Revised Version of Risk Management - a conceptual framework
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Revised Version of Risk Management - a conceptual framework

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A more detailed account of the preliminaries of risk management

A more detailed account of the preliminaries of risk management

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