Introduction to risk management

1. RISK AND INSURANCE MANAGEMENT
BBBA 405
Lecture 2; Week 2

2. OUTLINE
• Meaning of Risk Management
• Objectives of Risk Management
• Steps in the Risk Management Process
• Identifying Loss Exposures
• Analyzing the Loss Exposures
• Selecting the Appropriate Techniques for
Treating the Loss Exposures

3. Meaning of Risk Management
• Risk Management
– A systematic process for managing (pure) risks
faced by an individual or organization.
– The purpose of a risk management program is
to manage an organization’s exposure to loss
and to protect its assets.
• Loss Exposure
– Any situation or circumstance in which a loss is possible regardless of
whether a loss occurs.

4. New Definitions
Risk The impact of a currently
unknown event on the business
A potential problem
Risk Assessment Defining the likely outcome of
uncertain events
Risk Management Evaluating the range of risk
responses available and deciding
the most appropriate
one in each case

5. Objectives of Risk Management
Risk
management
has important
objectives.
These
objectives can
be classified as
follows:
Pre-loss objectives
Post-loss objectives

6. Pre-loss objectives
ECONOMY
EFICIENCY
REDUCTION
OF ANXIETY
MEETING
ANY LEGAL
OBLIGATION
Pre –Loss
Objectives

7. Post-loss Objectives
Survival
of the
firm
Continued
operation
Stability
of
earnings
Continued
growth
Social
responsibi
lity
Ensure
organisat
ion
survives
losses
To operate
after loss
occurs
Earnings
per share
can be
maintaine
d
Firm to
continue to
grow after
loss
To
continue
to behave
responsibl
y

8. Risk Management Process
What kinds of events can damage my
business, how much damage can be
done, and what should I do about it?
.
“Did I make the right decisions? Were
my choices too expensive? Have
circumstances changed sufficiently so
that past decisions no longer apply?

9. Risk Management Process
• Risk management process needs to be supported
by a framework within the organization.
• The key components of a successful risk
management framework are
– the communications and reporting structure
(architecture),
– the overall risk management strategy that is set by
the organization (strategy) and
– the set of guidelines and procedures (protocols) that
have been established.

10. Steps in the Risk Management Process

11. The Process
• Step 1 - Identification
– Loss exposures
– Methods
• Step 2 – Evaluation
– Frequency
– Severity
• Step 3 – Risk Management Selection
– Control vs. Finance
– Prevention vs. Reduction
• Step 4 – Implementation and Monitor

12. Step One: Identify All Significant
Risks
A. Identify the Loss Exposures
1. Important loss exposures
a. Property loss exposures
b. Liability loss exposures
c. Business income loss exposures
d. Human resources loss exposures
e. Crime loss exposures
f. Employee benefits loss exposures
g. Foreign loss exposures
h. Intangible property loss exposures
i. Failure to comply with government laws and
regulations

13. Step One: Types of Risks

14. Cont.
• Tools for recognizing loss exposures are:
a. Risk analysis questionnaires
b. Physical inspection
c. Flowcharts
d. Financial statements
e. Historical loss data
14

15. Step Two: Measure and Analyze the
Loss Exposures
1. Two concepts
• a. Loss frequency
• b. Loss severity
• After this loss exposures are prioritized
according to their relative importance.

16. Cont.
• Catastrophic losses are difficult to predict
because they occur infrequently. However,
their potential impact on the firm must be
given high priority.
• In contrast, certain losses, such as physical
damage losses to cars and trucks, occur with
greater frequency, are usually relatively small,
and can be predicted with greater accuracy.

18. Step Three: Develop and select
methods for managing risk
Selecting the
most
appropriate
technique, or
combination of
techniques, for
treating the loss
exposures.
Risk control Techniques that
reduce the
frequency and
severity of
losses
Risk financing Techniques that
provide for the
funding of
losses

19. Risk Management Techniques
Avoidance
Loss control
Prevention
Reduction
1
Risk control options
• Retention
• Transfer
–Insurance
–Non-
insurance
2
Risk Financing Options

20. Avoidance
Loss exposure is never
acquired
Existing loss
exposure is
abandoned
.

21. Advantages
The chance of loss
is reduced to zero if
the loss exposure is
never acquired.
The firm may not be
able to avoid all
losses
If abandoned, the
chance of loss is
reduced or eliminated
Disadvantages
It may not be
feasible or
practical to avoid
the exposure

22. Loss Prevention
• Loss prevention refers to measures that
reduce the frequency (number of times) of a
particular loss or eliminate them entirely.

23. Loss Reduction
• Loss reduction refers to measures that reduce
the severity (the size) of a loss after it occurs.

24. In conclusion
Effective risk control
techniques can
significantly reduce the
frequency and severity of
claims, especially in
workplace safety.
Effective safety programs
reduce direct costs
(payments to injured
workers and health care
providers) and indirect
costs (such as overtime and
lost productivity)
A study by one insurer
found that for every $1
invested in workplace safety
by employers, savings of $3
or more are possible

25. Risk Identification Example