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RISK ANALYSIS AND MANAGEMENT
Mugher Cement Enterprise MERGA MEKURIA & BARSISA KACHO
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RISK ANALYSIS AND MANAGEMENT
OBJECTIVES OF THE TRAINING Up on completion of the training,
trainees will; Understand the concept of risk Explain the various forms and sources of risk Recognize risks related to cement industries Explain the risk management process Analyze the risk management process Apply the risk management process
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RISK ANALYSIS AND MANAGEMENT
Guiding questions What is Risk Management?
Who uses Risk Management? How is Risk Management used? Risk Management in cement enterprise Mouse ‘Click’ to move on to the next slide
Next 3
RISK ANALYSIS AND MANAGEMENT
Introduction People undertake business activities with the main objective of making profit. As there is a chance to get profit, there is also a possibility of loss due to one of the essential characteristics of a business in that it involves an element of risk.
Risk exist because there is no perfect foresight about the future. 4
RISK ANALYSIS AND MANAGEMENT
INTRODUCTION Risk is undesirable and its consequences are at times damaging
to
individuals, businesses and the society as a whole, mankind is constantly developing its predictive ability through the constant upgrading and refinement of its knowledge. The more mankind is knowledgeable about the future, the more certain it will be concerning future events. But the disappointing phenomenon is that perfect foresight about the future is something impossible. Thus, risk becomes a fact of life that will remain side by side with the activities of mankind.
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RISK ANALYSIS AND MANAGEMENT
INTRODUCTION These and related facts, thus, call for the need for sound
risk management in firms. There is a need to identity possible risks. There is a necessity to device and employ preventive measures. To manage risk, it is imperative to anticipate the possible consequences of our actions. As such, this training manual discusses
the nature of risk, its identification, measurement and management processes in general and in cement factories in particular. 6
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Risk Defined No comprehensive definition exists so far. It is defined in different forms by several authors with some
differences in the wordings used. The essence, however, is very similar. In general, risk refers to exposure to adverse consequences. Some definitions are as forwarded to you below:
is a possibility of an adverse deviation from a desired outcome
that is expected. is the possibility that something we don't want to happen will happen or that something we want to happen will fail to do so. is the variation in outcome that could occur over a specified period in a given situation.
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS For example, in a manufacturing organization, there may be a reliance on a critical component produced by a third party without which the product cannot be manufactured. Unavailability of this component would severely disrupt, if not stop the business process.
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RISK ANALYSIS AND MANAGEMENT
Activity In group of five Take 10 minutes to discuss What types of risk are there associated with cement
manufacturing?
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Sources of risk Sources of risk are the sources of factors or hazards that may contribute to positive or negative outcomes. It can be classified in different ways. Authorities classify sources of risk in various ways. Some identify general sources while others become more specific. how the environment in which the firm operates can become source of risk ?
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS
Sources of risk Environment as a source of risk
Physical Environment Social Environment Political Environment Legal Environment
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Physical environment This source of risk emanates from our ability to fully
understand our environment and the effect we have on it as well as those that have on us. Examples of physical environment Earthquakes, drought, or excessive rainfall can all lead to accidental
losses.
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RISK ANALYSIS AND MANAGEMENT
RISK ANDEnvironment RELATED CONCEPTS Social This relates to changing morals and values, human
behavior, social structures and institutions, etc. A social environment is a reflection of cultural, religious, and moral values of people. As these values differ significantly, the social environment in different areas differs. For example comparison of a social environment in Addis and Nairobi may reveal that Addis is less risk y than Nairobi. Note that social environment also includes the working habit of people. A social environment, which is reflected by cultural,13
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Political environment A change in government or a change in its composition may bring with it new policy directions that might have dramatic effects on a firm’s operation. For instance, if one government in a country changes to a very hostile government that fails to recognize the rights of people, business people could find themselves in risky situations. Moreover, when a country is in a political upheaval or when the government lacks credibility, political environment can be a source of risk. 14
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Political environment In the international realm, the political environment is even more complex Some countries might confiscate foreign business people’s assets or may change their policies, in a way that impedes their operations. You may remember what the Eritrean government did to Ethiopian business people during Ethio-Eritrea conflict. This is a good example of politically motivated risk. In fact one can see how the Djibouti government creates problems by changing port related policies overnight. 15
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Legal environment A great deal of uncertainty and risk might arise from the legal system as it evolves new standards that may not be fully anticipated.
The lease policy, the investment codes and the general policy of an economy concerning
businesses have a big impact on the economy and
unexpected unfavorable changes would mean a lot in terms of causing risks. This complexity increases in the international domain as legal standards may vary from country to country. 16
RISK ANALYSIS AND MANAGEMENT
Activity In group of five Take 10 minutes to discuss What do you think is the effect of land lease policy that was recently formulated on cement market?
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Related concepts to risk are the following; Uncertainty Probability Peril Hazard
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RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty People often confuse the terms risk and uncertainty.
The terms are distinct concepts. Uncertainty Is the doubt a person has concerning his or her ability to
predict which of the many outcomes will occur? Is a person’s conscious awareness of the risk in a given situation Depends upon the person’s estimated risk-what that person believes to be the state of the world-and the confidence he or she has in this belief. Exists only with awareness; it is a state of mind whereby a sentient entity experience19
RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty Some authors argue that risk may cause uncertainty. Thus, the relationship between risk and uncertainty is established in terms of cause and effect. They state that “knowledge of the existence of risk and appreciation of its significance creates a feeling of uncertainty. Risk, when we are aware of it, cause uncertainty.” Unlike probability & risk, uncertainty cannot be measured by any commonly accepted yardstick. In general uncertainty results in a feeling of insecurity. 20
RISK ANALYSIS AND MANAGEMENT
Decision making techniques under uncertainty Maximax Maximin Laplace Criterion of realism Regret criterion
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RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty Some authors differentiates risk and uncertainty in
such a way that risk involves assigning the true theoretical or estimated
probabilities to the possible outcomes; where as in the case of uncertainty it is difficult to estimate and assign probabilities. Thus, risk is understood as a situation where the probability distribution of possible future events is known, whereas such is not the case under uncertainty. 22
RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty Example: The risk of cigarette smoking existed the moment cigarettes are produced. However, uncertainty did not arise until the relationship between cigarette smoking and cancer is established through scientific and empirical research. Hence, risk is the state of the world while uncertainty is the state of mind.
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RISK ANALYSIS AND MANAGEMENT
Risk versus Probability There exists also some confusion as to the difference
between risk and probability. Probability is the long-run chance of occurrence or
relative frequency of some event; whereas risk is the relative variation of actual loss from expected loss. Probabilities are generally assigned to events that are expected to happen in the future.
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RISK ANALYSIS AND MANAGEMENT
Risk versus Probability Thus to each possible event is assigned a corresponding
probability of occurrence that leads to probability distribution. This means that probability relates to a single possible event. Risk, on the other hand, refers to the variation in the possible outcomes. This means that risk depends on the entire probability distribution. It indicates the concept of variability. Risk and probability are, therefore, two different things. 25
RISK ANALYSIS AND MANAGEMENT
Risk Example: versus Probability Consider the occurrence of a particular event. One extreme is that the event is certain to take
place.100% but there is no risk (risk=0) because there is a perfect foresight as to the occurrence of the event in this regard. The other extreme is the event will not take place at all (0) . Here, too, there is certainty and, therefore, no risk. In between these two extremes there could be several occurrences of the events with the corresponding probabilities of occurrence. This puts us in a situation of uncertainty because it is
26
RISK ANALYSIS AND MANAGEMENT
Risk, Peril and Hazards Peril Peril refers to the specific cause of a loss. It is the prime cause or what will give rise to the loss. e.g. fire, windstorm, theft, flood, explosion, collusion, etc Hazards refer to the condition that may create or increase the chance of loss arising from a given peril. affects the magnitude (severity) and frequency of a loss. increase the effect should a peril operate. The more hazardous conditions are, the higher the 27
RISK ANALYSIS AND MANAGEMENT
Risk, Peril categories and Hazards Three of hazards are identified: Physical hazard This is associated with the physical properties of the items exposed to risk. Conditions
stemming from the physical characteristics of an object. Examples may include:
Type of construction (wood, bricks) Location of property (near burglar area, flood area, earthquake area). Occupancy of building (dry cleaning, chemicals, supermarkets) Existence of dry forest-for fire
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RISK ANALYSIS AND MANAGEMENT
Risk, Peril and Hazards Moral Hazard: Originates from evil tendencies in the character of
the insured person. is associated with human nature: qualities, reputation, attitude, etc. Stems from dishonesty or character defects of an individual that increases the probability as well as the severity of loss. Examples may include:
Faking an accident to collect insurance money. Submitting a fraudulent claim. Inflating (exaggerating) the size of a claim. Intentionally burning unsold merchandise that is
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RISK ANALYSIS AND MANAGEMENT
Risk, Peril and Hazards Morale Hazard It does not involve dishonesty but it occurs due to
lack of concern for events. Carelessness or indifference to a loss because of the existence of insurance. This type of individual does not appear to deliberately cause the accident that happen Examples may include:
Leaving key in an unlocked Leaving a door unlocked Poor housekeeping in stores Cigarette smoking around petrol station. 30
RISK ANALYSIS AND MANAGEMENT
Hazards in cement industries and their sources Risks in cement factories emanate from the processes
involved in the production and distribution of cement products and
Generally speaking, there are three major processes of
manufacturing cement such as; Quarrying
Crushing and Storage and material transportation systems
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RISK ANALYSIS AND MANAGEMENT
Hazards in cement industries and their sources
Associated with each of the above mentioned processes, there are factors that are likely to increase the severity as well as the chances of occurrences of risk in cement industries. For fast conceptualization of how this works, let us look at the flow chart diagram of the
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RISK ANALYSIS AND MANAGEMENT
Hazards in cement industries and their sources
Cement manufacture process flow Quarrying
Crushing
Storage and transportation
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RISK ANALYSIS AND MANAGEMENT
Quarrying The quarrying activity includes the drilling of bore holes, the filling up of explosives and the triggering of the explosives. Once this happens then the material is loaded and
transported either to open storage piles or to the crushing area. During the process of charging and ignition, the explosives are transported to the explosion area from the explosive storage facilities. 34
RISK ANALYSIS AND MANAGEMENT
Hazards as a result of the storage , transport and use of explosives
The explosives are stored only in approved
sites that have to comply with the requirements of relevant legislation. During explosives storage the main hazards are the following: Storing explosives and capsules in the same area Entry of unauthorized persons in the area Smoking or use of naked flame in the
35
RISK ANALYSIS AND MANAGEMENT
Storage of other equipment Hazards as a result of the goods storage,and transport and use of explosives Bad housekeeping in and out of the warehouse. Inadequate distance (<10cm) between the containers
and the warehouse wall Insufficient building maintenance (lighting, ventilation) with the possibility of concentration of humidity in the warehouse Execution of non-approved maintenance work on the warehouse electrical wiring. Insufficient warehouse security Not following the FIFO (First In First Out) in the management of explosive stocks 36
RISK ANALYSIS AND MANAGEMENT
Hazards during the transport of the explosives are:
The use of unauthorized vehicles The transport of explosives together with
capsule as well as not keeping the necessary labeling during transport The carrying of passengers The unplanned stoppage The transport of explosives during unstable weather 37
RISK ANALYSIS AND MANAGEMENT
Hazards use of explosives are: rules and Theduring failure the to implement the company regulations The use of unauthorized explosives The failure to use the approved explosion plan The failure to prevent unauthorized person to approach the explosives area The transport of more than required explosives quantity The temporary storage of explosives at excessive temperatures (greater than 65 degrees Celsius) or near naked flame 38
RISK ANALYSIS AND MANAGEMENT
Hazards during thethe use filling of explosives are: triggering the During up and
explosives the main hazards are: The triggering of the explosives by unauthorized personnel or outside the agreed timetable The insufficient warning prior to triggering The approach of other persons other than the person in charge near the explosion area following the triggering 39
RISK ANALYSIS AND MANAGEMENT
Hazards during holing process During the the boreBore holing process the basic hazards are: The moving parts of the bore holing machinery Falls from height Material falling from height Crushing of quarry table Hurling of material Presence of dust and noise Movement of earth moving equipment 40
RISK ANALYSIS AND MANAGEMENT
Crushing Hazards The rotational movement and the movement of the parts of the crusher The exposure to noise and dust of the personnel responsible for the continuous control of the crusher The maintenance activities inside the crushing chamber The electrical problems The activities inside the hopper due to: The operation of the feeder The possible crushing of material 41
RISK ANALYSIS AND MANAGEMENT
Crushing Hazards The movement of heavy goods vehicles: Reversing of the vehicle into the hopper
Accident on personnel
The inappropriate loading of material
onto the heavy goods vehicles with the result that material is hurled from the vehicle as the material is transported.
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RISK ANALYSIS AND MANAGEMENT
Storage and material transportation systems
The main hazards during the transportation
and storing of material are: The airborne dust created during the storage of material The conveyor belts during their normal operation as well as during their maintenance F:\risk1\TRAINIG MANUAL FOR RISK MANAGEMENT IN CEMENT INDUSTRY2.doc 43
RISK ANALYSIS AND MANAGEMENT
Objective VsRisk Subjective Risk Objective The relative variation of actual from probable or
expected loss. Refers to the variation that exists in nature is the same for all persons facing the same situation. Is concerned with the range of variability of economic losses about some long-run average (most probable) loss in a group large enough to analyze significantly in a statistical sense.
Objective Risk = loss
Probable variation of actual Probable losses
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RISK ANALYSIS AND MANAGEMENT
Example Consider the probability of fire losses to buildings in two towns A and B. There are 100,000 buildings in each town and, on average each town has 100 fire losses per year. By looking at historical data from the towns, statisticians are able to estimate that in town A, the actual number of fire losses during the next year will very likely, range from 95 to 105. In town B, however, the range probably will be greater, with at least 80 fire losses expected and possible as many as 120. Objective risk A = 105-95 = 10%
100
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RISK ANALYSIS AND MANAGEMENT
Subjective Risk of The estimate
the objective risk which depends on the person’s psychological belief is the subjective risk. Psychological uncertainty that stems from the individual’s mental attitude or state of mind. May be measured by means of different psychological tests but no widely accepted or uniform tests of proven reliability have been developed. The impact of subjective risk varies depending on the individual. Subjective risk may affect a decision when the 46
RISK ANALYSIS AND MANAGEMENT
Pure Vs Speculative Risks The distinction primarily rest on profit/loss structure of
the underlying situations, in which the events occur. Pure risks refer to the situation in which only a loss or no loss would occur. There is only two distinct outcomes loss or no loss. Most pure risks are insurable. They are always undesirable and hence people take steps to avoid such risks. These risks have no element of gain
Risk of motor accident Risk of fire at a factory Theft of goods from a store
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RISK ANALYSIS AND MANAGEMENT
Classification of pure risks Personal Risk
Are risks that directly affect an individual Refers to the possibility of loss to a person such as: death, disability, loss of earning power, etc… Involve the possibility of the complete loss or reduction of earned income, extra expenses, and the depletion of financial assets.
Property Risk
Refers to losses associated with ownership of a property, such as destruction of property by fire. Persons owning property are exposed to the risk of having their property damaged or lost from numerous causes Property risk stems from diverse perils accompanied by48
RISK ANALYSIS AND MANAGEMENT
Cont’d Liability risk Is the possibility of loss arising from intentional or
unintentional damage made to other persons or to their property.
Speculative Risk can result in three possible outcomes, loss, breakeven, or gain situations. People may deliberately create speculative risks when they realize that the favorable (gain) outcome is, indeed, so promising. Examples may include;
Investing in a venture Gambling transaction 49
RISK ANALYSIS AND MANAGEMENT
Static Vs Dynamic Dynamic Risks Risks
Originate from changes in the overall economy such as price level change, changes in consumer tastes, income distribution, technological changes, political changes. Are less predictable and hence beyond the control of the risk manager.
Static Risks Are losses arising from causes other than changes in the economy. Are predictable and could be controlled to some extent by taking loss prevention measures. Many of the perils fall under this category. 50
RISK ANALYSIS AND MANAGEMENT
Fundamental Vs Risk Particular Risks Fundamental It is impersonal in origin and widespread in effect. affect the entire society or a larger segment of the
population, which are usually, beyond the control of individuals. The responsibility for tackling these risks is, therefore, left to the society itself. They are generally uninsurable. Example include: Earthquakes, Floods, Famine, Volcanoes, 51 Inflation
RISK ANALYSIS AND MANAGEMENT
Particular Risks affect each individual separately. arise from
individual causes and affect individuals in their consequences. are dealt with by purchasing insurance policies and other techniques. Examples include:
Fire, Theft, Work related injury, Motor accidents, Property losses, Death,
52
RISK ANALYSIS AND MANAGEMENT
Risks Related Business Activities Most risks intobusiness environment are speculative in nature. The finance literature considers four such types of risks Business Risk is associated with the physical operation of the firm. Variations in the level of sales,
costs, profits are likely to occur due to a number of factors
inherent in the economic environment. 53
RISK ANALYSIS AND MANAGEMENT
Risks RelatedRisk to Business Activities Financial This is associated with debt financing. Borrowing results in the payment of periodic interest
charge and the payment of the principal upon maturity. There is a risk of default by the company if operations are not profitable. Other financial risks include: bankruptcy, stock price decline, and insolvency.
Interest Rate Risk This is a risk resulting from changes in interest rates. Changes in interest rates affect the prices of financial securities such as the prices of bonds etc. for interest rate 54 rise depresses bond prices and vice versa.
RISK ANALYSIS AND MANAGEMENT
Risks Related to Business Activities Purchasing Power Risk Arises
under inflationary situations (general price rise of goods and services) leading to decline in the purchasing power of the asset held. Financial assets lose purchasing power if increased inflationary tendencies prevail in the economy. 55
RISK ANALYSIS AND MANAGEMENT
Burden of Risk on Society The presence of risk results in certain undesirable social and economic effects:
How The size of emergency funds may be increased Deterrent effect on capital accumulation
Society is deprived of certain goods and services Higher cost of capital Worry and fear are present 56
RISK ANALYSIS AND MANAGEMENT
Beneficial Functions of Risk Risk enables wealth to be created. It does so in a number of ways: It creates the hope for profit It encourages a safety culture.
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END OF PART ONE
THANK YOU FOR YOUR ATTENTION 58
RISK ANALYSIS AND MANAGEMENT
PART II- RISK MANAGEMENT PROCESS
What is risk management? What are the major steps in risk
management?
59
RISK ANALYSIS AND MANAGEMENT
Risk management defined Risk management is a general management function that seeks to assess and address the causes and effects of uncertainty and risk on an organization.
Risk management is the identification, measurement and treatment of exposure to potential accidental losses almost
always in situation where the only possible outcomes are losses or no change in the status. 60
RISK ANALYSIS AND MANAGEMENT
RISK MANAGEMENT Risk management PROCESS is the systematic process for the identification
and evaluation of pure loss exposures faced by an organization or individual and for the selection and implementation of the most appropriate techniques for treating such exposures. is a discipline that systematically identifies and analyses the various loss exposures faced by a firm or organization and the best methods of treating the loss exposures consistent with the 61 organization’s goals and objectives.
RISK ANALYSIS AND MANAGEMENT
RISK MANAGEMENT PROCESS Risk Management practices are widely used in public
and the private sectors, covering a wide range of activities or operations. These include: Finance and Investment Insurance Health Care
Public Institutions Governments Risk Management is now an integral part of business
planning.
62
RISK ANALYSIS AND MANAGEMENT
The Risk Management process steps are a generic guide for any organization,
63
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Functions of Risk Management From the above definition one can infer that, there are
certain duties left for the risk manager of an organization. These include: To recognize exposures to loss: The risk manager must first of all be aware of the
possibility of type of loss. This is a fundamental duty which must precede all other function of risk management.
To estimate the frequency and size (severity) of
loss; Once the possible type of loss is identified, the risk
manager has to estimate the probability of loss from
64
RISK ANALYSIS AND MANAGEMENT
Risk matrix
65
RISK ANALYSIS AND MANAGEMENT
Functions of Risk To decide theManagement best and most economical method of handling the risk of loss Whether it be by assumption (retention),
avoidance, self-insurance, reduction of hazards, transfer, commercial insurance, or some combination of these methods. To administer the programs of risk
management Important, but often overlooked function of
risk management is the duty of constantly tracking and revaluating of the programs, record keeping & the like. 66
RISK ANALYSIS AND MANAGEMENT
Activity In a group of five trainees Take 10 minutes Discuss to what extent the above mentioned risk management process A) Exist B) Implemented C) Contribute
Towards the success of your enterprise goals
67
RISK ANALYSIS AND MANAGEMENT
Risk management matrix
68
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Objectives of Risk Management Risk management has several important objectives Mere survival, peace of mind, lower risk management costs and hence
Higher profits, Fairly stable earnings, Little or no interruption of operation, Continued growth, Satisfaction of the firm’s sense of social 69
RISK ANALYSIS AND MANAGEMENT
Objectives Risk Management Theseofobjectives of risk management can be classified as pre-loss and post-loss. Pre-loss objectives: - are objectives to be achieved prior to the occurrence of any loss. They include:
Handle potential losses in the most economical way possible Reduction of anxiety and fear associated with all loss exposures. Meeting externally imposed obligations 70
RISK ANALYSIS AND MANAGEMENT
Objectives of objectives: Risk Management Post-loss - objectives to be achieved after a loss has occurred, they include:
The survival of the firm Survival means after a loss occurs, the firm can at least resume partial operation within some reasonable time period if it chooses to do so. To continue operating For some firms the ability to operate after a severe loss is an extremely important objective. Stability of earnings The firm wants to maintain its earnings per share after a loss occurs. 71
RISK ANALYSIS AND MANAGEMENT
Cont’d To maintain continued growth of the
firm A firm may grow by developing new products and markets or by acquisitions and mergers. The risk manager must consider the impact that a loss will have on the firm’s ability to grow. To meet the goal of social responsibility It aims to minimize the impact that a loss
72
RISK ANALYSIS AND MANAGEMENT
Activity In groups of five Take 15 minutes Discuss The possible contribution of risk
management To whom does risk management contributes something? 73
RISK ANALYSIS AND MANAGEMENT
Contribution of Risk Management The possible contribution of risk management is discussed below: Contribution to a Business
The possible contribution of risk management to a business can be divided in to five major categories:
1. Risk management may make the difference between survival and failure. Some losses may so cripple a firm that without proper advance preparation for such events the firm must close its doors. 74
RISK ANALYSIS AND MANAGEMENT
Contribution of Risk Management 2. Risk management can contribute directly to business profits by reducing expenses as well as increasing income 3. Risk management can contribute indirectly to business profits in the following ways: By reduce the fluctuations in annual profits and cash
flows. make it possible to continue operations following a loss, thus retaining customers or suppliers who might otherwise turn to competitors through advance preparation. 75
RISK ANALYSIS AND MANAGEMENT
Contribution of Risk Management 4. Because the risk management plan may help
others such as employees, who would be affected by losses to the firm, risk management can also help satisfy the firm’s sense of social responsibility or desire for a good public image. 5. The peace of mind made possible by sound management of pure risks may itself be a valuable non-economic asset because it improves the physical and mental health of the management 76 and owners.
RISK ANALYSIS AND MANAGEMENT
Cont’d Contribution to Family The possible contributions may include: Protecting the family against catastrophic losses Reduction of expenditure for insurance without reducing its protection Provision of relief from physical or mental strain
Contribution to a society To the extent that individual businesses and
families benefit from risk management, so does the society of which they are members. 77
RISK ANALYSIS AND MANAGEMENT
The Risk Management Process Risk management is the identification, measurement, and
treatment
of property,
liability, and personal pure-risk exposures.
The process includes five steps: 78
RISK ANALYSIS AND MANAGEMENT
The Risk Management Process Step 1: Identification of Loss Exposures (Risks) This is the process in which the organization is able to learn areas in which it is exposed to risk. It is the most important, and perhaps the most difficult function that the risk manager or administrator must perform from among the element of the risk management process. It involves the identification of risks that affect the organization and identification of the related hazards 79
RISK ANALYSIS AND MANAGEMENT
Categories of Loss Although in Exposures the broadest sense the entire organization is at exposure to risk, it is useful to develop categories of exposures for analytical purposes. Physical asset exposures Ownership of property gives rise to possible losses or
gains to physical assets. Property could be
damaged, destroyed, lost or 80
RISK ANALYSIS AND MANAGEMENT
Categories Loss Exposures LiabilityofExposures Obligation imposed by the legal system creates this
type of exposures. Liability losses arise out of damage to or destruction of other’s property or personal injuries to others.
Human Asset Exposures : This involves such loses as; Losses to the firm itself as a result of the death,
disability or old age of employees, customers, or owners. Losses to the families of the personnel or the personnel themselves as a result of their death, disability, old age, or unemployment. 81
RISK ANALYSIS AND MANAGEMENT
The Risk Management process:
Identify the risks Defining types of risk, for instance, ‘Strategic’ risks to the goals and objectives of the organisation. • Identifying the stakeholders, (i.e.,who is involved or affected). • Past events, future developments.
Monitor and review
Communicate & consult
Next 82
RISK ANALYSIS AND MANAGEMENT
Illustration
83
RISK ANALYSIS AND MANAGEMENT
Methods of risk identification
Because most businesses are complex, diversified, dynamic operations,
a more systematic method of
exploring all facets of the specific firm is highly desirable. 84
RISK ANALYSIS AND MANAGEMENT
Methods risk identification Seven of methods that have been suggested are: The risk analysis questionnaire Financial statement method Flow-chart method On-site inspections Interactions with other departments 85
RISK ANALYSIS AND MANAGEMENT
This
measurement includes the determination of: The probability or chance that the loss will occur /frequency of occurrences of losses/ The impact the losses would have up on the financial affairs of the firm or the family, should they occur /size or severity of loss/
Step 2: Measurement of the losses associated with the different exposures
86
RISK ANALYSIS AND MANAGEMENT
Step 2: Measurement of the losses associated with the different exposures
The
measurement process is important because it indicates the exposures that are most serious and consequently most in need of urgent attention. It also yields information needed 87
RISK ANALYSIS AND MANAGEMENT
Step 3: Consideration of Alternative Risk Management Tools This involves comparison of various risk management tools and decision to select the best method. The risk management tools include: Risk Avoidance Risk Reduction
Risk Transfer Risk Retention Risk Diversification 88
RISK ANALYSIS AND MANAGEMENT
Step 4: Implementation of Decision Involves putting the chosen method into action.
Step 5: Evaluation and Review The decision made and implemented in the first four
steps must be monitored to evaluate the wisdom of those decisions to determine whether changing conditions suggest different solutions.
89
RISK ANALYSIS AND MANAGEMENT
END OF PART TWO
THANK YOU FOR YOUR ATTENTION 90
Mugher Cement Enterprise MERGA MEKURIA & BARSISA KACHO
1
RISK ANALYSIS AND MANAGEMENT
OBJECTIVES OF THE TRAINING Up on completion of the training,
trainees will; Understand the concept of risk Explain the various forms and sources of risk Recognize risks related to cement industries Explain the risk management process Analyze the risk management process Apply the risk management process
2
RISK ANALYSIS AND MANAGEMENT
Guiding questions What is Risk Management?
Who uses Risk Management? How is Risk Management used? Risk Management in cement enterprise Mouse ‘Click’ to move on to the next slide
Next 3
RISK ANALYSIS AND MANAGEMENT
Introduction People undertake business activities with the main objective of making profit. As there is a chance to get profit, there is also a possibility of loss due to one of the essential characteristics of a business in that it involves an element of risk.
Risk exist because there is no perfect foresight about the future. 4
RISK ANALYSIS AND MANAGEMENT
INTRODUCTION Risk is undesirable and its consequences are at times damaging
to
individuals, businesses and the society as a whole, mankind is constantly developing its predictive ability through the constant upgrading and refinement of its knowledge. The more mankind is knowledgeable about the future, the more certain it will be concerning future events. But the disappointing phenomenon is that perfect foresight about the future is something impossible. Thus, risk becomes a fact of life that will remain side by side with the activities of mankind.
5
RISK ANALYSIS AND MANAGEMENT
INTRODUCTION These and related facts, thus, call for the need for sound
risk management in firms. There is a need to identity possible risks. There is a necessity to device and employ preventive measures. To manage risk, it is imperative to anticipate the possible consequences of our actions. As such, this training manual discusses
the nature of risk, its identification, measurement and management processes in general and in cement factories in particular. 6
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Risk Defined No comprehensive definition exists so far. It is defined in different forms by several authors with some
differences in the wordings used. The essence, however, is very similar. In general, risk refers to exposure to adverse consequences. Some definitions are as forwarded to you below:
is a possibility of an adverse deviation from a desired outcome
that is expected. is the possibility that something we don't want to happen will happen or that something we want to happen will fail to do so. is the variation in outcome that could occur over a specified period in a given situation.
7
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS For example, in a manufacturing organization, there may be a reliance on a critical component produced by a third party without which the product cannot be manufactured. Unavailability of this component would severely disrupt, if not stop the business process.
8
RISK ANALYSIS AND MANAGEMENT
Activity In group of five Take 10 minutes to discuss What types of risk are there associated with cement
manufacturing?
9
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Sources of risk Sources of risk are the sources of factors or hazards that may contribute to positive or negative outcomes. It can be classified in different ways. Authorities classify sources of risk in various ways. Some identify general sources while others become more specific. how the environment in which the firm operates can become source of risk ?
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS
Sources of risk Environment as a source of risk
Physical Environment Social Environment Political Environment Legal Environment
11
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Physical environment This source of risk emanates from our ability to fully
understand our environment and the effect we have on it as well as those that have on us. Examples of physical environment Earthquakes, drought, or excessive rainfall can all lead to accidental
losses.
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RISK ANALYSIS AND MANAGEMENT
RISK ANDEnvironment RELATED CONCEPTS Social This relates to changing morals and values, human
behavior, social structures and institutions, etc. A social environment is a reflection of cultural, religious, and moral values of people. As these values differ significantly, the social environment in different areas differs. For example comparison of a social environment in Addis and Nairobi may reveal that Addis is less risk y than Nairobi. Note that social environment also includes the working habit of people. A social environment, which is reflected by cultural,13
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Political environment A change in government or a change in its composition may bring with it new policy directions that might have dramatic effects on a firm’s operation. For instance, if one government in a country changes to a very hostile government that fails to recognize the rights of people, business people could find themselves in risky situations. Moreover, when a country is in a political upheaval or when the government lacks credibility, political environment can be a source of risk. 14
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Political environment In the international realm, the political environment is even more complex Some countries might confiscate foreign business people’s assets or may change their policies, in a way that impedes their operations. You may remember what the Eritrean government did to Ethiopian business people during Ethio-Eritrea conflict. This is a good example of politically motivated risk. In fact one can see how the Djibouti government creates problems by changing port related policies overnight. 15
RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Legal environment A great deal of uncertainty and risk might arise from the legal system as it evolves new standards that may not be fully anticipated.
The lease policy, the investment codes and the general policy of an economy concerning
businesses have a big impact on the economy and
unexpected unfavorable changes would mean a lot in terms of causing risks. This complexity increases in the international domain as legal standards may vary from country to country. 16
RISK ANALYSIS AND MANAGEMENT
Activity In group of five Take 10 minutes to discuss What do you think is the effect of land lease policy that was recently formulated on cement market?
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RISK ANALYSIS AND MANAGEMENT
RISK AND RELATED CONCEPTS Related concepts to risk are the following; Uncertainty Probability Peril Hazard
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RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty People often confuse the terms risk and uncertainty.
The terms are distinct concepts. Uncertainty Is the doubt a person has concerning his or her ability to
predict which of the many outcomes will occur? Is a person’s conscious awareness of the risk in a given situation Depends upon the person’s estimated risk-what that person believes to be the state of the world-and the confidence he or she has in this belief. Exists only with awareness; it is a state of mind whereby a sentient entity experience19
RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty Some authors argue that risk may cause uncertainty. Thus, the relationship between risk and uncertainty is established in terms of cause and effect. They state that “knowledge of the existence of risk and appreciation of its significance creates a feeling of uncertainty. Risk, when we are aware of it, cause uncertainty.” Unlike probability & risk, uncertainty cannot be measured by any commonly accepted yardstick. In general uncertainty results in a feeling of insecurity. 20
RISK ANALYSIS AND MANAGEMENT
Decision making techniques under uncertainty Maximax Maximin Laplace Criterion of realism Regret criterion
21
RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty Some authors differentiates risk and uncertainty in
such a way that risk involves assigning the true theoretical or estimated
probabilities to the possible outcomes; where as in the case of uncertainty it is difficult to estimate and assign probabilities. Thus, risk is understood as a situation where the probability distribution of possible future events is known, whereas such is not the case under uncertainty. 22
RISK ANALYSIS AND MANAGEMENT
Risk versus Uncertainty Example: The risk of cigarette smoking existed the moment cigarettes are produced. However, uncertainty did not arise until the relationship between cigarette smoking and cancer is established through scientific and empirical research. Hence, risk is the state of the world while uncertainty is the state of mind.
23
RISK ANALYSIS AND MANAGEMENT
Risk versus Probability There exists also some confusion as to the difference
between risk and probability. Probability is the long-run chance of occurrence or
relative frequency of some event; whereas risk is the relative variation of actual loss from expected loss. Probabilities are generally assigned to events that are expected to happen in the future.
24
RISK ANALYSIS AND MANAGEMENT
Risk versus Probability Thus to each possible event is assigned a corresponding
probability of occurrence that leads to probability distribution. This means that probability relates to a single possible event. Risk, on the other hand, refers to the variation in the possible outcomes. This means that risk depends on the entire probability distribution. It indicates the concept of variability. Risk and probability are, therefore, two different things. 25
RISK ANALYSIS AND MANAGEMENT
Risk Example: versus Probability Consider the occurrence of a particular event. One extreme is that the event is certain to take
place.100% but there is no risk (risk=0) because there is a perfect foresight as to the occurrence of the event in this regard. The other extreme is the event will not take place at all (0) . Here, too, there is certainty and, therefore, no risk. In between these two extremes there could be several occurrences of the events with the corresponding probabilities of occurrence. This puts us in a situation of uncertainty because it is
26
RISK ANALYSIS AND MANAGEMENT
Risk, Peril and Hazards Peril Peril refers to the specific cause of a loss. It is the prime cause or what will give rise to the loss. e.g. fire, windstorm, theft, flood, explosion, collusion, etc Hazards refer to the condition that may create or increase the chance of loss arising from a given peril. affects the magnitude (severity) and frequency of a loss. increase the effect should a peril operate. The more hazardous conditions are, the higher the 27
RISK ANALYSIS AND MANAGEMENT
Risk, Peril categories and Hazards Three of hazards are identified: Physical hazard This is associated with the physical properties of the items exposed to risk. Conditions
stemming from the physical characteristics of an object. Examples may include:
Type of construction (wood, bricks) Location of property (near burglar area, flood area, earthquake area). Occupancy of building (dry cleaning, chemicals, supermarkets) Existence of dry forest-for fire
28
RISK ANALYSIS AND MANAGEMENT
Risk, Peril and Hazards Moral Hazard: Originates from evil tendencies in the character of
the insured person. is associated with human nature: qualities, reputation, attitude, etc. Stems from dishonesty or character defects of an individual that increases the probability as well as the severity of loss. Examples may include:
Faking an accident to collect insurance money. Submitting a fraudulent claim. Inflating (exaggerating) the size of a claim. Intentionally burning unsold merchandise that is
29
RISK ANALYSIS AND MANAGEMENT
Risk, Peril and Hazards Morale Hazard It does not involve dishonesty but it occurs due to
lack of concern for events. Carelessness or indifference to a loss because of the existence of insurance. This type of individual does not appear to deliberately cause the accident that happen Examples may include:
Leaving key in an unlocked Leaving a door unlocked Poor housekeeping in stores Cigarette smoking around petrol station. 30
RISK ANALYSIS AND MANAGEMENT
Hazards in cement industries and their sources Risks in cement factories emanate from the processes
involved in the production and distribution of cement products and
Generally speaking, there are three major processes of
manufacturing cement such as; Quarrying
Crushing and Storage and material transportation systems
31
RISK ANALYSIS AND MANAGEMENT
Hazards in cement industries and their sources
Associated with each of the above mentioned processes, there are factors that are likely to increase the severity as well as the chances of occurrences of risk in cement industries. For fast conceptualization of how this works, let us look at the flow chart diagram of the
32
RISK ANALYSIS AND MANAGEMENT
Hazards in cement industries and their sources
Cement manufacture process flow Quarrying
Crushing
Storage and transportation
33
RISK ANALYSIS AND MANAGEMENT
Quarrying The quarrying activity includes the drilling of bore holes, the filling up of explosives and the triggering of the explosives. Once this happens then the material is loaded and
transported either to open storage piles or to the crushing area. During the process of charging and ignition, the explosives are transported to the explosion area from the explosive storage facilities. 34
RISK ANALYSIS AND MANAGEMENT
Hazards as a result of the storage , transport and use of explosives
The explosives are stored only in approved
sites that have to comply with the requirements of relevant legislation. During explosives storage the main hazards are the following: Storing explosives and capsules in the same area Entry of unauthorized persons in the area Smoking or use of naked flame in the
35
RISK ANALYSIS AND MANAGEMENT
Storage of other equipment Hazards as a result of the goods storage,and transport and use of explosives Bad housekeeping in and out of the warehouse. Inadequate distance (<10cm) between the containers
and the warehouse wall Insufficient building maintenance (lighting, ventilation) with the possibility of concentration of humidity in the warehouse Execution of non-approved maintenance work on the warehouse electrical wiring. Insufficient warehouse security Not following the FIFO (First In First Out) in the management of explosive stocks 36
RISK ANALYSIS AND MANAGEMENT
Hazards during the transport of the explosives are:
The use of unauthorized vehicles The transport of explosives together with
capsule as well as not keeping the necessary labeling during transport The carrying of passengers The unplanned stoppage The transport of explosives during unstable weather 37
RISK ANALYSIS AND MANAGEMENT
Hazards use of explosives are: rules and Theduring failure the to implement the company regulations The use of unauthorized explosives The failure to use the approved explosion plan The failure to prevent unauthorized person to approach the explosives area The transport of more than required explosives quantity The temporary storage of explosives at excessive temperatures (greater than 65 degrees Celsius) or near naked flame 38
RISK ANALYSIS AND MANAGEMENT
Hazards during thethe use filling of explosives are: triggering the During up and
explosives the main hazards are: The triggering of the explosives by unauthorized personnel or outside the agreed timetable The insufficient warning prior to triggering The approach of other persons other than the person in charge near the explosion area following the triggering 39
RISK ANALYSIS AND MANAGEMENT
Hazards during holing process During the the boreBore holing process the basic hazards are: The moving parts of the bore holing machinery Falls from height Material falling from height Crushing of quarry table Hurling of material Presence of dust and noise Movement of earth moving equipment 40
RISK ANALYSIS AND MANAGEMENT
Crushing Hazards The rotational movement and the movement of the parts of the crusher The exposure to noise and dust of the personnel responsible for the continuous control of the crusher The maintenance activities inside the crushing chamber The electrical problems The activities inside the hopper due to: The operation of the feeder The possible crushing of material 41
RISK ANALYSIS AND MANAGEMENT
Crushing Hazards The movement of heavy goods vehicles: Reversing of the vehicle into the hopper
Accident on personnel
The inappropriate loading of material
onto the heavy goods vehicles with the result that material is hurled from the vehicle as the material is transported.
42
RISK ANALYSIS AND MANAGEMENT
Storage and material transportation systems
The main hazards during the transportation
and storing of material are: The airborne dust created during the storage of material The conveyor belts during their normal operation as well as during their maintenance F:\risk1\TRAINIG MANUAL FOR RISK MANAGEMENT IN CEMENT INDUSTRY2.doc 43
RISK ANALYSIS AND MANAGEMENT
Objective VsRisk Subjective Risk Objective The relative variation of actual from probable or
expected loss. Refers to the variation that exists in nature is the same for all persons facing the same situation. Is concerned with the range of variability of economic losses about some long-run average (most probable) loss in a group large enough to analyze significantly in a statistical sense.
Objective Risk = loss
Probable variation of actual Probable losses
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RISK ANALYSIS AND MANAGEMENT
Example Consider the probability of fire losses to buildings in two towns A and B. There are 100,000 buildings in each town and, on average each town has 100 fire losses per year. By looking at historical data from the towns, statisticians are able to estimate that in town A, the actual number of fire losses during the next year will very likely, range from 95 to 105. In town B, however, the range probably will be greater, with at least 80 fire losses expected and possible as many as 120. Objective risk A = 105-95 = 10%
100
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RISK ANALYSIS AND MANAGEMENT
Subjective Risk of The estimate
the objective risk which depends on the person’s psychological belief is the subjective risk. Psychological uncertainty that stems from the individual’s mental attitude or state of mind. May be measured by means of different psychological tests but no widely accepted or uniform tests of proven reliability have been developed. The impact of subjective risk varies depending on the individual. Subjective risk may affect a decision when the 46
RISK ANALYSIS AND MANAGEMENT
Pure Vs Speculative Risks The distinction primarily rest on profit/loss structure of
the underlying situations, in which the events occur. Pure risks refer to the situation in which only a loss or no loss would occur. There is only two distinct outcomes loss or no loss. Most pure risks are insurable. They are always undesirable and hence people take steps to avoid such risks. These risks have no element of gain
Risk of motor accident Risk of fire at a factory Theft of goods from a store
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RISK ANALYSIS AND MANAGEMENT
Classification of pure risks Personal Risk
Are risks that directly affect an individual Refers to the possibility of loss to a person such as: death, disability, loss of earning power, etc… Involve the possibility of the complete loss or reduction of earned income, extra expenses, and the depletion of financial assets.
Property Risk
Refers to losses associated with ownership of a property, such as destruction of property by fire. Persons owning property are exposed to the risk of having their property damaged or lost from numerous causes Property risk stems from diverse perils accompanied by48
RISK ANALYSIS AND MANAGEMENT
Cont’d Liability risk Is the possibility of loss arising from intentional or
unintentional damage made to other persons or to their property.
Speculative Risk can result in three possible outcomes, loss, breakeven, or gain situations. People may deliberately create speculative risks when they realize that the favorable (gain) outcome is, indeed, so promising. Examples may include;
Investing in a venture Gambling transaction 49
RISK ANALYSIS AND MANAGEMENT
Static Vs Dynamic Dynamic Risks Risks
Originate from changes in the overall economy such as price level change, changes in consumer tastes, income distribution, technological changes, political changes. Are less predictable and hence beyond the control of the risk manager.
Static Risks Are losses arising from causes other than changes in the economy. Are predictable and could be controlled to some extent by taking loss prevention measures. Many of the perils fall under this category. 50
RISK ANALYSIS AND MANAGEMENT
Fundamental Vs Risk Particular Risks Fundamental It is impersonal in origin and widespread in effect. affect the entire society or a larger segment of the
population, which are usually, beyond the control of individuals. The responsibility for tackling these risks is, therefore, left to the society itself. They are generally uninsurable. Example include: Earthquakes, Floods, Famine, Volcanoes, 51 Inflation
RISK ANALYSIS AND MANAGEMENT
Particular Risks affect each individual separately. arise from
individual causes and affect individuals in their consequences. are dealt with by purchasing insurance policies and other techniques. Examples include:
Fire, Theft, Work related injury, Motor accidents, Property losses, Death,
52
RISK ANALYSIS AND MANAGEMENT
Risks Related Business Activities Most risks intobusiness environment are speculative in nature. The finance literature considers four such types of risks Business Risk is associated with the physical operation of the firm. Variations in the level of sales,
costs, profits are likely to occur due to a number of factors
inherent in the economic environment. 53
RISK ANALYSIS AND MANAGEMENT
Risks RelatedRisk to Business Activities Financial This is associated with debt financing. Borrowing results in the payment of periodic interest
charge and the payment of the principal upon maturity. There is a risk of default by the company if operations are not profitable. Other financial risks include: bankruptcy, stock price decline, and insolvency.
Interest Rate Risk This is a risk resulting from changes in interest rates. Changes in interest rates affect the prices of financial securities such as the prices of bonds etc. for interest rate 54 rise depresses bond prices and vice versa.
RISK ANALYSIS AND MANAGEMENT
Risks Related to Business Activities Purchasing Power Risk Arises
under inflationary situations (general price rise of goods and services) leading to decline in the purchasing power of the asset held. Financial assets lose purchasing power if increased inflationary tendencies prevail in the economy. 55
RISK ANALYSIS AND MANAGEMENT
Burden of Risk on Society The presence of risk results in certain undesirable social and economic effects:
How The size of emergency funds may be increased Deterrent effect on capital accumulation
Society is deprived of certain goods and services Higher cost of capital Worry and fear are present 56
RISK ANALYSIS AND MANAGEMENT
Beneficial Functions of Risk Risk enables wealth to be created. It does so in a number of ways: It creates the hope for profit It encourages a safety culture.
57
RISK ANALYSIS AND MANAGEMENT
END OF PART ONE
THANK YOU FOR YOUR ATTENTION 58
RISK ANALYSIS AND MANAGEMENT
PART II- RISK MANAGEMENT PROCESS
What is risk management? What are the major steps in risk
management?
59
RISK ANALYSIS AND MANAGEMENT
Risk management defined Risk management is a general management function that seeks to assess and address the causes and effects of uncertainty and risk on an organization.
Risk management is the identification, measurement and treatment of exposure to potential accidental losses almost
always in situation where the only possible outcomes are losses or no change in the status. 60
RISK ANALYSIS AND MANAGEMENT
RISK MANAGEMENT Risk management PROCESS is the systematic process for the identification
and evaluation of pure loss exposures faced by an organization or individual and for the selection and implementation of the most appropriate techniques for treating such exposures. is a discipline that systematically identifies and analyses the various loss exposures faced by a firm or organization and the best methods of treating the loss exposures consistent with the 61 organization’s goals and objectives.
RISK ANALYSIS AND MANAGEMENT
RISK MANAGEMENT PROCESS Risk Management practices are widely used in public
and the private sectors, covering a wide range of activities or operations. These include: Finance and Investment Insurance Health Care
Public Institutions Governments Risk Management is now an integral part of business
planning.
62
RISK ANALYSIS AND MANAGEMENT
The Risk Management process steps are a generic guide for any organization,
63
RISK ANALYSIS AND MANAGEMENT
Functions of Risk Management From the above definition one can infer that, there are
certain duties left for the risk manager of an organization. These include: To recognize exposures to loss: The risk manager must first of all be aware of the
possibility of type of loss. This is a fundamental duty which must precede all other function of risk management.
To estimate the frequency and size (severity) of
loss; Once the possible type of loss is identified, the risk
manager has to estimate the probability of loss from
64
RISK ANALYSIS AND MANAGEMENT
Risk matrix
65
RISK ANALYSIS AND MANAGEMENT
Functions of Risk To decide theManagement best and most economical method of handling the risk of loss Whether it be by assumption (retention),
avoidance, self-insurance, reduction of hazards, transfer, commercial insurance, or some combination of these methods. To administer the programs of risk
management Important, but often overlooked function of
risk management is the duty of constantly tracking and revaluating of the programs, record keeping & the like. 66
RISK ANALYSIS AND MANAGEMENT
Activity In a group of five trainees Take 10 minutes Discuss to what extent the above mentioned risk management process A) Exist B) Implemented C) Contribute
Towards the success of your enterprise goals
67
RISK ANALYSIS AND MANAGEMENT
Risk management matrix
68
RISK ANALYSIS AND MANAGEMENT
Objectives of Risk Management Risk management has several important objectives Mere survival, peace of mind, lower risk management costs and hence
Higher profits, Fairly stable earnings, Little or no interruption of operation, Continued growth, Satisfaction of the firm’s sense of social 69
RISK ANALYSIS AND MANAGEMENT
Objectives Risk Management Theseofobjectives of risk management can be classified as pre-loss and post-loss. Pre-loss objectives: - are objectives to be achieved prior to the occurrence of any loss. They include:
Handle potential losses in the most economical way possible Reduction of anxiety and fear associated with all loss exposures. Meeting externally imposed obligations 70
RISK ANALYSIS AND MANAGEMENT
Objectives of objectives: Risk Management Post-loss - objectives to be achieved after a loss has occurred, they include:
The survival of the firm Survival means after a loss occurs, the firm can at least resume partial operation within some reasonable time period if it chooses to do so. To continue operating For some firms the ability to operate after a severe loss is an extremely important objective. Stability of earnings The firm wants to maintain its earnings per share after a loss occurs. 71
RISK ANALYSIS AND MANAGEMENT
Cont’d To maintain continued growth of the
firm A firm may grow by developing new products and markets or by acquisitions and mergers. The risk manager must consider the impact that a loss will have on the firm’s ability to grow. To meet the goal of social responsibility It aims to minimize the impact that a loss
72
RISK ANALYSIS AND MANAGEMENT
Activity In groups of five Take 15 minutes Discuss The possible contribution of risk
management To whom does risk management contributes something? 73
RISK ANALYSIS AND MANAGEMENT
Contribution of Risk Management The possible contribution of risk management is discussed below: Contribution to a Business
The possible contribution of risk management to a business can be divided in to five major categories:
1. Risk management may make the difference between survival and failure. Some losses may so cripple a firm that without proper advance preparation for such events the firm must close its doors. 74
RISK ANALYSIS AND MANAGEMENT
Contribution of Risk Management 2. Risk management can contribute directly to business profits by reducing expenses as well as increasing income 3. Risk management can contribute indirectly to business profits in the following ways: By reduce the fluctuations in annual profits and cash
flows. make it possible to continue operations following a loss, thus retaining customers or suppliers who might otherwise turn to competitors through advance preparation. 75
RISK ANALYSIS AND MANAGEMENT
Contribution of Risk Management 4. Because the risk management plan may help
others such as employees, who would be affected by losses to the firm, risk management can also help satisfy the firm’s sense of social responsibility or desire for a good public image. 5. The peace of mind made possible by sound management of pure risks may itself be a valuable non-economic asset because it improves the physical and mental health of the management 76 and owners.
RISK ANALYSIS AND MANAGEMENT
Cont’d Contribution to Family The possible contributions may include: Protecting the family against catastrophic losses Reduction of expenditure for insurance without reducing its protection Provision of relief from physical or mental strain
Contribution to a society To the extent that individual businesses and
families benefit from risk management, so does the society of which they are members. 77
RISK ANALYSIS AND MANAGEMENT
The Risk Management Process Risk management is the identification, measurement, and
treatment
of property,
liability, and personal pure-risk exposures.
The process includes five steps: 78
RISK ANALYSIS AND MANAGEMENT
The Risk Management Process Step 1: Identification of Loss Exposures (Risks) This is the process in which the organization is able to learn areas in which it is exposed to risk. It is the most important, and perhaps the most difficult function that the risk manager or administrator must perform from among the element of the risk management process. It involves the identification of risks that affect the organization and identification of the related hazards 79
RISK ANALYSIS AND MANAGEMENT
Categories of Loss Although in Exposures the broadest sense the entire organization is at exposure to risk, it is useful to develop categories of exposures for analytical purposes. Physical asset exposures Ownership of property gives rise to possible losses or
gains to physical assets. Property could be
damaged, destroyed, lost or 80
RISK ANALYSIS AND MANAGEMENT
Categories Loss Exposures LiabilityofExposures Obligation imposed by the legal system creates this
type of exposures. Liability losses arise out of damage to or destruction of other’s property or personal injuries to others.
Human Asset Exposures : This involves such loses as; Losses to the firm itself as a result of the death,
disability or old age of employees, customers, or owners. Losses to the families of the personnel or the personnel themselves as a result of their death, disability, old age, or unemployment. 81
RISK ANALYSIS AND MANAGEMENT
The Risk Management process:
Identify the risks Defining types of risk, for instance, ‘Strategic’ risks to the goals and objectives of the organisation. • Identifying the stakeholders, (i.e.,who is involved or affected). • Past events, future developments.
Monitor and review
Communicate & consult
Next 82
RISK ANALYSIS AND MANAGEMENT
Illustration
83
RISK ANALYSIS AND MANAGEMENT
Methods of risk identification
Because most businesses are complex, diversified, dynamic operations,
a more systematic method of
exploring all facets of the specific firm is highly desirable. 84
RISK ANALYSIS AND MANAGEMENT
Methods risk identification Seven of methods that have been suggested are: The risk analysis questionnaire Financial statement method Flow-chart method On-site inspections Interactions with other departments 85
RISK ANALYSIS AND MANAGEMENT
This
measurement includes the determination of: The probability or chance that the loss will occur /frequency of occurrences of losses/ The impact the losses would have up on the financial affairs of the firm or the family, should they occur /size or severity of loss/
Step 2: Measurement of the losses associated with the different exposures
86
RISK ANALYSIS AND MANAGEMENT
Step 2: Measurement of the losses associated with the different exposures
The
measurement process is important because it indicates the exposures that are most serious and consequently most in need of urgent attention. It also yields information needed 87
RISK ANALYSIS AND MANAGEMENT
Step 3: Consideration of Alternative Risk Management Tools This involves comparison of various risk management tools and decision to select the best method. The risk management tools include: Risk Avoidance Risk Reduction
Risk Transfer Risk Retention Risk Diversification 88
RISK ANALYSIS AND MANAGEMENT
Step 4: Implementation of Decision Involves putting the chosen method into action.
Step 5: Evaluation and Review The decision made and implemented in the first four
steps must be monitored to evaluate the wisdom of those decisions to determine whether changing conditions suggest different solutions.
89
RISK ANALYSIS AND MANAGEMENT
END OF PART TWO
THANK YOU FOR YOUR ATTENTION 90
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