2. DEFINITION
As a systematic approach
to identifying, measuring
and controlling risks that
can threaten assets and
earnings of oneself, a
business or the
organization.
The purpose of risk
management is to enable
an organization to
progress toward its goal
and objectives (mission) in
the most direct, efficient,
and effective path
3. OBJECTIVES OF RISK
MANAGEMENT
Objectives
prior to a loss
Objectives
after a loss
occurs
7. IDENTIFYING POTENTIAL
LOSSES
Risk identification is the process
by which an organization is able
to learn of the areas in which it is
exposed to risk.
Identification techniques are
designed to develop information
on sources of risk, hazards, risk
factors, perils and exposures to
loss.
It is everybody’s task to identify
the loss exposures in one
organization.
8. IDENTIFYING POTENTIAL
LOSSES
Losses can be classify
as:
– Direct damage (damage to
building)
– Indirect damage (loss of
profits due to business
interruption)
– Liability (court award to 3rd
party since fire was
caused by negligence of
the owner of building)
9. IDENTIFYING POTENTIAL
LOSSES
How to identify risk?
– Questionnaires
– Interviews
– Financial Statements
– Flow Charts
– Personal inspection / Observation
10. EVALUATING POTENTIAL
LOSSES
– Risk measurement evaluates the likelihood
of loss and the value of loss in terms of
frequency and severity.
– The measurement process may take the
form of a qualitative assessment (using %)
– This step involves two important aspects of
loss exposures
• Frequency
• Severity
11. EVALUATING POTENTIAL
LOSSES
– Risk measurement evaluates the likelihood
of loss and the value of loss in terms of
frequency and severity.
– The measurement process may take the
form of a qualitative assessment (using %)
– This step involves two important aspects of
loss exposures
• Frequency
• Severity
12. EVALUATING POTENTIAL
LOSSES
– Identifying and
determining the loss
exposures alone is
not sufficient
– In evaluating the
potential losses:
• Estimating the
frequency and
severity for each
type of loss
13. EVALUATING POTENTIAL
LOSSES
How can you determine
and estimate the
impact of losses
– Frequency
• Referring to the
number of times the
loss occurs
– Severity .
• Referring to the
maximum size of loss
exposures
14. EXAMINING THE METHODS OF
HANDLING THE LOSS EXPOSURES
Two main ways to classify the risk
management techniques
- Risk Control
• Risk avoidance
• Loss control
– Loss prevention
– Loss reduction
• Separation
• Contractual Transfer
_Risk Financing
– Retention/Assumption
– Captive insurer
– Insurance
15. RISK CONTROL
Methods seek to alter an organization’s
exposure to risk.
Risk control efforts help organization
avoid a risk, prevent loss, lessen the
amount of damage if a loss occurs or
reduce undesirable effects of risk on an
organization.
16. Risk Avoidance
If someone is afraid of risks, the best way to deal with
it is to avoid it completely.
Example; a manufacturer may stop production of a
defective products to avoid a lawsuit.
However, some risks are unavoidable although risk
avoidance may be chosen as an option in handling
certain risks, the exposures of losses cannot be
eliminated entirely.
17. Loss Control
Loss control is designed
to reduce both the
frequency and severity
of losses by changing
the characteristics of the
exposure so that it is
more acceptable to the
firm. Divided into:
– Loss prevention
– Loss reduction
18. Loss Control
Loss Prevention
– Seek to reduce the
number of losses
(frequency) of losses
– Is used when the benefits
outweigh the costs
involved.
– Either imposed by law or
imposed by companies
and factories to fence
dangerous machinery to
reduce the chances of
employees being injured.
Loss Reduction
– Designed to reduce or lower
the severity of losses,
should it occur.
– Since some risks are
unavoidable, the other
alternative is to reduce its
impact.
– Can be used in two
circumstances: before a
loss, e.g. installation of fire
alarm or after a loss e.g.
salvage efforts in the
restoration of a building
burnt down by fire.
19. Separation
Involves the dispersal
of the firm’s assets in
several locations
instead of confining it
to one major area.
This measure will
reduce the impact of
losses should a major
disaster occurs.
20. Contractual Transfer
Risk transfer mechanism.
Refers to the various methods other than insurance
by which a pure risk and its potential financial
consequences can be transferred to other party.
21. Contractual Transfer
Types of contractual transfer
– Incorporation
• The owner of the company transfers the risks to corporation
by registering the company.
– Leasing contracts
• An agreement where the owner or landlord transfers the risks
to the tenants
– Hedging
• An agreement to buy or sell a commodity at a certain price to
avoid losses due to price increase or decrease.
– Hold-harmless agreements
• An agreement between a retailer and a manufacturer whereby
the later agrees to bear losses due to the manufacturer of
defective products thus relieving the retailer of any liability.
22. Contractual Transfer
Advantages
– Can transfer
potential losses that
are commercially
uninsurable
– Often cost less than
insurance
– Potential loss shifted
to a party who is in a
better position to
exercise control
Disadvantages
– If the party to whom the
loss is transferred is
unable to pay the loss
the firm is still
responsible
– Not necessarily cheaper
than insurance if
discounts are taken into
consideration
23. RISK FINANCING
Methods involving generating funds to
pay for these losses
– Retention
– Self insurance and captive insurer
– Insurance
24. Retention
Retention – the company will
bear the consequences of the
loss
Risk or loss exposed are
normally assumed or retained
when their impact and
consequences are not too
great or in cases when or
other methods seem feasible.
In an organization, the ability
to assume a risk depends on
one’s financial ability.
25. Self insurance
Self insurance implies tat
the organization sets up a
pool of fund to retain its
loss exposures.
Adequate financial
agreement has to be made
in advance of the
occurrence of losses.
26. Captive Insurer
A captive insurance
company is an entity to
write insurance
arrangement for its parent
company.
The captive’s parent may
be one company, several
companies or an entire
industry.
27. Insurance
Risk financing method of
transferring the financial
consequences of potential
accidental losses from an
insured firm or family to an
insurer
Transferring the risks to
another party involves a
contractual agreement whereby
the other party assumes the
risks and is liable for the loss in
the event of loss.
28. Insurance
In an insurance contract,
the party exposed to the
risks (the
proposer/insured) pays
the premium to the
insurance company.
In return, the insurance
company agrees to pay a
stated sum on the
happening of certain risks
specified in the contract.
29. TO DRAW UP AND IMPLEMENT THE
RISK MANAGEMENT PROGRAM
Once a decision has been in the selection,
the management must select the best and
most cost effective risk management program
The selection may based of two factors
– Financial criteria – whether it will affects the
organization’s profitability or rate of return.
– Non financial criteria – whether it affects the
growth of the organization.