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RISK ANALYSIS AND MANAGEMENT

Mugher Cement Enterprise


MERGA MEKURIA
&
BARSISA KACHO

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RISK ANALYSIS AND MANAGEMENT

OBJECTIVES OF THE TRAINING


 Up on completion of the training,
trainees will;
 Understand the concept of risk
 Explain the various forms and sources of
risk
 Recognize risks related to cement
industries
 Explain the risk management process
 Analyze the risk management process
 Apply the risk management process

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RISK ANALYSIS AND MANAGEMENT

Guiding questions

What is Risk Management?

Who uses Risk Management?

How is Risk Management used?

Risk Management in cement enterprise


Next
Mouse ‘Click’ to move on to the next slide
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RISK ANALYSIS AND MANAGEMENT

Introduction
People undertake business activities with
the main objective of making profit.
As there is a chance to get profit, there is
also a possibility of loss due to one of the
essential characteristics of a business in that
it involves an element of
 risk.
Risk exist because there is no perfect foresight about
the future.

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RISK ANALYSIS AND MANAGEMENT

INTRODUCTION
 Risk is undesirable and its consequences are at times damaging
to
individuals,

 businesses and
 the society as a whole,
 mankind is constantly developing its predictive ability through
the constant upgrading and refinement of its knowledge.
 The more mankind is knowledgeable about the future,
 the more certain it will be concerning future events.
 But the disappointing phenomenon is that perfect foresight
about the future is something impossible.
 Thus, risk becomes a fact of life that will remain side by side with
the activities of mankind.

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INTRODUCTION
 These and related facts, thus, call for the need for sound
risk management in firms.
 There is a need to identity possible risks.
 There is a necessity to device and employ preventive
measures.
 To manage risk, it is imperative to anticipate the possible
consequences of our actions.
 As such, this training manual discusses
 the nature of risk,
 its identification,
 measurement and
 management processes in general and in cement factories in
particular.

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RISK ANALYSIS AND MANAGEMENT

RISK AND RELATED CONCEPTS


 Risk Defined
 No comprehensive definition exists so far.
 It is defined in different forms by several authors with some
differences in the wordings used.
 The essence, however, is very similar.
 In general, risk refers to exposure to adverse consequences.
 Some definitions are as forwarded to you below:
 is a possibility of an adverse deviation from a desired outcome
that is expected.
 is the possibility that something we don't want to happen will
happen or that something we want to happen will fail to do so.
 is the variation in outcome that could occur over a specified
period in a given situation.

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RISK ANALYSIS AND MANAGEMENT

RISK AND RELATED CONCEPTS


 For example,
 in a manufacturing organization, there may be a reliance
on a critical component produced by a third party
without which the product cannot be manufactured.
 Unavailability of this component would severely disrupt,
if not stop the business process.

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RISK ANALYSIS AND MANAGEMENT

Activity
 In group of five
 Take 10 minutes to discuss
 What types of risk are there associated with cement
manufacturing?

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RISK AND RELATED CONCEPTS


 Sources of risk
 Sources of risk are the sources of factors or hazards that
may contribute to positive or negative outcomes.
 It can be classified in different ways.
 Authorities classify sources of risk in various ways.
 Some identify general sources while others become
more specific.
 how the environment in which the firm operates can
become source of risk ?

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RISK AND RELATED CONCEPTS


Sources of risk
 Environment as a source of risk
 Physical Environment
 Social Environment

 Political Environment

 Legal Environment

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RISK AND RELATED CONCEPTS


 Physical environment
 This source of risk emanates from our ability to fully
understand our environment and the effect we have on
it as well as those that have on us.
 Examples of physical environment
 Earthquakes,
 drought, or excessive rainfall can all lead to accidental
losses.

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RISK ANDEnvironment
 Social RELATED CONCEPTS
 This relates to changing morals and values, human
behavior, social structures and institutions, etc.
 A social environment is a reflection of cultural,
religious, and moral values of people. As these values
differ significantly, the social environment in
different areas differs.
 For example comparison of a social environment in
Addis and Nairobi may reveal that Addis is less risk
y than Nairobi.
 Note that social environment also includes the
working habit of people.
 A social environment, which is reflected by cultural,13
RISK ANALYSIS AND MANAGEMENT

RISK AND RELATED CONCEPTS


 Political environment
 A change in government or a change in its
composition may bring with it new policy directions
that might have dramatic effects on a firm’s operation.
 For instance, if one government in a country changes
to a very hostile government that fails to recognize the
rights of people, business people could find
themselves in risky situations.
 Moreover, when a country is in a political upheaval or
when the government lacks credibility, political
environment can be a source of risk.
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RISK ANALYSIS AND MANAGEMENT

RISK AND RELATED CONCEPTS


 Political environment
 In the international realm, the political environment is
even more complex
 Some countries might confiscate foreign business
people’s assets or may change their policies, in a way that
impedes their operations.
 You may remember what the Eritrean government did to
Ethiopian business people during Ethio-Eritrea conflict.
 This is a good example of politically motivated risk.
 In fact one can see how the Djibouti government creates
problems by changing port related policies overnight.
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RISK AND RELATED CONCEPTS


 Legal environment
 A great deal of uncertainty and risk might arise from the
legal system as it evolves new standards that may not be
fully anticipated.
 The lease policy,
 the investment codes and
 the general policy of an economy concerning
 businesses have a big impact on the economy and
unexpected unfavorable changes would mean a lot in
terms of causing risks.
 This complexity increases in the international domain as
legal standards may vary from country to country. 16
RISK ANALYSIS AND MANAGEMENT

Activity
In group of five
Take 10 minutes to discuss
What do you think is the effect of land lease policy
that was recently formulated on cement market?

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RISK AND RELATED CONCEPTS


 Related concepts to risk are the following;
 Uncertainty
 Probability
 Peril
 Hazard

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Risk versus Uncertainty


 People often confuse the terms risk and uncertainty.
The terms are distinct concepts.
 Uncertainty
 Is the doubt a person has concerning his or her ability to
predict which of the many outcomes will occur?
 Is a person’s conscious awareness of the risk in a given
situation
 Depends upon the person’s estimated risk-what that
person believes to be the state of the world-and the
confidence he or she has in this belief.
 Exists only with awareness;
 it is a state of mind whereby a sentient entity experience19
RISK ANALYSIS AND MANAGEMENT

Risk versus Uncertainty


 Some authors argue that
 risk may cause uncertainty.
 Thus, the relationship between risk and uncertainty is
established in terms of cause and effect.
 They state that “knowledge of the existence of risk and
appreciation of its significance creates a feeling of
uncertainty.
 Risk, when we are aware of it, cause uncertainty.” Unlike
probability & risk, uncertainty cannot be measured by
any commonly accepted yardstick.
 In general uncertainty results in a feeling of insecurity.
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Decision making techniques under uncertainty


 Maximax
 Maximin
 Laplace
 Criterion of realism
 Regret criterion

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Risk versus Uncertainty


 Some authors differentiates risk and uncertainty in
such a way that
 risk involves assigning the true theoretical or estimated
probabilities to the possible outcomes;
 where as in the case of uncertainty it is difficult to
estimate and assign probabilities.
 Thus, risk is understood as a situation where the
probability distribution of possible future events is
known,
 whereas such is not the case under uncertainty.

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Risk versus Uncertainty


 Example:
 The risk of cigarette smoking existed the moment
cigarettes are produced.
 However, uncertainty did not arise until the relationship
between cigarette smoking and cancer is established
through scientific and empirical research.
 Hence, risk is the state of the world while uncertainty is
the state of mind.

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Risk versus Probability


 There exists also some confusion as to the difference
between risk and probability.
 Probability is the long-run chance of occurrence or
relative frequency of some event;
 whereas risk is the relative variation of actual loss from
expected loss.
 Probabilities are generally assigned to events that are
expected to happen in the future.

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Risk versus Probability


 Thus to each possible event is assigned a corresponding
probability of occurrence that leads to probability
distribution.
 This means that probability relates to a single possible
event.
 Risk, on the other hand, refers to the variation in the
possible outcomes.
 This means that risk depends on the entire probability
distribution.
 It indicates the concept of variability.
 Risk and probability are, therefore, two different things.
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Risk Example:
versus Probability
Consider the occurrence of a particular
event.
 One extreme is that the event is certain to take
place.100% but there is no risk (risk=0) because
there is a perfect foresight as to the occurrence of the
event in this regard.
 The other extreme is the event will not take place at
all (0) . Here, too, there is certainty and, therefore,
no risk.
 In between these two extremes there could be several
occurrences of the events with the corresponding
probabilities of occurrence.
 This puts us in a situation of uncertainty because it is
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RISK ANALYSIS AND MANAGEMENT

Risk, Peril and Hazards


 Peril
 Peril refers to the specific cause of a loss.
 It is the prime cause or what will give rise to the loss.
 e.g. fire, windstorm, theft, flood, explosion, collusion,
etc
 Hazards
 refer to the condition that may create or increase the
chance of loss arising from a given peril.
 affects the magnitude (severity) and frequency of a loss.
 increase the effect should a peril operate.
 The more hazardous conditions are, the higher the 27
RISK ANALYSIS AND MANAGEMENT

Risk, Peril categories


 Three and Hazards
of hazards are identified:
 Physical hazard
 This is associated with the physical properties
of the items exposed to risk. Conditions
stemming from the physical characteristics of
an object.
 Examples may include:
 Type of construction (wood, bricks)
 Location of property (near burglar area, flood area,
earthquake area).
 Occupancy of building (dry cleaning, chemicals,
supermarkets)
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 Existence of dry forest-for fire
RISK ANALYSIS AND MANAGEMENT

Risk, Peril and


 Moral Hazards
Hazard:
 Originates from evil tendencies in the character of
the insured person.
 is associated with human nature: qualities,
reputation, attitude, etc.
 Stems from dishonesty or character defects of an
individual that increases the probability as well as
the severity of loss.
 Examples may include:
 Faking an accident to collect insurance money.
 Submitting a fraudulent claim.
 Inflating (exaggerating) the size of a claim.
 Intentionally burning unsold merchandise that is 29
RISK ANALYSIS AND MANAGEMENT

Risk, Peril and


 Morale Hazards
Hazard
 It does not involve dishonesty but it occurs due to
lack of concern for events.
 Carelessness or indifference to a loss because of the
existence of insurance.
 This type of individual does not appear to
deliberately cause the accident that happen
 Examples may include:
 Leaving key in an unlocked
 Leaving a door unlocked
 Poor housekeeping in stores
 Cigarette smoking around petrol station.
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RISK ANALYSIS AND MANAGEMENT

Hazards in cement industries and their sources


 Risks in cement factories emanate from the processes
involved in
 the production and
 distribution of cement products and
 Generally speaking, there are three major processes of
manufacturing cement such as;
 Quarrying
 Crushing and
 Storage and material transportation systems

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Hazards in cement industries and their sources


Associated with each of the above
mentioned processes, there are factors that
are likely to increase
 the severity as well as
 the chances of occurrences of risk in
cement industries.
For fast conceptualization of how this
works,
 let us look at the flow chart diagram of the32
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Hazards in cement industries and their sources


 Cement manufacture process flow

Quarrying Crushing

Storage and
transportation

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Quarrying
 The quarrying activity includes
 the drilling of bore holes,
 the filling up of explosives and
 the triggering of the explosives.
 Once this happens then the material is loaded and
transported either to open storage piles or to the
crushing area.
 During the process of charging and ignition, the
explosives are transported to the explosion area from
the explosive storage facilities.
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Hazards as a result of the storage , transport and use of explosives


 The explosives are stored only in approved
sites that have to comply with the
requirements of relevant legislation.
 During explosives storage the main hazards
are the following:
 Storing explosives and capsules in the
same area
 Entry of unauthorized persons in the area
 Smoking or use of naked flame in the 35
RISK ANALYSIS AND MANAGEMENT

 Storage
Hazards of other
as a result of the goods
storage,and equipment
transport and use of explosives
 Bad housekeeping in and out of the warehouse.
 Inadequate distance (<10cm) between the containers
and the warehouse wall
 Insufficient building maintenance (lighting,
ventilation) with the possibility of concentration of
humidity in the warehouse
 Execution of non-approved maintenance work on the
warehouse electrical wiring.
 Insufficient warehouse security
 Not following the FIFO (First In First Out) in the
management of explosive stocks 36
RISK ANALYSIS AND MANAGEMENT

Hazards during the transport of the explosives are:


 The use of unauthorized vehicles
 The transport of explosives together with
capsule as well as not keeping the necessary
labeling during transport
 The carrying of passengers
 The unplanned stoppage
 The transport of explosives during unstable
weather
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RISK ANALYSIS AND MANAGEMENT

Hazards
 Theduring
failure the use of explosives
to implement are: rules and
the company
regulations
 The use of unauthorized explosives
 The failure to use the approved explosion plan
 The failure to prevent unauthorized person to
approach the explosives area
 The transport of more than required explosives
quantity
 The temporary storage of explosives at excessive
temperatures (greater than 65 degrees Celsius) or
near naked flame 38
RISK ANALYSIS AND MANAGEMENT

Hazards during thethe


 During use filling
of explosives
up andare: triggering the
explosives the main hazards are:
 The triggering of the explosives by
unauthorized personnel or outside the
agreed timetable
 The insufficient warning prior to
triggering
 The approach of other persons other
than the person in charge near the
explosion area following the triggering 39
RISK ANALYSIS AND MANAGEMENT

Hazards during
 During the the
boreBore holing
holing process
process the basic
hazards are:
 The moving parts of the bore holing
machinery Falls from height
 Material falling from height
 Crushing of quarry table
 Hurling of material
 Presence of dust and noise
 Movement of earth moving equipment
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RISK ANALYSIS AND MANAGEMENT

Crushing Hazards
 The rotational movement and the movement of the
parts of the crusher
 The exposure to noise and dust of the personnel
responsible for the continuous control of the
crusher
 The maintenance activities inside the crushing
chamber
 The electrical problems
 The activities inside the hopper due to:
 The operation of the feeder
 The possible crushing of material 41
RISK ANALYSIS AND MANAGEMENT

Crushing Hazards

 The movement of heavy goods vehicles:


 Reversing of the vehicle into the hopper
 Accident on personnel
 The inappropriate loading of material
onto the heavy goods vehicles with the
result that
 material is hurled from the vehicle as
the material is transported. 42
RISK ANALYSIS AND MANAGEMENT

Storage and material transportation systems


 The main hazards during the transportation
and storing of material are:
 The airborne dust created during the storage
of material
 The conveyor belts during their normal
operation as well as during their
maintenance F:\risk1\TRAINIG MANUAL
FOR RISK MANAGEMENT IN CEMENT
INDUSTRY2.doc
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RISK ANALYSIS AND MANAGEMENT

Objective VsRisk
 Objective Subjective Risk
 The relative variation of actual from probable or
expected loss.
 Refers to the variation that exists in nature
 is the same for all persons facing the same situation.
 Is concerned with the range of variability of economic
losses about some long-run average (most probable) loss
in a group large enough to analyze significantly in a
statistical sense.
 Objective Risk = Probable variation of actual
loss
Probable losses
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Example
 Consider the probability of fire losses to buildings
in two towns A and B.
 There are 100,000 buildings in each town and, on
average each town has 100 fire losses per year.
 By looking at historical data from the towns,
statisticians are able to estimate that in town A, the
actual number of fire losses during the next year
will very likely, range from 95 to 105. In town B,
however, the range probably will be greater, with at
least 80 fire losses expected and possible as many
as 120.
 Objective risk A = 105-95 = 10%
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 100
RISK ANALYSIS AND MANAGEMENT

Subjective Risk of
 The estimate the objective risk which depends
on the person’s psychological belief is the
subjective risk.
 Psychological uncertainty that stems from the
individual’s mental attitude or state of mind.
 May be measured by means of different
psychological tests but no widely accepted or
uniform tests of proven reliability have been
developed.
 The impact of subjective risk varies depending on
the individual.
 Subjective risk may affect a decision when the
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Pure Vs Speculative Risks


 The distinction primarily rest on profit/loss structure of
the underlying situations, in which the events occur.
 Pure risks
 refer to the situation in which only a loss or no loss would
occur.
 There is only two distinct outcomes loss or no loss.
 Most pure risks are insurable.
 They are always undesirable and hence people take steps
to avoid such risks. These risks have no element of gain
 Risk of motor accident
 Risk of fire at a factory
 Theft of goods from a store
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RISK ANALYSIS AND MANAGEMENT

Classification of pure risks


 Personal Risk
 Are risks that directly affect an individual
 Refers to the possibility of loss to a person such as: death,
disability, loss of earning power, etc…
 Involve the possibility of the complete loss or reduction of
earned income, extra expenses, and the depletion of financial
assets.
 Property Risk
 Refers to losses associated with ownership of a property, such
as destruction of property by fire.
 Persons owning property are exposed to the risk of having
their property damaged or lost from numerous causes
 Property risk stems from diverse perils accompanied by48
RISK ANALYSIS AND MANAGEMENT

Cont’d
 Liability risk
 Is the possibility of loss arising from intentional or
unintentional damage made to other persons or to
their property.
 Speculative Risk
 can result in three possible outcomes, loss,
breakeven, or gain situations.
 People may deliberately create speculative risks when
they realize that the favorable (gain) outcome is,
indeed, so promising. Examples may include;
 Investing in a venture
 Gambling transaction
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RISK ANALYSIS AND MANAGEMENT

Static Vs Dynamic
 Dynamic Risks Risks
 Originate from changes in the overall economy such
as price level change, changes in consumer tastes,
income distribution, technological changes, political
changes.
 Are less predictable and hence beyond the control of
the risk manager.
 Static Risks
 Are losses arising from causes other than changes in
the economy.
 Are predictable and could be controlled to some
extent by taking loss prevention measures.
 Many of the perils fall under this category. 50
RISK ANALYSIS AND MANAGEMENT

Fundamental Vs Risk
 Fundamental Particular Risks
 It is impersonal in origin and widespread in effect.
 affect the entire society or a larger segment of the
population, which are usually, beyond the control of
individuals.
 The responsibility for tackling these risks is,
therefore, left to the society itself.
 They are generally uninsurable. Example include:
 Earthquakes,

 Floods,

 Famine,

 Volcanoes,
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 Inflation
RISK ANALYSIS AND MANAGEMENT

Particular Risks
 affect each individual separately.
 arise from individual causes and affect
individuals in their consequences.
 are dealt with by purchasing insurance
policies and other techniques. Examples
include:
 Fire,
 Theft,
 Work related injury,
 Motor accidents,
 Property losses,
 Death, 52
RISK ANALYSIS AND MANAGEMENT

Risks Related
 Most risks intobusiness
Business Activities
environment are speculative
in nature. The finance literature considers four
such types of risks
 Business Risk
 is associated with the physical operation of the
firm.
 Variations in the level of
 sales,
 costs,
 profits are likely to occur due to a number of factors
inherent in the economic environment.
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RISK ANALYSIS AND MANAGEMENT

Risks RelatedRisk
 Financial to Business Activities
 This is associated with debt financing.
 Borrowing results in the payment of periodic interest
charge and the payment of the principal upon maturity.
 There is a risk of default by the company if operations are
not profitable.
 Other financial risks include: bankruptcy, stock price
decline, and insolvency.
 Interest Rate Risk
 This is a risk resulting from changes in interest rates.
 Changes in interest rates affect the prices of financial
securities such as the prices of bonds etc. for interest rate
rise depresses bond prices and vice versa. 54
RISK ANALYSIS AND MANAGEMENT

Risks Related to Business Activities


 Purchasing Power Risk
 Arises under inflationary situations
(general price rise of goods and services)
 leading to decline in the purchasing
power of the asset held.
 Financial assets lose purchasing power if
increased inflationary tendencies prevail
in the economy.
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RISK ANALYSIS AND MANAGEMENT

Burden of Risk on Society


 The presence of risk results in certain undesirable
 social and
 economic effects:
 How
 The size of emergency funds may be increased
 Deterrent effect on capital accumulation
 Society is deprived of certain goods and services
 Higher cost of capital
 Worry and fear are present
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RISK ANALYSIS AND MANAGEMENT

Beneficial Functions of Risk


 Risk enables wealth to be created.
 It does so in a number of ways:
 It creates the hope for profit
 It encourages a safety culture.

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END OF PART ONE

THANK YOU FOR YOUR


ATTENTION
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RISK ANALYSIS AND MANAGEMENT

PART II- RISK MANAGEMENT PROCESS


What is risk management?
What are the major steps in risk
management?

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Risk management defined


Risk management is a general management function
that seeks to assess and address the
 causes and
 effects of uncertainty and risk on an organization.
 Risk management is the
 identification,
 measurement and
 treatment
 of exposure to potential accidental losses almost
always in situation where the only possible outcomes
are losses or no change in the status.
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RISK ANALYSIS AND MANAGEMENT

RISK MANAGEMENT
 Risk management PROCESS
 is the systematic process for the identification
and evaluation of pure loss exposures faced by
an organization or individual and for the
selection and implementation of the most
appropriate techniques for treating such
exposures.
 is a discipline that systematically identifies and
analyses the various loss exposures faced by a
firm or organization and the best methods of
treating the loss exposures consistent with the
organization’s goals and objectives. 61
RISK ANALYSIS AND MANAGEMENT

RISK MANAGEMENT PROCESS


 Risk Management practices are widely used in public
and the private sectors, covering a wide range of
activities or operations.
 These include:
 Finance and Investment
 Insurance
 Health Care
 Public Institutions
 Governments
 Risk Management is now an integral part of business
planning. 62
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The Risk Management process steps are a generic guide for any organization,

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Functions of Risk Management


 From the above definition one can infer that, there are
certain duties left for the risk manager of an
organization. These include:
 To recognize exposures to loss:
 The risk manager must first of all be aware of the
possibility of type of loss.
 This is a fundamental duty which must precede all other
function of risk management.
 To estimate the frequency and size (severity) of
loss;
 Once the possible type of loss is identified, the risk
64
manager has to estimate the probability of loss from
RISK ANALYSIS AND MANAGEMENT

Risk matrix

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RISK ANALYSIS AND MANAGEMENT

Functions of Risk
 To decide theManagement
best and most economical
method of handling the risk of loss
 Whether it be by assumption (retention),
avoidance, self-insurance, reduction of
hazards, transfer, commercial insurance, or
some combination of these methods.
 To administer the programs of risk
management
 Important, but often overlooked function of
risk management is the duty of constantly
tracking and revaluating of the programs,
record keeping & the like. 66
RISK ANALYSIS AND MANAGEMENT

Activity
In a group of five trainees
Take 10 minutes
Discuss to what extent the above
mentioned risk management process
A) Exist
B) Implemented
C) Contribute
Towards the success of your enterprise
goals 67
RISK ANALYSIS AND MANAGEMENT

Risk management matrix

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RISK ANALYSIS AND MANAGEMENT

Objectives of Risk Management


 Risk management has several important
objectives
 Mere survival,
 peace of mind,
 lower risk management costs and hence
 Higher profits,
 Fairly stable earnings,
 Little or no interruption of operation,
 Continued growth,
 Satisfaction of the firm’s sense of social
69
RISK ANALYSIS AND MANAGEMENT

Objectives
Theseofobjectives
Risk Management
of risk management can
be classified as pre-loss and post-loss.
 Pre-loss objectives: - are objectives to
be achieved prior to the occurrence of
any loss. They include:
 Handle potential losses in the most
economical way possible
 Reduction of anxiety and fear associated
with all loss exposures.
 Meeting externally imposed obligations
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RISK ANALYSIS AND MANAGEMENT

Objectives of objectives:
 Post-loss Risk Management
- objectives to be achieved after a
loss has occurred, they include:
 The survival of the firm
 Survival means after a loss occurs, the firm can at
least resume partial operation within some
reasonable time period if it chooses to do so.
 To continue operating
 For some firms the ability to operate after a severe
loss is an extremely important objective.
 Stability of earnings
 The firm wants to maintain its earnings per share
after a loss occurs.
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RISK ANALYSIS AND MANAGEMENT

Cont’d
 To maintain continued growth of the
firm
 A firm may grow by developing new
products and markets or by acquisitions
and mergers. The risk manager must
consider the impact that a loss will have
on the firm’s ability to grow.
 To meet the goal of social responsibility
 It aims to minimize the impact that a loss
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RISK ANALYSIS AND MANAGEMENT

Activity
 In groups of five
 Take 15 minutes
 Discuss
 The possible contribution of risk
management
 To whom does risk management
contributes something?

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RISK ANALYSIS AND MANAGEMENT

Contribution of Risk Management


 The possible contribution of risk management is
discussed below:
 Contribution to a Business
 The possible contribution of risk management to a
business can be divided in to five major categories:
1. Risk management may make the difference
between survival and failure.
 Some losses may so cripple a firm that without
proper advance preparation for such events
the firm must close its doors.
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RISK ANALYSIS AND MANAGEMENT

Contribution of Risk Management


2. Risk management can contribute directly to
business profits by reducing expenses as well as
increasing income
3. Risk management can contribute indirectly to
business profits in the following ways:
 By reduce the fluctuations in annual profits and cash
flows.
 make it possible to continue operations following a loss,
thus retaining customers or suppliers who might
otherwise turn to competitors through advance
preparation.
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RISK ANALYSIS AND MANAGEMENT

Contribution of Risk Management


4. Because the risk management plan may help
others such as employees, who would be affected
by losses to the firm, risk management can also
help satisfy the firm’s sense of social responsibility
or desire for a good public image.

5. The peace of mind made possible by sound


management of pure risks may itself be a valuable
non-economic asset because it improves the
physical and mental health of the management
and owners. 76
RISK ANALYSIS AND MANAGEMENT

Cont’d
 Contribution to Family
 The possible contributions may include:
 Protecting the family against catastrophic losses

 Reduction of expenditure for insurance without


reducing its protection
 Provision of relief from physical or mental strain

 Contribution to a society
 To the extent that individual businesses and
families benefit from risk management, so does
the society of which they are members.
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RISK ANALYSIS AND MANAGEMENT

The Risk Management Process


 Risk management is the
 identification,
 measurement, and
 treatment
 of
 property,
 liability, and
 personal pure-risk exposures.
 The process includes five steps:
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RISK ANALYSIS AND MANAGEMENT

The Risk Management Process


Step 1: Identification of Loss Exposures (Risks)
 This is the process in which the organization is able to
learn areas in which it is exposed to risk.
 It is the most important, and perhaps the most
difficult function that the risk manager or
administrator must perform from among the element
of the risk management process.
 It involves the identification of
 risks that affect the organization and
 identification of the related hazards
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RISK ANALYSIS AND MANAGEMENT

Categories of Loss
 Although in Exposures
the broadest sense the entire
organization is at exposure to risk, it is useful to
develop categories of exposures for analytical
purposes.
 Physical asset exposures
 Ownership of property gives rise to possible losses or
gains to physical assets.
 Property could be
 damaged,
 destroyed,
 lost or
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RISK ANALYSIS AND MANAGEMENT

Categories
 LiabilityofExposures
Loss Exposures
 Obligation imposed by the legal system creates this
type of exposures.
 Liability losses arise out of damage to or destruction of
other’s property or personal injuries to others.
 Human Asset Exposures :
 This involves such loses as;
 Losses to the firm itself as a result of the death,
disability or old age of employees, customers, or owners.
 Losses to the families of the personnel or the personnel
themselves as a result of their death, disability, old age,
or unemployment.
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RISK ANALYSIS AND MANAGEMENT

The Risk Management process:

Identify the risks

Defining types of risk, for instance,


‘Strategic’ risks to the goals and objectives
of the organisation.
• Identifying the stakeholders, (i.e.,who is
involved or affected).
• Past events, future developments.
Monitor and review
Communicate & consult
Next

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RISK ANALYSIS AND MANAGEMENT

Illustration

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RISK ANALYSIS AND MANAGEMENT

Methods of risk identification


Because most businesses are
 complex,
 diversified,
 dynamic operations,
a more systematic method of
exploring all facets of the specific
firm is highly desirable.
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RISK ANALYSIS AND MANAGEMENT

Methods
 Seven of risk identification
methods that have been
suggested are:
 The risk analysis questionnaire
 Financial statement method
 Flow-chart method
 On-site inspections
 Interactions with other
departments
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RISK ANALYSIS AND MANAGEMENT

 This measurement includes the


Step 2: Measurement of the losses associated with the different exposures

determination of:
 The probability or chance that the
loss will occur /frequency of
occurrences of losses/
 The impact the losses would have up
on the financial affairs of the firm or
the family, should they occur /size
or severity of loss/ 86
RISK ANALYSIS AND MANAGEMENT

Step 2: Measurement of the losses associated


with the different exposures
The measurement process is
important because it indicates
 the exposures that are most
serious and
 consequently most in need of
urgent attention.
It also yields information needed
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RISK ANALYSIS AND MANAGEMENT

Step 3: Consideration of Alternative Risk


Management Tools
 This involves comparison of various risk
management tools and decision to select
the best method.
 The risk management tools include:
 Risk Avoidance
 Risk Reduction
 Risk Transfer
 Risk Retention
 Risk Diversification
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RISK ANALYSIS AND MANAGEMENT

Step 4: Implementation of Decision


 Involves putting the chosen method into action.

Step 5: Evaluation and Review


 The decision made and implemented in the first four
steps must be monitored to evaluate the wisdom of
those decisions to determine whether changing
conditions suggest different solutions.

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RISK ANALYSIS AND MANAGEMENT

END OF PART TWO

THANK YOU FOR YOUR


ATTENTION
90