Revised Version of Risk Management - a conceptual framework


Published on

A more detailed account of the preliminaries of risk management

Published in: Economy & Finance, Business
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Revised Version of Risk Management - a conceptual framework

  1. 1. Risk Management: A Conceptual Framework<br />B.V.Raghunandan,<br />SVS College,<br />Bantwal-Karnataka-India<br />
  2. 2. Meaning of Risk<br />Risk is defined as possibility of loss<br />Lico Reis, ”Degree of uncertainty of return on an asset”<br />Investopedia (, ”The chance that an investment's actual return will be different than expected”.<br />Philippe Jorion, ”the volatility of unexpected outcomes, which can represent the value of assets, equity or earnings” <br />
  3. 3. Classification of Risks<br />
  4. 4. A] Pure Risk<br />It is a risk where there is no possibility of profit<br />There is the expense in the form of insurance premium<br />There is a loss when the compensation paid by insurance company is less than the actual loss<br />It is a method of dividing the risk among those exposed to a particular type of risk<br />
  5. 5. B] Speculative Risk<br />Speculative risk not only attempts to compensate for the loss, but may also bring in a profit<br />Financial risk management tools may bring in profit apart from covering the risk<br />
  6. 6. A] Pure Risk Management<br />Life Insurance and General Insurance<br />Life Insurance Principles: Utmost Good faith, and Insurable Interest<br />General Insurance Principles:<br />- Utmost Goodfaith<br />-Insurable Interest<br />-Indemnity<br />-Subrogation<br />-Contribution<br />
  7. 7. Principle of Utmost Goodfaith<br />Insured should reveal to the insurers all the material facts about the subject-matter<br />This principle is applicable to all types of insurance contracts<br />In life insurance, all the facts about the health of the insured person should be revealed to the insurers<br />In case of any material facts concealed, the insurer can avoid his liability<br />
  8. 8. Principle of Insurable Interest<br />A person standing to gain from the existence of the subject matter or stands to lose by its destruction has insurable interest in the subject matter<br />Everyone has insurable interest in his life, in the life of his spouse and in the lives of his children and vice versa<br />In case properties, the owner has insurable interest and the lender on the security of the property<br />
  9. 9. Principle of Indemnity<br />It applies only to general insurance<br />It does not apply to life insurance contracts<br />According to the principle, the compensation payable in case of damage is equal or less than the loss suffered<br />Insurance contracts are not to give any profit to the insured<br />Under no circumstance, the compensation will exceed the loss incurred<br />
  10. 10. Principle of Subrogation<br />It is an extension of the principle of indemnity<br />Applicable to general insurance contracts and not to life insurance contracts<br />Once the compensation is paid for the total loss of the subject matter, the insurers get the ownership of the damaged subject-matter<br />
  11. 11. Principle of Contribution<br />It is also an extension of principle of indemnity<br />Applicable only to general insurance contracts and not to life insurance contracts<br />In case of double insurance, both the insurers put together will contribute towards the compensation proportionately<br />Both the insurers will give a compensation that will not exceed the loss<br />
  12. 12. Reinsurance<br />Reinsurance is an arrangement whereby the original insurer insures the subject-matter with another insurer for a lesser amount<br />This is to reduce his contingent liability<br />In case of loss, he receives the reinsurance amount and contributes the remaining amount to the insured<br />In double insurance, the insured pays premium to two insurance companies. In reinsurance, the insured pays a single premium and the insurer pays a lesser premium to another insurer<br />
  13. 13. Types of Pure Risks<br />Risks relating to physical assets<br />Risks relating to human assets<br />Risks relating to liability<br />
  14. 14. B] Speculative Risks<br />Business Risk<br />Default Risk<br />Market Risk<br />Liquidity Risk<br />Credit Risk<br />Exchange Risk<br />Financial Risk<br />External Environment Risk<br />Environment Risk<br />Attrition Risk<br />Manufacturing Risk<br />Risk of Natural Calamity<br />
  15. 15. Handling the Risk<br />Risk Management<br />Risk Retention<br />
  16. 16. Risk Management: Action<br />Risk Avoidance<br />Diversification<br />Spin-off<br />Risk Transfer<br />Risk Sharing<br />Fighting Fire with Fire<br />
  17. 17. Risk Retention: Acceptance<br />Rationale:<br /> 1. When it can not be avoided<br /> 2. High cost of management of risk<br /> 3. Risk management may increase loss<br /> 4. Where control is difficult<br /> 5. Where risk management is too complex <br />
  18. 18. Risk Management Process: Steps Involved<br />Identification of Objectives: competition, stability in earnings, meeting customer expectation, treasury management, cost control, protecting foreign markets<br />Identification of Risks<br />Evaluation of Risk<br />Selection of Policy<br />Developing Strategy<br />Organisational Authority<br />Organisational Control & Corrective Action <br />
  19. 19. THANK YOU<br />