NATURE OF RISK MANAGEMENT

i. ii. iii. iv.

Risk management aims at controlling the risk exposure of a firm. It is a rational approach towards controlling the Pure Risk to which an organization or an individual is exposed to. Risk management function can be groups with other management function such as Financial Management, Human Resource Management, etc An overview of different risks will help us to understand the nature of risk management. Organization and individual are exposed to a wide array of risk in their day to day operations, such as: Fire risk Risk of theft Loss of customer Delay in delivery of raw materials

In between there are many views on the nature of risk management. Breakdown of machinery Accident Bad debts Change in industrial policy whenever the government changes Changes in financial market Changes in taxation etc. Many scholars and practitioners agree that risk management is an evolving science while a distinct minority feels that it is going to disappear in the years to come. VIII. Organization have their own views on risk. The perspective of risk management varies from one individual to another individual. IX.NATURE OF RISK MANAGEMENT V. VI. VII. . X.

which are insurable and uninsurable in nature. the extent to which the loss prevention measures reduce insurance cost. . When considering loss prevention measures. When considering deduction. Usually. a.DISTINCTION BETWEEN RISK MANAGEMENT AND INSURANCE MANAGENENT The science of risk management is wider in scope than that of insurance management. Risk management includes both risks: pure and speculative. the extent of saving made by the insurance company and the extent to which that saving will meet the risk. like. an insurance manager of a company underwrites policies to cover the underlying risk. But an insurance company while assuming risk. Insurance management uses methods which may differ from risk management such as preventing occurrence of loss or retaining the loss. whereas the scope of insurance management is limited only to those activities which can be insured. b. Moreover philosophically also these two are unique in their point of view. analyzes it from different point of view.

DISTINCTION BETWEEN RISK MANAGENT AND INSURANCE MANAGENENT While the insurance manager tries to minimize the risk manager perceives insurance as one of the methods to protect his business against the perceived risks. . The risk manager has to justify the need for insurance before undertaking the policy. Though risk management is different from insurance management. Thus the emphasis of the risk manager is to identify those risks which can be retained. its scope is narrow as it does not cover the business risk. As the cost of risk manager takes up insurance when all other options are exhausted. Risk is insured only in unavoidable circumstances.

f. d. which are stated below: Determination of objectives Identification of risks Evaluation of risk exposures Consideration and selection of Risk Management technique Implementation of decisions Evaluation and review a.RISK MANAGEMENT PROCESS Six distinct steps in risk management process. b. e. . c.

it is very important to link the priorities. . This includes the expectations that the organization has from the risk manager.DETERMINATION OF OBJECTIVES It is very important for an organization to identify the objectives of the risk management function. goals and objective of risk management with that of the organization as it is essential for the risk management program to protect the organization from various exposures. The clear delineation of the risk management process as a holistic approach rather than isolated individual problems to be dealt with. In order to ascertain the risk management objective of the organization. The efficiency of the risk management may be seriously hampered if its objectives are not clearly specified.

retailers. survival of the organization Perpetuity of the organization’s operation Steady flow of income Social obligation Economy Reduction in anxiety Social obligation Fulfillment of external Obligation . customer.DETERMINATION OF OBJECTIVES Exp: the organization would like to protect itself from running out of cash or becoming insolvent. Thus. 3. there are varies objectives of risk management. Moreover the organization would like to ensure safety for its workers. which the organization would like to meet. They are: Post loss objectives Pre loss objectives 1. or from a lock out. These objectives may be classified into two broad categories. 2. 4. have good understanding and terms with its shareholder( suppliers. The would like to control its cost. dealers. etc) and fulfill its social obligation.

However. the organization develops a risk management policy which lays down the objectives of risk management. . the guiding principle of development of objectives for an organization remains the same: to save the organization from the perceived risks. The ultimate responsibility of the welfare of the organization rests with the top management because of which they lay down the important policy decisions. Usually.IDENTIFACATION OF THE OBJECTIVES Identification of the objectives of a risk management program depends upon the type of the organization. the risk manager can provide valuable suggestions which will help the top management in arriving at well developed policies. However.

Therefore. A few other methods used in general are check list. flowchart. They should have in-depth knowledge about the aims and objectives of organization as well as specific characteristic of the organization which distinguishes it from others. A brief description of techniques applied by risk managers to identify organizational risk is given below: . questionnaire. The past organization. The risk manager usually undertakes a systematic study of identifying the potential risks. Discussion with department officials concerned can help him assess the current operations and activities. financial statement analysis and close examination of company operations. It is important for the risk managers to have clear understanding of the various processes of the organization and orient their thinking towards these processes.IDENTIFICATION OF RISK The second objective of the risk management process is to identify the potential risk to which the organization can be exposed to. the risk manager has to analyze varies system of the organization in detail and identify the maximum possible risk expose of the firm.

IDENTIFICATION OF RISK Risk Analysis Questionnaire Checklist Of Exposures Insurance Policy Checklist Flow Charts Analysis Of Financial Statements Other Records Of The Company Inspection Discussion Combination Approach .