Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters
Risks which are not capable of avoidance, prevention, reduction to a large extent or assumption may be transferred from one party to the other party. The basic objective of insurance is to transfer the risk of a person to the insurance company which has easily spread it over a large number of persons insuring similar risks. As such, for handling risks which involve large financial losses or which are dangerous, insurance is a means of shifting such risks in consideration of a nominal cost called premium.
2. Risk Management
Risk management is the process of identifying, assessing and controlling threats to an
organization's capital and earnings. These threats, or risks, could stem from a wide
variety of sources, including financial uncertainty, legal liabilities, strategic
management errors, accidents and natural disasters
3. Steps In The Risk Management
Process :-
Identify all
significant risks
that can cause
loss.
Evaluate
potential
losses.
Develop and
select methods
for treating loss
exposure
Implement and
administer the
program.
4. Steps In The Risk Management
Process :-
Implement and administer the program.
Methods For Treating Loss Exposure
1. Risk Control :- Avoidance, Loss Prevention, Loss Reduction
2. Risk Financing :- Retention, Non Insurance Transfers, Commercial Insurance
Evaluate potential losses.
Identify significant potential losses.
5. Identifying
Significant Potential
Loss Exposures :-
The first step in this process is risk
identification. There are various methods
of identifying exposures Which Includes
:-
1. Analysis of the firm’s financial
statements
2. Survey of employees
3. Discussion with managers throughout
the firm
4. Discussion with insurance agents and
risk management consultants.
5. Risk analysis questionnaire.
6. Historical loss data.
7. Overall understanding of business etc.
6. Evaluating Potential
Losses :-
The Second step in corporate risk
management process is measurement
and evaluation of risk in order to project
the frequency and severity of future
losses.
1. Loss Frequency :- It refers to the
probable number of losses that may
occur during some given time period.
2. Loss Severity :- It refers to the probable
size of the losses that may occur.
o It is better to consider property risks
separately from other risks.
7. Methods For
Treating Loss
Exposures :-
Risk is the occurrence of an uncertain
event which causes loss. Various
methods or techniques are available to
tackle the problem of risk and a few of
those are mentioned here as under :-
1. Avoidance of Risk
2. Risk Reduction or Prevention
3. Retention or Assumption of Risk
4. Transfer of Risks
5. Insurance
6. Management of Risk and Risk Research.
8. Avoidance of Risk
Avoidance is perhaps the most drastic method of handling risks. Generally
it involves such activities which zero a risk such as ceasing to continue the
activity which creates the risk or changing the way of performing the
activity. A risk of damage by flooding may be avoided by moving to another
site well above recorded flood levels.
9. Risk Reduction or Prevention
It includes all those methods which are employed to reduce either the
probability of loss creating events or to minimize such events. Generally, it
is impossible to prevent a risk completely. But every possible effort is made
to reduce their frequency and severity. There are a number of ways in
which the financial outcome of such risks may be handled.
10. Retention or Assumption of
Risk
One best way of handling risks is to retain risks with self. It is the easiest
and cheapest way of dealing with relatively small losses by paying out of
one’s own resources whenever they occur or by creating some contingent
reserves or funds to meet such losses, if their magnitude is somewhat
large. Some risks which are not insurable must be tolerated at one’s own
level. As such, assumption of risks may either be deliberate decision or the
result of a failure either to recognize that risk or there exists no other
method to deal with such risks.
11. Transfer of Risks
Risks may be transferred in to two ways :-
1. A firm may seek to transfer the activity which is risky either be hedging,
stock exchange markets and by sub-contracting.
2. By making contractual arrangements to transfer responsibility for any
losses which are outcomes of the occurrence of specified uncertain event.
12. Insurance
Risks which are not capable of avoidance, prevention, reduction to a large
extent or assumption may be transferred from one party to the other party.
The basic objective of insurance is to transfer the risk of a person to the
insurance company which has easily spread it over a large number of
persons insuring similar risks. As such, for handling risks which involve
large financial losses or which are dangerous, insurance is a means of
shifting such risks in consideration of a nominal cost called premium.
Modern insurance system is capable of taking over largest possible risks
relating to persons, property and liability.
13. Management of Risk And Risk
Research
Almost in every developed country, large or giant organizations secure the
services of risk managers who are well equipped with the capability to
analyze and forecast the risks and take corrective or prevention measures.
Some organizations have a well organized research units as vital part of
management. As such, research designed to improve the information on
which decision are taken can help to reduce risks.
To conclude, and organization may use all or any one method of handling
irks in the light of financial consideration and organization objectives and
magnitude of risk etc.
14. Which Method To Be Adopted?
Types of
Loss
Loss
Severity
Loss
Frequency
Appropriate Risk
Management Technique
1. High High Avoidance
2. High Low Insurance
3. Low High Loss Prevention and
Retention
4. Low Low Assumption
Risk Management Matrix
15. Which Method To Be Adopted?
The Previous stated matrix is useful in determining risk management
techniques in various loss exposure according to frequency and severity.
1. The first type of loss exposure is having features of high frequency and
high severity. Best Technique to handle such losses is avoidance.
2. The second type of loss exposure can be handled by insurance method.
These risks have less frequency of occurrence but if they occur, they
involve large financial losses, are dangerous and uncontrollable by any
single person.
16. Which Method To Be Adopted?
3. The Third type of loss exposure is characterized by low severity and high
frequency i.e. losses occur frequently but severity is low. Loss prevention
should be used to handle with these exposures. Also because these
occur regularly and are therefore predictable, they can be retained also.
4. The last category is of both low frequency and low severity loss
exposures. This type of exposure can be handled by retention because it
seldom occurs and also has very less financial harm.
17. Implementing And
Administering The
Program :-
After selection of risk management
techniques, this is fourth step which
throws a light upon implementation and
administration of the risk management
program. This include following steps :-
I. Risk Management Policy
II. Co-operation with other Departments
Risk Management program can be
implemented with the help of these
departments :-
1. Production
2. Marketing
3. Finance
4. Personnel
18. Conclusion/Periodic
Review and Evaluation
This program must be periodically
reviewed and evaluated to know
whether objectives are being
achieved. Various loss prevention
and risk reduction techniques are
being adopted or not. After
developing new safety programs
in the firm, whether there is any
change in loss frequency and
severity of losses.