
 Direct expected losses;
 Indirect expected losses.
Types of risk
 Business Risk and Personal Risk (Harrington and Niehaus, 2004)

 Possible reductions in business value from any source is considered business

risk

 Personal risk includes the risks faced by individuals and families

 Types of risk

Business Risk

Price Risk Credit Risk Pure Risk

Output Input price Damage to Legal

price risk risk assets liability

Exchange Interest Employee Worker

rate risk rate risk benefits injury

Commodity
price risk
Types of risk
Personal Risk

Earnings Medical Liability Physical Financial Longevity

expenses assets assets

Death Auto Auto Stocks

Disability Home Home Bonds

Aging Others Others

Unemployment
Types of risk
 Pure Risks and Speculative Risks (Gupta, 2009)
 Pure Risks: situations are those where there is a possibility of loss or no loss.
There is no gain to the individual or the organization
 Speculative Risks are those where there is a possibility of gain as well as
loss. The element of gain is inherent or structured in such a situation
Pure risks are generally insurable while speculative ones are not.
Types of risk

Pure Risk

Personal Risk Liability Risk Property Risk

Types of risk
 Personal risks: these are the risks that directly affect the individual’s
capabilities to earn income.
 Risk of premature death
 Risk of Insufficient income during retirement
 Risk of poor health
 Risk of unemployment
Types of risk
 Property risks are the risks to the person in possession of the property
being damaged or lost. The property includes immovables and
movables.
 Liability risks are the risks arising out of the intentional or unintentional
injury to the people or damages to their properties through negligence
or carelessness. Liability risks generally arise from the law.
Risk Management Process
1. Defining the
 Risk management is an objectives of 2. Identifying
the risk the risk
integrated process of management exposures
exercise
delineating specific areas
or risk, developing
comprehensive plan,
integrating the plan, and
conducting ongoing 5.
Implementation 3. Evaluating
the exposures
and review
evaluation.
4. Critical
analysis of risk
management
alternatives
and selecting
one of them
Risk Management Process
 Three elements Risk analysis

 Risk analysis
Risk identification Risk evaluation

Financial Check list method The probability of The severity of

statement method loss occurring loss occurring

On-site inspection Flow chart method

Contract analysis Interactions with

others

Statistical records
of losses
Risk Management Process
 Riskcontrol: risk control consists of those techniques that are designed to
minimize, at the least possible costs, those risks to which the organization is
exposed.
◼ In risk control, risks can be controlled by avoidance or by controlling losses.
 Risk financing: Risk financing, in contrast with risk control, consists of
those techniques that focus on arrangements designed to guarantee
the availability of funds to meet those losses that do occur.
◼ Risk financing includes:
◼ Retention and self-insurance
◼ Transfer – insurance and non insurance
Methods of Handling Pure Risks
 Avoidance: avoid the risks or circumstances which may lead to losses.
 Loss control
 Loss prevention: reduce loss frequency
 Loss reduction: lower loss severity

 Retention: to retain in full or part of the risk

 Transfer: to transfer the risk to another individual or organization.