Risk & Risk Management


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Risk & Risk Management

  2. 2. RISK <br /><ul><li>It is defined as an uncertainty consulting the concurrency of the loss.
  3. 3. Categorized into two types:
  4. 4. Objective Risk
  5. 5. Subjective Risk
  6. 6. Objective Risk:</li></ul> It is a variable of actual loss from excepted loss.<br /><ul><li>Subjective Risk:</li></ul> Based on persons mental conditions or state of mind.<br />
  7. 7. CHANCE OF LOSS<br />Defined as probability that event can occur.<br />Divided into two types:<br />Objective Probability<br />Subjective Probability<br />Objective Probability:<br /> long run relative frequency of an event based on the assumption of an infinite no. of observation and there is no change in underline conditions .<br /><ul><li>Subjective Probability: </li></ul> It is individual personal estimate of the chance of loss.<br />
  8. 8. SOME RELATIVE TERMS OF RISK<br /><ul><li>PERIL:</li></ul> Defined as a cause of loss.<br /><ul><li>Hazard:</li></ul> It is a condition that creates or increase <br /> the chance of loss. <br /><ul><li> It is again divided into 4 types:
  9. 9. Physical
  10. 10. Moral
  11. 11. Morale
  12. 12. Legal</li></li></ul><li><ul><li>Physical:</li></ul> physical condition that increases the chance of loss.<br /><ul><li>Moral:</li></ul> It is dishonesty or character defect in an individual that increases the frequency or severity of loss.<br /><ul><li>Morale:</li></ul> It is the carelessness or indifferent to a loss .<br /><ul><li>Legal:</li></ul> It refers to the characteristics of the legal system or regulatory environment that increases the frequency or severity of the loss.<br />
  13. 13. CATEGORIES OF RISK<br />
  14. 14. <ul><li>Fundamental Risk:</li></ul> It is defined in which effect the entire economy or large no. of persons or groups within the economy.<br /><ul><li>Particular Risk:</li></ul> It effects only the individuals not the the entire community.<br /><ul><li>Enterprise Risk:</li></ul> It is a relatively new term that encompasses all major risk faced by a business norm.<br />
  15. 15. <ul><li>Speculative Risk:</li></ul>It is a situation in which either profit or loss is possible.<br /><ul><li>Pure Risk:</li></ul> It is defined as a situation in which there are only the possibility of loss and no loss.<br /><ul><li>There are different types of risk exist which are as follows:
  16. 16. Personal Risk:</li></ul> It directly effects an individual.<br /><ul><li>Property Risk:</li></ul> Under this risk contains direct loss and indirect loss.<br />
  17. 17. <ul><li>Direct loss:</li></ul> It is a financial loss that results from the physical damage ,destruction or theft of the property.<br /><ul><li>Indirect loss:</li></ul> It is the financial loss that results indirectly from the occurrence of the direct physical damage or theft.<br /><ul><li>Liability Risk:</li></ul> It is another type of pure risk that most person face under legal system, that one can be held legally liable for something that results in bodily injury or property damage.<br />
  18. 18. RISK MANAGEMENT<br />
  19. 19. Objectives of Risk Management:<br /><ul><li>Pre loss :
  20. 20. The firm should prepare for potential losses in the most economical way.
  21. 21. Reduction of anxiety
  22. 22. Meet any legal obligation.
  23. 23. Post loss:
  24. 24. Survival of the firm
  25. 25. Continue operating
  26. 26. Stability of earning
  27. 27. Continue growth of the firm
  28. 28. Minimize effects that a loss will have on other persons and society.</li></li></ul><li>Steps in Risk Management Process<br />
  29. 29. There are five methods of identifying loss exposures.<br />Risk Analysis Questionnaires<br />Physical Inspection<br />Flowcharts<br />Financial Statements<br />Historical Loss data<br /><ul><li>Analyze the loss exposure: It involves estimation of frequency & severity of loss.</li></ul> Loss Frequency: Probable number of losses that may occur during some given time period.<br />
  30. 30. Loss Severity: It refers to the probable size of the losses that may occur.<br /><ul><li>Both maximum & maximum probable loss are estimated.
  31. 31. Maximum possible loss is the worst loss that could happen to a firm during its lifetime.
  32. 32. Maximum probable loss is the worst loss that is likely to happen.
  33. 33. Select appropriate techniques for treating the loss exposures:</li></ul> It broadly consist of two techniques:<br />
  34. 34. Risk Control: It describes techniques for reducing the frequency or severity of loss.<br /><ul><li>Avoidance: It means a certain loss exposure is never acquired , or an existing loss exposure is abandoned.
  35. 35. Loss Prevention: It refers to measures that reduce the frequency of a particular loss.
  36. 36. Loss Reduction: It refers to measures that reduce the severity of a loss after it occurs.</li></ul>2.Risk Financing: It refers to the techniques that provide funding of losses after they occur.<br />
  37. 37. <ul><li>Retention : It means that the firm retains part or all losses that can result from a given loss. It can be either active or passive.
  38. 38. Noninsurance Transfers: Noninsurance transfers are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party.
  39. 39. Commercial Insurance: Commercial insurance is also used in a risk management program. Insurance is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high.</li></li></ul><li><ul><li>Implement & Monitor the risk management process.
  40. 40. Risk Management Policy Statement: This statement outlines the risk management objectives of the firm.
  41. 41. Risk Management Mannual : It consists of details of risk management program & helps in training new employees .
  42. 42. Co operation with other departments like accounting , finance , marketing , production and human resources.</li></li></ul><li>