Risk Management

in
Decision Making
What is Risk?
Risk is a condition in which there is a possibility
of an adverse deviation from a desired outcome
that is expected . (Vaughn)
Interpretations
Any (-) deviation from what is expected - pure risk
Any (+/-) deviation from what is expected
speculative risk
Expected total losses - Variability of total losses
around their expected value
Exposure, peril, hazard

Traditional RM Paradigm
Determination of objectives
Identification of risks
Evaluation of risks
Consideration of alternatives-risk control vs. risk financing
Implementation of decisions
Evaluation and review
Integrated (Enterprise, Holistic) RM is a formal
approach to the problem of dealing with all risks that
endanger the strategic mission.
Integrated Risk Management
Integrated RM Paradigm
Risk assessment is a continuous activity.
All in organization are involved in managing risk.
Risk assessment and control are supervised by top
management.
Ineffective processes are the primary source of risk.
Risk Control focuses on:
avoiding unacceptable risk
managing impact of other risks to acceptable levels
formal risk control policy should be widely distributed
anticipating/preventing (i.e., monitoring controls).
Adopting Integrated RM
The CRO must:
define consistent approach to RM
create organization-wide awareness
measure operational and financial risk
develop organizational risk map
develop other methods, tools, and practices
develop outcome measurements
Integrated RM involves:
strategic systems-to identify significant risks & determine
root causes
management systems-to disseminate business risk assessment
& control methods in the organization & establish accountability
process systems - to establish a common language of risk and
RM methods


Risk Management Objectives
Post-Loss Objectives Pre-Loss Objectives
Survival Economic Efficiency
Continuity of Operations Reduction in Anxiety
Earnings Stability Meeting Externally
Continued Growth Imposed Obligations
Social Responsibility Social Responsibility
Risk Identification
Interviews - some practical advice
Use open questions: Ask what, how, why, etc.; avoid
questions that can be answered with one word.
Use closed questions to bring closure like can, would, do, are etc.
Ask one question at a time.
Explore breadth and depth of issues.

Estimate loss frequency, severity, and annual aggregate losses
Frequency - number of times loss can occur
Severity - expected size of loss that occurs
Use confidence levels (how much accuracy?)
Estimate property/business interruption loss
Risk Assessment
Risk Mapping
A Risk Map:
identifies risks that may materially and negatively affect a
companys earnings
quantifies risks in terms of frequency and severity (and may
also provide annual aggregate information)
illustrates the risks in a manner that facilitates further analysis
Benefits of Risk Map
Identifies in one place all risks facing the firm
Permits cross-discipline analyses
Focuses attention on areas that are material to the
companys financial viability
Quantifies magnitude of required level of protection


Risk Mapping
How to construct a Risk Map
Determine scope of project
Create a team
Collect (secondary) data
Public information - financial statements, business periodicals,
Internal documents - business plans, procedure manuals,
consultants reports, etc.
Benchmark against competitors
Collect (primary) data
Questionnaires and interviews
Historical loss data - RMIS
Policy checklist and exclusions
Begin analysis with senior management
Include business operations and managers, auditors,
engineers (loss prevention)

Risk Map RM Techniques
Low #
High $
(Finance/Transfer)
High #
High $
(Control/Avoid)
Low #
Low $
(Ignore)
High #
Low $
(Finance/Transfer)
Risk Financing
Risk transfer
lInsurance
lContract hold
harmless/indemnification
(like car Insurance)
Risk retention
lPlanned vs.
unplanned
lFunded vs.
unfunded
Risk Avoidance
Avoidance occurs when decisions are made to
prevent a risk from even coming into existence.
Risks are avoided when the organization refuses to
accept the risk for even an instant.
Example: A firm that considers manufacturing some
product but, because of the hazards involved, elects
not to do so.
While avoidance is the only alternative for dealing
with some risks, it is a negative rather than a positive
approach.
If avoidance is used extensively, the firm may not be
able to achieve its primary objectives.

Risk Avoidance
For this reason, avoidance is, in a sense, the
RM technique of last resort.
Avoidance should be used in those instances in
which the exposure has catastrophic potential,
and the risk cannot be reduced or transferred.
Generally, these conditions exist in the case of
risks for which both the frequency and the
severity are high.

Risk Reduction
Risk Reduction describes a broad set of efforts
aimed at minimizing risk.
Other terms those were formerly used and have
been displaced by this more general term,
include loss prevention and loss control.
Loss Prevention efforts are aimed at
preventing the occurrences of losses.
Loss Control efforts are directed at reducing
the severity of those losses that do occur.

References
www.eiu.edu/~minnis/mba5680/notes/PPT_c
h10.ppt , Retrieved on December 09, 2013
www.csupomona.edu/~wcweber/301/301slide
/ch06301/Chpt06.ppt, Retrieved on January 27,
2014
ocean.otr.usm.edu/~w813743/454powerpoints
/chapter7.ppt , Retrieved on February 01, 2014