An overview of risk management b.v.raghunanadan


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Basics of Risk and Risk Management

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An overview of risk management b.v.raghunanadan

  1. 1. Overview of Risk Management<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. Recent Developments in Insurance Sector in India<br />In 1993, R.N.Malhotra Committee was appointed <br />The Committee recommended:<br />Govt. ownership in insurance companies shoud be brought down to 50%<br />Greater operational freedom to insurance companies<br />Private insurance companies with Rs.100 crore capital shpuld be allowed to run insurance business<br />No single entity should carry on both life insurance and general insurance<br />An insurance regulatory body should be set up<br />In March 2000, insurance sector was liberalised by passing the Insurance Regulatory and Development Authority Bill<br />Private Companies were allowed<br />
  15. 15. Recent Developments in Insurance Sector in India…contd<br />Foreign players were allowed with a maximum of 26% participation in the capital<br />There are 16 life insurance companies and 15 non-life insurance companies<br />There is a vast potential as 80% of the population is uninsured<br />
  16. 16. Recent Developments: IRDA<br />Established in 2000 by passing Insurance Regulatory & Development Authority of India<br />All insurance companies must register with IRDA<br />Protection of the interest of the policy-holders<br />Specifying qualification and code of conduct for insurance intermediaries<br />Promoting efficiency in the conduct of insurance business<br />Controlling rates, terms and conditions of insurance policies<br />Calling for information from insurance companies and insurance intermediaries<br />
  17. 17. 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 />
  18. 18. Handling the Risk<br />Risk Management<br />Risk Retention<br />
  19. 19. Risk Management: Action<br />Risk Avoidance<br />Diversification<br />Spin-off<br />Risk Transfer<br />Risk Sharing<br />Fighting Fire with Fire<br />
  20. 20. 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 />
  21. 21. 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 />
  22. 22. THANK YOU<br />