 Human beings are considered the most intelligent

creatures on earth.
 The criteria for deciding whether the situation is good or
bad depend upon individual’s perception.
 The preference and strive for being happy always leads to
“RISK”.
 Risk is the possibility of loss or injury.
 “Risk is defined as a state of knowledge in which each
alternative leads to one of a set of specific outcomes, each
occurring with a probability that is known to decision
maker.”
Milton H Spencer
 In Insurance, the risk is uncertainty concerning loss.
Uncertainty

Perils
Basis Risk Uncertainty

The probability of winning Uncertainty implies a

Meaning or losing something situation where the future
worthy is known as risk. events are not known.
Ascertainment It can be measured It cannot be measured.
Chances of outcomes are
Outcome The outcome is unknown.
known.
Control Controllable Uncontrollable
Minimization Yes No
Probabilities Assigned Not assigned
Cost of production
not included in the cost of
Element of Risk includes the cost of risk
production
bearing
Not covered under
Insurance Coverage Covered under insurance
insurance
 Financial risk and non-financial risk:
 If a risk is concerned with financial loss, it is termed as
financial risk.
 If a risk does not involve financial loss, it is known as
non-financial risk.
 For example, the unexpected demise of an efficient
manager of a company will result in financial losses to
the company and hence there is financial risk from the
point of view of the company. At the same time, family
members of the manager have non-financial risk more than the
financial risk
Quantifiable and non-
quantifiable:

 Therisks which can be measured are known as

quantifiable risk
 Non-quantifiable risk cannot be measured. For
example:-Risks which leads to tension or loss
of peace etc
 Fundamental and particular risks:
 Particular risk can be confined to individuals or
smaller groups.. Example: - accidental death of
a person.

 Fundamental risks affect the whole society. its

origin and effects affect larger number of
people. Example:- Tsunami, flood, earthquake,
etc
 Dynamic risk and static risks:
Dynamic risks arise from changes in the economic, social, technological or
political environment. They are difficult to predict.
Example: 1) Change in the economic policies
2) Total ban of tobacco may be heavy risk for a cigarette
manufacturing industry.

Static risks are there occurring even if there is no change in the macro
environment. They are more or less predictable.
Example: Fire in a building can lead to netloss
Dynamic risks static risks resemble speculative and pure risks respectively.
 Pure risk and Speculative risks
A pure risk is one which the loss occurs by
chance or not by choice. It involves no loss or
chances of loss.
Eg: Accident resulting in physical injury
A speculative risk is one which the loss occurs by
choice of a person. There can be loss or break
even or profit.
 Pure risk creates great financial insecurity fir
individual and society. The major types of pure
risk are.

1. Personal Risks
2. property Risks
3. Liability Risks
 Personal Risks:
The risks that directly affect an individual are known as personal
risks. They involve the possibility of the complete loss are
reduction of earned income, extra, expense and the depletion of
financial assets. There are four major personal risks:
 Risk of premature death
 Risk of insufficient Income after Retirement
 Risk of Poor Health
 Risks of Unemployment
 Property Risk:
These are the risk to the persons in possession of the property being
damaged or lost.
 Liability risk:
These are the risk arising out of the intentional or unintentional injury
to the person or damage to their properties through negligence or
carelessness.
 Every organization manages risk, but not always in a way
that is visible, repeatable to support effective decision
making.
 Risk management is an integrated process of delineating
specific areas or risk, developing a comprehensive plan,
integrating the plan and conducting ongoing evaluation
 Risk Control
 avoidance
 losscontrol
 Loss Prevention
 Loss Reduction
 Risk Financing
 retention
 noninsurance transfers
 insurance
 Risk permeates the organization – not to avoid loss
but to enhance reputation adv and yield
competitive advantage.
 Dangers lurk in non traditional risks – not only
traditional risk but also other areas.
 Many drivers to strengthen the function
 Awareness of risk is the key
 Companies create a figure head for risk
 Increase in investment is predicted
Establishing the context
• Planning
• Mapping out
• Defining framework
• Developing an analysis
• mitigation

Identification
• Source Analysis
• Problem Analysis

Assessment
• Once risk is identified, they must be assessed as to their potential loss
• Risk = rate of occurrence * impact of the event

Potential Risk treatments

• Avoidance of risk
• Reduction of risk
• Retention of risk
• Transfer of risk

Review & Evaluation Plan

• Review of plan by evaluating the previous control and possible risk level changes in business

Implementation
• Purchase of insurance policy for the risk

Create Risk management plan

• Selection of appropriate controls and counter measures
 “Process
by which a business systematically &
continuously identifies property, liability &
personnel exposure as soon as or before they
emerge” - Williams & Heinz

 BusinessRisk Exposure is a method of calculating

the nature & level of exposure that is likely to
confront through a potential failure of a
specified asset or group of assets. In other
words, “Process of determining source of loss
that results in loss or injury”.
 Physical
Asset

Legal Business Risk Financial

Liability Exposure Asset

Human Asset
 Tangible asset like warehouse is exposed to
risk.
 Causes damage to assets
 Damage is covered on two bases:
 Replacement cost – without deduction of
depreciation
 Actual cost value - with deduction of
depreciation.
 Financialassets like bond, shares are
exposed to risk.
 Credit exposure – delay in payment or
defaulter in payment.
 Currency exposure – adverse movement
in exchange rates
 Liquidity exposure – risk in selling the
asset
 Human resources is an asset .
 Death or injury of employees affects
management of HR and internal operation of
a firm.
 Exists within legal system or contract. It is
only a pure risk.
 Different from asset exposure.
 Criminal Law – offense against society
 Civil Law – disputes between two parties
 Risk controlling firms focuses on cost / loss
aspects i.e. negative effects of risk rather than
business opportunity. It is concerned with;
 Maintenance of risk tolerance
 Enhancing efficiency of business operations
 Maintenance of sound governance
 Risk Control
 avoidance
 losscontrol
 Loss Prevention
 Loss Reduction
 Insurance as security is need of all human beings.
 Early Death Financial obligation
Family Social group
Contribution
A contract (policy) in which an individual or entity
receives financial protection or reimbursement against
losses from an insurance company. The company pools
clients' risks to make payments more affordable for
the insured.
 It is a contract for compensating losses.
 Premium is charged for Insurance Contract.
 The payment of Insured as per terms of agreement in
the event of loss.
 It is a contract of good faith.
 It is a contract for mutual benefit.
 It is an instrument of distributing the loss of few among
many.
 The occurrence of the loss must be accidental.
 Insurance must be consistent with public policy.
 Primary Function
 Provision of certainty of payment at the time of loss
 Provision of protection Risk sharing
 Secondary Function
 Prevention of loss
 Provision of Capital
 Improvement of efficiency
 Ensuring welfare of the Society