RISK MANAGEMENT

Risk arises out of uncertainty. It can also

represent the possibility of an outcome
being different from the expected.
When risk is said to exist, there must
always be at least two possible outcomes.
If it is known for certain that a loss will
occur, there is no risk. At least one of the
possible outcomes is undesirable.
Risk is a condition where there is a
possibility of an adverse deviation from a
desired outcome that is expected or hoped
for.

TYPES OF RISKS

Speculative or Dynamic Risk

Speculative (dynamic) risk is a situation
in which either profit OR loss is possible.
Examples of speculative risks are
betting on a horse race, investing in
stocks/bonds and real estate.
In the business level, in the daily
conduct of its affairs, every business
establishment
faces
decisions that entail an element of risk.

TYPES OF RISKS

Speculative
or
Dynamic
Risk
The decision to venture into a new market,
purchase new equipments, diversify on the
existing product line, expand or contract areas
of operations, commit more to advertising,
borrow additional capital, etc., carry risks
inherent to the business.
The outcome of such speculative risk is either
beneficial (profitable) or loss. Speculative risk
is
uninsurable.

TYPES OF RISKS
Pure or Static Risk
Pure (static) risk is a situation in which there
are only the possibilities of loss or no loss, as
oppose to loss or profit with speculative risk.
The only outcome of pure risks are adverse (in a
loss) or neutral (with no loss), never beneficial.
Examples of pure risks include premature death,
occupational disability, catastrophic medical
expenses, and damage to property due to
fire,
lightning,
or
flood.

TYPES OF RISKS
Types of Pure (Static) Risk
The major types of pure risk that are associated
with great economic and financial insecurity
include;
personal risks;
property risks; and
liability risks.

TYPES OF RISKS

Personal risks are risks that directly affect an individual.

They involve the possibility of loss or reduction of income,
of extra expenses, and the elimination of financial assets.
There are four major personal risks;
premature death
old age
poor health
unemployment

TYPES OF RISKS
Premature death risk is defined as the risk of the death of the
head of a household with unfulfilled financial obligations. These can
include dependents to support, a mortgage to be paid off, or children
to educate.

Old Age is a risk of insufficient income during retirement. When

older workers retire, they lose their normal amount of earnings. Unless
they have accumulated sufficient assets from which to draw on, they
would be facing a serious problem of economic insecurity.

TYPES OF RISKS
Risk of poor health includes both catastrophic medical bills and the
loss of earned income.
The cost of health care have increased substantially in recent years.
The loss of income is another major cause of financial instability. In
cases of severe long term disability, their is a substantial loss of
earned income, medical bills are incurred, employee benefits may be
lost,
and
savings
depleted.

TYPES OF RISKS
The risk of unemployment is another major threat to most families.
Unemployment can be the result of a industry cycle downswing,
economic changes, seasonal factors and frictions in the labor market.
Regardless of the cause, unemployment can create financial havoc in the
average families by way of loss of income and employment benefits.

TYPES OF RISKS
Property risk is the risk of having property damaged or loss from numerous
perils.
Property loss can occur as a result of fire, lightning, windstorms, hail, and a
number of other causes.
Liability risks are another important type of pure risk that many people face. More
than ever, we are living in a litigious society. One can be
sued for any frivolous reason.
One has to defend himself when sued.

TYPES OF RISKS
Fundamental Risks and Particular Risks
Fundamental risks affect the entire economy or large numbers of people
or groups within the economy. Examples of fundamental risks are high
inflation, unemployment, war, and natural disasters such as earthquakes,
hurricanes, tornadoes, and floods.

TYPES OF RISKS
Particular Risks
Particular risks are risks that affect only individuals and not the entire
community. Examples of particular risks are burglary, theft, auto accident,
dwelling fires. With particular risks, only individuals experience losses, and
the rest of the community are left unaffected.

TYPES OF RISKS
The distinction between a fundamental and a particular risk is important, since
government assistance may be necessary in order to insure fundamental risk.
Social insurance, government insurance programs, and government guarantees
and subsidies are used to meet certain fundamental risks in our country.
For example, the risk of unemployment is generally not insurable by private
insurance companies but can be insured publicly by federal or state agencies.

SPREADING OF RISK
There are various methods to achieve
spreading
or
averaging
of
risks.
Diversification is an important feature of
modern economic enterprise. An insurer
would normally seek to achieve spread of
risk as under:(a)By writing different classes of Insurance
business and even within a single class, by
catering to various types of risks.
(b)By
writing
business
in
different
geographical locations, states within a
country or different countries.

SPREADING OF RISK
(c) By Incorporating as a public limited
company so that with the help of larger
capital resources, its is in a position to
write larger volumes of business in
order to achieve a larger spread of
risks.
(d) By means of Reinsurance, i.e., by
placing reinsurance business with other
companies.

MANAGING RISKS
Risks and uncertainties are not avoidable in
life. They threaten the assets and their
earning capacities. The assets may be
human or material. The risks have to be
managed.
The Four Steps to Manage Risk are as follows: Risk Avoidance
Risk Reduction
Risk Retention
Risk Transfer

RISK MANAGEMENT
Risk Management means The
identification, analysis and economic control
of those risks which can threaten the assets
or earning capacity of an enterprise.
Risks must be identified before they can be
measured, and only after their impact has
been evaluated, one can decide on the most
effective method of control.
Cost of control of risk must be
commensurate with the benefit expected to
be derived.

RISK MANAGEMENT
The management of an organization
has ultimate responsibility for dealing
with all risks facing the organization,
including both pure and speculative
risks. Risk Management focuses its
attention only on the pure risks.
Risk Management deals with insurable
and uninsurable risks and the choice of
the appropriate techniques for dealing
with them.

PROCESS OF RISK
MANAGEMENT
RISK IDENTIFICATION
RISK ASSESSMENT
IMPLEMENTATION OF THE DECISION
EVALUATION AND REVIEW

RISK IDENTIFICATION
The risk manager must dig into the operations of
the organization and discover the risks to which
it is exposed.
There are a number of important tools or
techniques including insurance policy checklists,
risk analysis questionnaires, analysis of financial
statements, hazard, physical inspections of the
operations, flow charts and organizational charts
which provide risk manager with a powerful
weapon in the endeavor towards identifying the
risks to which the organizations is exposed.

RISK ASSESSMENT
The cost of risk can be looked at from a
number of different perspectives. There is
at least the:
Frequency of risk;
Monetary cost or financial severity;
Human cost in terms of pain and suffering.
The risks may, therefore, be grouped as
critical, important and unimportant.

IMPLEMENTATION OF
THE DECISION
The decision for dealing with the risk may
be
A)To retain the risk this may be attained
with or without a reserve or a fund;
B)To deal with risk through loss prevention
the proper loss prevention programme must
be designed and implemented.
C)To transfer the risk through insurance and
this must be followed by the selection of an
insurer.