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AN INTRODUCTION TO RISK
UNCERTAINITY DOUBT TO PREDICT THE OUTCOME RISK POSSIBILITY OF LOSS (OR) POTENTIAL VARIATION IN OUTCOMES PURE RISKS (FIRE, FLOOD, ACCIDENTS ETC.) LOSS (Financial repercussion) TO BE MADE GOOD HOW? PRINCIPLE OF INSURANCE
SPECULATIVE RISKS (RISK INVESTMENTS, GAMBLING ETC.,) LOSS/GAIN NOT INSURABLE HOWEVER ALTERNATIVE INSTRUMENTS HAVE BEEN DEVELOPING TO MANAGE MITIGATE AND REDUCE RISK
Definitions and meaning of Risk RISK refers to the possibility that something unpleasant or dangerous might happen (Dictionary meaning) A condition in which there is s possibility of an adverse deviation from a desired outcome that is expected or hoped for Refers to a situation where there is the possibility of a loss
MEANING
Risk is SUGAR AND SALT" of Life Risk can have UPSIDE or DOWNSIDE People take Risk in order to achieve some goal could not be achieved without risk taking. Can mean Danger or Loss Care has to be taken to avoid that Loss. Prevention is better than Cure
Definitions
Contd..
Not amenable to be described as an insurance buying function Cost of Risk is high. Its components are Cost of Losses that do occur Cost of Uncertainty itself Worry and Anxiety Misallocation of resources Eg: Reluctance of some Pharmaceutical companies to invest in new product development of fear of product liability suits
Contd..
Risk & Uncertainty bestow benefits Organizations would seek to manage its affairs to maximize both the possibility and value of such outcomes - Organizations have motives to address Risk and Uncertainty and this motivation gives rise to Risk Management - Risk Management practiced because of negative and positive possibilities of Risk as well as Moral Considerations
RISK is the probability or chance of loss -Estimation requires accounting for causes of losses known as PERILS and HAZARDS
PERILS CAUSE OF LOSS RISK HAZARDS CONDITION THAT INCREASE SEVERITY OF LOSS
Degree of Risk : Refers to the likelihood of occurrence of an event. It is a measure of accuracy with which the outcome of a chance event can be predicted.
Classification of Risks
RISK
PURE RISK
SPECULATIVE RISK
DIVERSIFIABLE/ NON DIVERSIABLE Risk that may/ may not be reduced through pooling or risk sharing agreements
STATIC & DYNAMIC Dynamic: Resulting from macro economic variables: inflation, technology changes etc., Static : Predicable not affected by economic conditions Eg: loss in business, loss due to act of others etc.,
BUSINESS RISK
PERSONAL RISK Earnings Medical expenses Liability Physical assets Financial assets Longevity
DEGREE OF RISK
Refers to the likelihood of occurrence of an event - It is a measure of accuracy with which the outcome of a chance event can be predicted - In Risky Situations two elements are found i. Outcome is uncertain - two possible outcomes for a given situation ii. Out of two possible outcomes one is unfavorable - not liked by the individual or analyst.
S. No:
I
Level of Uncertainty
Characteristics
Examples
Physical laws Natural sciences Games of chance, cards, dice, mortality Fire, automobile accidents, many investments Space exploration genetic research
None (certainty) Outcomes are predicted with precession Objective uncertainty Subjective uncertainty Level Outcomes-identifies probabilities -known Outcomes-identified probabilities unknown Outcomes-not fully identified probabilitiesUnknown
Contd
Misconceptions
Waste of Money Pessimistic Approach Creates super specialists
Security
2. Full Time Risk Manager Positively related to the size of the Organization Presence of Full Time Risk Manager is positively related to Riskiness of organization
3. R.M. Activities
Identification of Risks Implementing Loss Prevention & control programs Reviewing contracts & documents for R.M. purposes Training and Education on safety related issues Compliance with Governmental mandates Arranging non-insurance financing schemes ( self insurance, captive insurance) Claims management litigation Employee Benefit programmes
4. R.M. Includes
Currency Hedging Capital Budgeting Public Relations Employee Assistance and Training Government Lobbying Services Marketing Mergers & Acquisitions
Contd
Safety engineering Globalization phase Formation of Professional Associations (Risk and Insurance Management Society RIMS) 1970s,1980s & 1990s Rise of Public Sector Risk Management practices Post 1990s Four Sources of systems failure Hardware failure Software failure Organizational failure Human failure
Contd...
Harmonious with TQM Corporate R.M R.M. decisions or Financial decisions should be evaluated with firm value Financial Risk Management Principally in the Banking and Investment Community to deal with specific financial risks like credit risks, currency exchange risks, operational risks and investment risks Financial Derivatives
LOSS CONTROL
LOSS FINANCING
DIVERSIFICATION
INSURANCE
INVESTMENTS IN INFORONCTION