Economic facult

1. Chapter one
Introduction to Risk Management
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2. 2
Chapter Objectives
• Explain three ways to categorize risk
• Sources of risks examples of risks involving property,
liability, life, health, loss of income, and financial
losses
• Identify the difference between hazards and perils
• Explain the concept of traditional, Integrated and
enterprise risk management
• Explain the four steps in the risk management process
Identify risks, Evaluate risks, and Select risk
management techniques , Implement and review
decisions.

3. Introduction
• Risk Management is a
method that helps managers
make best use of their
available resources.
• It is the process of
identification, analysis,
assessment, control, and
avoidance, minimization, or
elimination of unacceptable
risks.
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4. Introduction
• Risk Management processes are widely
used in public and the private sectors:
• Finance and Investment,
• Insurance,
• Health Care,
• Public Institutions and Governments.
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5. 5
Introduction
• Risk, which is often used to mean
uncertainty, creates both problems and
opportunities for Business and
individuals in nearly every walk of life.
• management, Employees, investors,
students, travelers, and farmers all face
risk and Manage in various ways.

6. The Difference Between Risk
and Uncertainty
• In business, risk might suggest the
potential loss of money, time, or
information. Most importantly, risk can
be calculated or measured.
• In contrast, uncertainty involves
situations with unknown variables,
information, and outcomes. Uncertainty
cannot be measured or calculated.
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7. Introduction
• Sometimes a particular
risk is analyzed and
managed while other times
risk is simply ignored,
maybe lack of knowledge
of its consequences or
less impact.
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8. 8
Introduction
• Risk regarding the possibility of loss
can be especially problematic
• If a loss is certain to occur
– It may be planned for in advance and
managed as a specific, known expense
• When there is uncertainty about the
occurrence of a loss
– Risk becomes an important problem

9. 9
Introduction
• Businesses may try to either avoid risk of
loss or to reduce its negative consequences
• A total cost of risk is the sum of
– Expenses of strategies to finance potential
losses
– The cost of un refund losses
– Outlays to reduce risks
– Opportunity cost of activities forgone due to
risk considerations

10. Introduction
• To minimize the cost of risk
efficiently, every company must
learn about the different types of
risk and find ways to deal with risk
more effectively.
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11. 11
FIGURE 1-1 Types of Risk

12. Pure risk
• Pure risk
• is defined as a situation in which there are
only the possibilities of loss.
• Pure risk exists when there is uncertainty
as to whether loss will occur
• No possibility of gain is presented only the
potential for loss.
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13. Pure risk
• Example of pure risk include
the uncertainty of damage
to property by fire, floods,
or the prospect of premature
death caused by accident
or illness.
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14. Types of Pure Risk
• Types of Pure Risk
• the major types of pure risk that can
create great financial insecurity include
Personal risks,
• Property risks, and
• Liability risks.
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15. 15
Speculative Risk
• Speculative risk
• is defined as a situation in which either
profit, break even point or loss is
possible.
• Speculative risk exists when there is
uncertainty about an event that can
produce either a profit or a loss.

16. Speculative Risk
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17. Pure vs Speculative Risk
• Business companies and investment
decisions are examples of situations
involving speculative risk.
• Profit as well as losses may occur,
changing the nature of the uncertainty
that is present.
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18. Static Risk
• Static risks are risks that involve losses
about by action of nature or mistakes of
Human. Static losses are an economy
that is not changing (static economy)
and as such, static risks are associated
with losses that would occur in an
unchanging economy.
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19. Dynamic Risks
• Dynamic risk is risks about by changes
in the economy. Changes in
• Price level,
• Income,
• Need of consumers,
• Technology etc
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20. Subjective vs Objective Risk
• Subjective risk
• is defined as uncertainty based on a
person’s mental condition or state of
mind.
• The impact of subjective risk varies
depending on the individual. Two
persons in the same situation can have
a different perception of risk, and their
behavior may be changed accordingly.
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21. different perception
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22. 22
Subjective vs Objective Risk
• Objective risk differs from subjective risk in
the sense that it is more exactly observable
and therefore measurable.
• Objective risk
• is defined as the relative variation of actual
loss from expected loss.

23. Objective Risk
• For example, assume that a property
insurer has 10,000 houses insured over
a long period and. On average, 1
percent, or 100 houses, burn each year.
However, it would be rare for exactly 100
houses to burn each year.
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24. Objective Risk
• In some years, as few as 90 houses may
burn; in other years as many as 110
houses may burn.
• Thus: there is a variation of 10 houses
from the expected this relative variation
of actual loss from expected loss is
known as objective risk.
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25. Sources of Risk
• This section briefly explains the
common sources of risks, which
include property risks; liability
risks; and life, health, and loss of
income risks.
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26. 26
Sources of Risk
• Property risks
– All business and individuals that own, rent or use
property are exposed to the risk that the property
may be damaged, destroyed or stolen.
– If property damage is large, a business may be
forced to shut down temporarily, there fore
incurring a loss of income in addition to the
expense of replacing the damaged property.

27. Sources of Risk
• Liability risks
– Legal judgments may result in payments
made to compensate injured parties as well
as to punish those responsible for the
injuries
– All individuals who own or use real property
are at risk to liability losses if others are
injured on their premises
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28. 28
Sources of Risk
• Life and health and loss of income risks
– The possibility of the premature death of a
star salesperson or key employee.
– The potential death of a parent with young
children
– Employees who become ill or injured in
accidents

29. Sources of Risk
• Businesses and individuals also face
risks associated with health problems.
Persons who become sick or who are
injured in accidents will incur expenses
for medical treatment, and the cost of
such treatment is becoming increasingly
expensive. 29

30. Sources of Risk
• Sometimes businesses arrange to
pay some or all of such expenses for
their employees, regardless of
whether a sickness or injury is job
related.
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31. Sources of Risk
• The possibility of the premature
death of star salesperson will be
potential loss to employer if a
replacement with the same skills
and experience is not available.
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32. Sources of Risk
• Financial risk
– Include credit risk, foreign exchange risk,
product or service risk, and interest rate
risk.
– These risks must be identified and assessed
in order for the firm to achieve its business
goals.
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33. Discussion
• the common sources of risks include
property risks, liability risks, financial
risk and life, health, and loss of income
risks.
• Which one you think is high risk to
Business and individuals? Why?
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34. 34
Measurement of Risk
• Chance of loss
– The long term chance of occurrence, or relative frequency
of loss
– for example, suppose 1,000 business buildings in a
particular area for example makah al mukarama road are
considered to be susceptible to the risk of loss due to a
explosion.
– If past experience indicates that 20 of these buildings are
likely to be damaged, then chances of loss is 2 present.
• This number is determined by dividing the probable number of
losses (20) by the number of buildings exposed to loss (1,000).

35. 35
Measurement of Risk
• Degree of Risk
• Amount of objective risk present in a
situation
• Relative variation of actual from expected
losses
– Objective risk = probable variation of actual
from expected losses ÷ expected losses
– Risk Yaaqshiid = (105 – 95) / 100 = 10 percent
– Risk Warta Nabada = (120 – 80) / 100 = 40 percent

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Degree of Risk
• If a loss has already occurred the probable
variation of actual from expected losses is
zero
– Therefore the degree of risk is zero
• If it is impossible for loss to occur the
probable variation is also zero

37. Measurement of Risk
– Peril/risk
– Specific emergency that may cause a loss
• Hazards
– Conditions that exist which either increase the
chance of a loss for a particular risk or tend to make
the loss more severe once the peril has occurred.
• Physical hazard
• Moral hazard
• Morale hazard
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38. 38
Hazards
• Physical hazard
– A condition stemming from the material characteristics of an
object
• An icy street makes the occurrence of accident more likely to
occur
– The icy street is the hazard and the accident is the risk
• Moral hazard
– Moral Hazards are behaviors or activities that increase risk,
such as drug or alcohol use. These have social, as well as,
personal effects.
• Morale hazard
– The mental attitude of a careless or accident
– Related to person’s attitudes, cultures and perception

39. 39
Management of risk
• Risk management
– Process used to systematically manage risk exposures
Traditional risk management goal has been to minimize the
cost of pure risk to the company.
• Integrated risk management and enterprise risk
management
– Aim is to manage all forms of risk.
• Many businesses have special departments charged
with overseeing the firm’s risk management activities
– The head of such a department often is called a risk manager
• Some firms have formed risk management
committees
• Some firms have created the position of chief risk
officer to coordinate the firm’s risk management
activities

40. 40
Risk Management Process
1. Identify risks
2. Evaluate risks (Frequency and severity)
3. Select risk management methods
4. Implement and review decisions

41. Risk Management
Process
• Identify risks
• There are many potential risks that face
individuals and businesses. Therefore,
the first step in the risk management
process is to identify the firm’s risks
from a different sources, include
operational, financial and strategic
activities.
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42. Risk Management
Process
• Risk Management is on going process
because new risks may become known
as the firm progresses through its life
cycle, previously‐identified risks may
drop out, and other new risks may be
updated.
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43. Risk Management
Process
• Evaluate risks
–For each source of risk that is
identified, an evaluation should be
performed. in terms of its probability
and impact on the company if it were
to occur.
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44. Risk Management
Process
–In addition to the evaluation of loss
frequency or Impact as
– “High” – First priority for risk
response.
– “Medium” – Risk response as time
and resources allow.
– “Low” – No risk response required at
this time.
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45. Risk Management
Process
• It should be performed as soon as
possible after risks have been
identified so that appropriate time
and resources can be allocated to
the more serious risks.
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46. Risk Management Process
• Select risk management methods
• The results of the analyses in step 2 are
used as the basis for decisions
regarding ways to manage existing
risks.
• In some situations, the best plan may be
to do nothing. In other cases,
complicated ways to finance positional
losses may be arranged.
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47. Risk Management
Process
• After a manager has analyzed all the
alternatives, he or she must decide on
the best one.
• The best method is the one that produces
the most advantages and the fewest
serious disadvantages.
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48. Risk Management Process
• Implement and review
decisions
• The business and
individuals must implement
the selected method.
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49. Recap
• What did you understand this
Chapter?
• How it related to your life,
environment and your past
experiences?
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50. End
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