Risk And Risk Management_session_1
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Risk and Risk Management
Concept of Risk
Risk arises out of uncertainty Possibility of adverse results flowing from any occurrence. It is possibility of an outcome being different from the expected. For risk to exist there must be at least two possible outcomes 06/26/09
1
Risk and Risk Management
Concept of Risk
If loss is certain there is no risk. At least one possible out come must be undesirable. Loss in general accepted sense is something is lost, or a gain smaller than the gain that was possible. 06/26/09
2
Risk and Risk Management
Definition of Risk “Risk is a condition where there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for” There is no requirement that the possibility is immeasurable, only that it must exist. 06/26/09
3
Risk and Risk Management Definition of Risk….Cont’d Our purpose is to relate risk to insurance;
Our focus is on risk, which entails the possibility of financial loss. Financial loss means decline in or disappearance of value due to a contingency. Thus if a loss of value is intended or if it is certain, it is not a risk within the context of the definition. 06/26/09
4
Risk and Risk Management
Definition of Risk -beyond insurance It focuses on accident-centered risks of loss.
“Risk is the probability of a material deviation from an anticipated outcome” 06/26/09
5
Risk and Risk Management
Definition of Risk -beyond insurance Thus risk has 3 crucial implications: 3. Risk is a probability- a mathematical quantity that can be measured, calculated or estimated. 4. Risk refers not just to probabilities of losses or gains, but probabilities of deviation, either downward losses or upward gain 5. Risk exists only if an objective exists,only if there is a goal ….a planned future state. » 06/26/09
Source: www.insurancetranslation.com 6
Risk and Risk Management
Degree of Loss/value of loss If risk is uncertainty, greater the uncertainty, greater the risk. The higher the probability of loss, greater is the probability of an adverse deviation from what is hoped for and therefore greater is the risk. 06/26/09
7
Risk and Risk Management
Degree of Loss/value of loss The mathematical value of a risk at any point of time is the probability of the loss materializing multiplied by the amount of potential or anticipated loss.
06/26/09
8
Risk and Risk Management Risk ,Peril and Hazard Risk is uncertainty of loss. Peril is a source of loss (fire, windstorm, embezzlement, etc.) Hazard is a condition which increases the likelihood of loss (e.g., a known embezzler hired as an accountant).
06/26/09
9
Risk and Risk Management Peril and Hazard Peril : is cause of loss. collision is a peril that causes the automobile accident and loss. Hazard: is condition for loss foggy weather is the hazard that creates the peril of collision. 06/26/09
10
Risk and Risk Management Types of Hazard 3. Physical Hazard 5. Moral Hazard 7. Morale Hazard 06/26/09
11
Risk and Risk Management Types of Hazard …Cont’d Physical Hazard: Physical conditions which that increase that increasse the likelihood of a peril occurring.
06/26/09
12
Risk and Risk Management Types of Hazard ….Cont’d Moral Hazard : Human behaviour that increase the exposure of individuals to potential perils is moral hazard depending on the intentions of the person. Increase in the probability of loss that result from dishonesty in the character of the insured person. 06/26/09
13
Risk and Risk Management
Types of Hazard ….Cont’d Morale Hazard : Attitude towards losses that it will be paid by insurance, than borne by the individual. Morale hazard reflects the careless attitude towards the occurrence of loss.
06/26/09
14
Risk and Risk Management
Spreading of Risk There are various methods to achieve spreading or “averaging” of risks. An insurer would achieve spread of risk by: 4. Writing different classes of insurance business. 6. Writing business in different geographical locations. 06/26/09
15
Risk and Risk Management
Spreading of Risk…cont’d 3. Have larger capital resources and write larger volumes of business to have larger spread. 5. by Reinsurance
06/26/09
16
Risk and Risk Management
Spreading of Risk…cont’d 5. By entering into risk pools for certain risks. 6. By spreading risk over a longer period of time.
06/26/09
17
Risk and Risk Management Static Risk
Dynamic Risk
Losses without change in the economy
Losses due to change in economy
Affects small number of individuals
Affects large number of indivuduals
Is predictable
Less predictable than static risk
Occurs with a degree of regularity
Do not occur with a precise degree of regularity
Eg: Perils of nature,Dishonesty
Eg: Change in price level,consumer taste
06/26/09
18
Risk and Risk Management
Fundamental Risk
Particular Risk
Losses that are impersonal in origin and consequences
Losses arising out of individual events
Affect large segment or overall population
Affects individuals rather than groups
Caused by conditions beyond the control of individuals
Caused directly by acts of individuals
Society has the responsibility to deal with the losses by mechanism of social insurance Eg: Unemployment, War, Inflation, Earthquake
Private insurance is the convenient mechanism to deal with this risk Eg: Burning of Houses, bank robbery
06/26/09
19
Risk and Risk Management Pure and Speculative Risk Pure risk has the possibility of loss only; thus, it is insurable. Speculative risk affords the opportunity for gain as well as the possibility of loss. Eg: gambling and stock market investments This type of risk is not insurable.
06/26/09
20
Risk and Risk Management
Insurable Risk A risk that meets the following criteria: 1. The insured loss must have a definite time and place; 2. The insured event must be accidental; 3. The insured must have an insurable interest in the subject of coverage; 06/26/09
21
Risk and Risk Management
Insurable Risk…Cont’d 4. The insured risks must belong to a sufficiently large group of homogeneous exposure units to make losses predictable; 5. The risk must not be subject to a catastrophic loss where a large number of exposure units can be damaged or destroyed in a single event;
06/26/09
22
Risk and Risk Management
Insurable Risk…Cont’d 6. The coverage must be provided at a reasonable cost; 7. The chance of loss must be calculable.
06/26/09
23
Risk and Risk Management
Uninsurable Risk A risk where there is no insurable interest; A risk where the potential for loss is so great it does not meet the definition of insurance; A risk where insurance is prohibited by public policy or is illegal. 06/26/09
24
Risk and Risk Management
Methods for treating risk There are established and tested techniques by which risks may be controlled. 1) AVOIDING RISK - A risk may be avoided by not accepting or entering into the event which has hazards. Such a choice is not always possible, or if possible, it may require giving up some important advantages. Nevertheless, in some situations risk avoidance is both possible and desirable. 06/26/09
25
Risk and Risk Management
Methods for treating risk….Cont’d 2) SPREADING RISK It is possible to spread the risk of loss to property and persons. Duplication of records and documents and, then, storing the duplicate copies elsewhere is an example of spreading the risk. A small fire in a single room can destroy the entire records of a department's
06/26/09
26
Risk and Risk Management
Methods for treating risk…cont’d
3) LOSS PREVENTION OR REDUCTION OF RISK "An ounce of prevention is worth a pound of cure," according to an old saying. Today, this statement provides the guide for the control of risk. Risk may be reduced, eliminated, or certainly controlled by using a wellplanned loss prevention program.
06/26/09
27
Risk and Risk Management
Methods for treating risk …Cont’d
4) RETENTION, ASSUMPTION OR ACCEPTANCE OF RISK Constant vigilance is needed to avoid accepting risks unintentionally through unawareness of the exposure. Some risks have to be retained because insurance cannot be purchased or the cost of insurance is not economically sound. Therefore, some risks should be retained, assumed, or accepted. Examples of these types of risks would be: earthquake, war, flood, accidental breakage, wear and tear etc.
06/26/09
28
Risk and Risk Management
Methods for treating risk…cont’d 5) TRANSFER OF RISK TO INSURANCE CARRIERS OR OTHERS Risk may be transferred contractually to others. For example, when leasing facilities from others, the lease could require the lessor to assume all property and liability losses.
06/26/09
29
Risk and Risk Management
Management of Risk The term risk management applies to a number of diverse disciplines. To bankers and financial officers it is sophisticated use of techniques of currency hedging and interests swaps. To insurance buyer and seller it is coordination of insurable risk and the reduction of insurance cost. To safety professionals it means reducing accidents and injuries.
06/26/09
30
Risk and Risk Management
Definition of Risk Management The process of defining and analyzing risk, and then deciding on the appropriate course of action in order to minimize risk, whilst still achieving business goals
06/26/09
31
Risk and Risk Management
Definition of Risk Management The optimal allocation of resources to arrive at cost affective investment in defensive measures within an organization .It minimizes both cost and risk
06/26/09
32
Risk and Risk Management
Definition of Risk Management A variety of activities undertaken by an organization to control and minimize threats to the continuing efficiency, profitability, and success of its operations.
06/26/09
33
Risk and Risk Management
Definition of Risk Management The process of determining the maximum acceptable level of overall risk to and from a proposed activity, then using risk assessment techniques to determine the initial level of risk , if this is excessive, developing a strategy to ameliorate appropriate individual risks until the overall level of risk is reduced to an acceptable level. 06/26/09
34
Risk and Risk Management Process of Risk Management Identification and analysis of risks to which the organization is exposed, The assessment of potential impacts on the business, Deciding what action can be taken to eliminate or reduce risk and deal with the impact of unpredictable events causing loss or damage. Includes taking out insurance against financial loss or legal liability and Introducing safety or security measures. 06/26/09
35
Risk and Risk Management Risk Management v/s Insurance Mgt Risk management deals with insurable and uninsurable risks and the choice of the appropriate techniques for dealing with them. Most people equate risk management with insurance. Insurance is one aspect of risk management, but certainly not the only one. Some equate risk management with disaster recovery. Insurance and disaster recovery are necessary parts of risk management 06/26/09
36
Risk and Risk Management Development of Risk Management In the 1970 and 80's risk management started to gain momentum . It derives its origins from the insurance industry. Its early focus was on protecting against catastrophe and evolved to protecting unaffordable potential losses. Insurers found results were enhanced by encouraging customers to exercise reasonable 06/26/09 care and by rewarding good performance.
37
Risk and Risk Management
Development of Risk Management Risk management evolved from natural intuition and analytical thinking into a more formal process of controls in place to influence outcomes. Risk management has become a universal management process involving quality of thought, quality of process and quality of action. 06/26/09
38
Risk and Risk Management
Development of Risk Management The main function of risk management was insurance buying,it is still widely used But, organizations have reduced their reliance on the conventional techniques They have realized insurance did not meet all organizational needs And internal activities could control the impact of risk and uncertainty of the organization. 06/26/09
39
Risk and Risk Management
Development of Risk Management Technical and financial aspects of risk management are integrated under one function. Most large medium organizations adopt risk management techniques because of their benefits and legislation compliance 06/26/09
40
Risk and Risk Management
Decisions of dealing with risk To retain the risk To deal with the risk through loss prevention To transfer the risk through insurance
06/26/09
41
Risk and Risk Management
Decision to retain risk Could be with or without a reserve or fund. Events of high frequency and low severity fall in this category. Cost could be paid out of current income and cost is less than the insurance premium.
06/26/09
42
Risk and Risk Management
Decision to deal through loss prevention To take preventative steps to eliminate loss as far as possible. To anticipate risk and take steps to ensure that incidence of risk is minimum. If risk happens take steps to minimise the effect of loss. 06/26/09
43
Risk and Risk Management
Decisions to transfer risk This is to transfer financial effects of risk to other party. Insurance is a risk transfer mechanism. This exchanges uncertainty with certainty. 06/26/09
44
Risk and Risk Management Buying Insurance One of the techniques for dealing with pure risk. Mistake of buying too little or too much. Rely on the entire decision making process on insurance agent or brokers. 06/26/09
45
Risk and Risk Management
Alternative to buying insurance Captive insurance company. Risk retention group. Risk sharing pools Self insurance.
06/26/09
46
Risk and Risk Management
Thank you!
06/26/09
47
Concept of Risk
Risk arises out of uncertainty Possibility of adverse results flowing from any occurrence. It is possibility of an outcome being different from the expected. For risk to exist there must be at least two possible outcomes 06/26/09
1
Risk and Risk Management
Concept of Risk
If loss is certain there is no risk. At least one possible out come must be undesirable. Loss in general accepted sense is something is lost, or a gain smaller than the gain that was possible. 06/26/09
2
Risk and Risk Management
Definition of Risk “Risk is a condition where there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for” There is no requirement that the possibility is immeasurable, only that it must exist. 06/26/09
3
Risk and Risk Management Definition of Risk….Cont’d Our purpose is to relate risk to insurance;
Our focus is on risk, which entails the possibility of financial loss. Financial loss means decline in or disappearance of value due to a contingency. Thus if a loss of value is intended or if it is certain, it is not a risk within the context of the definition. 06/26/09
4
Risk and Risk Management
Definition of Risk -beyond insurance It focuses on accident-centered risks of loss.
“Risk is the probability of a material deviation from an anticipated outcome” 06/26/09
5
Risk and Risk Management
Definition of Risk -beyond insurance Thus risk has 3 crucial implications: 3. Risk is a probability- a mathematical quantity that can be measured, calculated or estimated. 4. Risk refers not just to probabilities of losses or gains, but probabilities of deviation, either downward losses or upward gain 5. Risk exists only if an objective exists,only if there is a goal ….a planned future state. » 06/26/09
Source: www.insurancetranslation.com 6
Risk and Risk Management
Degree of Loss/value of loss If risk is uncertainty, greater the uncertainty, greater the risk. The higher the probability of loss, greater is the probability of an adverse deviation from what is hoped for and therefore greater is the risk. 06/26/09
7
Risk and Risk Management
Degree of Loss/value of loss The mathematical value of a risk at any point of time is the probability of the loss materializing multiplied by the amount of potential or anticipated loss.
06/26/09
8
Risk and Risk Management Risk ,Peril and Hazard Risk is uncertainty of loss. Peril is a source of loss (fire, windstorm, embezzlement, etc.) Hazard is a condition which increases the likelihood of loss (e.g., a known embezzler hired as an accountant).
06/26/09
9
Risk and Risk Management Peril and Hazard Peril : is cause of loss. collision is a peril that causes the automobile accident and loss. Hazard: is condition for loss foggy weather is the hazard that creates the peril of collision. 06/26/09
10
Risk and Risk Management Types of Hazard 3. Physical Hazard 5. Moral Hazard 7. Morale Hazard 06/26/09
11
Risk and Risk Management Types of Hazard …Cont’d Physical Hazard: Physical conditions which that increase that increasse the likelihood of a peril occurring.
06/26/09
12
Risk and Risk Management Types of Hazard ….Cont’d Moral Hazard : Human behaviour that increase the exposure of individuals to potential perils is moral hazard depending on the intentions of the person. Increase in the probability of loss that result from dishonesty in the character of the insured person. 06/26/09
13
Risk and Risk Management
Types of Hazard ….Cont’d Morale Hazard : Attitude towards losses that it will be paid by insurance, than borne by the individual. Morale hazard reflects the careless attitude towards the occurrence of loss.
06/26/09
14
Risk and Risk Management
Spreading of Risk There are various methods to achieve spreading or “averaging” of risks. An insurer would achieve spread of risk by: 4. Writing different classes of insurance business. 6. Writing business in different geographical locations. 06/26/09
15
Risk and Risk Management
Spreading of Risk…cont’d 3. Have larger capital resources and write larger volumes of business to have larger spread. 5. by Reinsurance
06/26/09
16
Risk and Risk Management
Spreading of Risk…cont’d 5. By entering into risk pools for certain risks. 6. By spreading risk over a longer period of time.
06/26/09
17
Risk and Risk Management Static Risk
Dynamic Risk
Losses without change in the economy
Losses due to change in economy
Affects small number of individuals
Affects large number of indivuduals
Is predictable
Less predictable than static risk
Occurs with a degree of regularity
Do not occur with a precise degree of regularity
Eg: Perils of nature,Dishonesty
Eg: Change in price level,consumer taste
06/26/09
18
Risk and Risk Management
Fundamental Risk
Particular Risk
Losses that are impersonal in origin and consequences
Losses arising out of individual events
Affect large segment or overall population
Affects individuals rather than groups
Caused by conditions beyond the control of individuals
Caused directly by acts of individuals
Society has the responsibility to deal with the losses by mechanism of social insurance Eg: Unemployment, War, Inflation, Earthquake
Private insurance is the convenient mechanism to deal with this risk Eg: Burning of Houses, bank robbery
06/26/09
19
Risk and Risk Management Pure and Speculative Risk Pure risk has the possibility of loss only; thus, it is insurable. Speculative risk affords the opportunity for gain as well as the possibility of loss. Eg: gambling and stock market investments This type of risk is not insurable.
06/26/09
20
Risk and Risk Management
Insurable Risk A risk that meets the following criteria: 1. The insured loss must have a definite time and place; 2. The insured event must be accidental; 3. The insured must have an insurable interest in the subject of coverage; 06/26/09
21
Risk and Risk Management
Insurable Risk…Cont’d 4. The insured risks must belong to a sufficiently large group of homogeneous exposure units to make losses predictable; 5. The risk must not be subject to a catastrophic loss where a large number of exposure units can be damaged or destroyed in a single event;
06/26/09
22
Risk and Risk Management
Insurable Risk…Cont’d 6. The coverage must be provided at a reasonable cost; 7. The chance of loss must be calculable.
06/26/09
23
Risk and Risk Management
Uninsurable Risk A risk where there is no insurable interest; A risk where the potential for loss is so great it does not meet the definition of insurance; A risk where insurance is prohibited by public policy or is illegal. 06/26/09
24
Risk and Risk Management
Methods for treating risk There are established and tested techniques by which risks may be controlled. 1) AVOIDING RISK - A risk may be avoided by not accepting or entering into the event which has hazards. Such a choice is not always possible, or if possible, it may require giving up some important advantages. Nevertheless, in some situations risk avoidance is both possible and desirable. 06/26/09
25
Risk and Risk Management
Methods for treating risk….Cont’d 2) SPREADING RISK It is possible to spread the risk of loss to property and persons. Duplication of records and documents and, then, storing the duplicate copies elsewhere is an example of spreading the risk. A small fire in a single room can destroy the entire records of a department's
06/26/09
26
Risk and Risk Management
Methods for treating risk…cont’d
3) LOSS PREVENTION OR REDUCTION OF RISK "An ounce of prevention is worth a pound of cure," according to an old saying. Today, this statement provides the guide for the control of risk. Risk may be reduced, eliminated, or certainly controlled by using a wellplanned loss prevention program.
06/26/09
27
Risk and Risk Management
Methods for treating risk …Cont’d
4) RETENTION, ASSUMPTION OR ACCEPTANCE OF RISK Constant vigilance is needed to avoid accepting risks unintentionally through unawareness of the exposure. Some risks have to be retained because insurance cannot be purchased or the cost of insurance is not economically sound. Therefore, some risks should be retained, assumed, or accepted. Examples of these types of risks would be: earthquake, war, flood, accidental breakage, wear and tear etc.
06/26/09
28
Risk and Risk Management
Methods for treating risk…cont’d 5) TRANSFER OF RISK TO INSURANCE CARRIERS OR OTHERS Risk may be transferred contractually to others. For example, when leasing facilities from others, the lease could require the lessor to assume all property and liability losses.
06/26/09
29
Risk and Risk Management
Management of Risk The term risk management applies to a number of diverse disciplines. To bankers and financial officers it is sophisticated use of techniques of currency hedging and interests swaps. To insurance buyer and seller it is coordination of insurable risk and the reduction of insurance cost. To safety professionals it means reducing accidents and injuries.
06/26/09
30
Risk and Risk Management
Definition of Risk Management The process of defining and analyzing risk, and then deciding on the appropriate course of action in order to minimize risk, whilst still achieving business goals
06/26/09
31
Risk and Risk Management
Definition of Risk Management The optimal allocation of resources to arrive at cost affective investment in defensive measures within an organization .It minimizes both cost and risk
06/26/09
32
Risk and Risk Management
Definition of Risk Management A variety of activities undertaken by an organization to control and minimize threats to the continuing efficiency, profitability, and success of its operations.
06/26/09
33
Risk and Risk Management
Definition of Risk Management The process of determining the maximum acceptable level of overall risk to and from a proposed activity, then using risk assessment techniques to determine the initial level of risk , if this is excessive, developing a strategy to ameliorate appropriate individual risks until the overall level of risk is reduced to an acceptable level. 06/26/09
34
Risk and Risk Management Process of Risk Management Identification and analysis of risks to which the organization is exposed, The assessment of potential impacts on the business, Deciding what action can be taken to eliminate or reduce risk and deal with the impact of unpredictable events causing loss or damage. Includes taking out insurance against financial loss or legal liability and Introducing safety or security measures. 06/26/09
35
Risk and Risk Management Risk Management v/s Insurance Mgt Risk management deals with insurable and uninsurable risks and the choice of the appropriate techniques for dealing with them. Most people equate risk management with insurance. Insurance is one aspect of risk management, but certainly not the only one. Some equate risk management with disaster recovery. Insurance and disaster recovery are necessary parts of risk management 06/26/09
36
Risk and Risk Management Development of Risk Management In the 1970 and 80's risk management started to gain momentum . It derives its origins from the insurance industry. Its early focus was on protecting against catastrophe and evolved to protecting unaffordable potential losses. Insurers found results were enhanced by encouraging customers to exercise reasonable 06/26/09 care and by rewarding good performance.
37
Risk and Risk Management
Development of Risk Management Risk management evolved from natural intuition and analytical thinking into a more formal process of controls in place to influence outcomes. Risk management has become a universal management process involving quality of thought, quality of process and quality of action. 06/26/09
38
Risk and Risk Management
Development of Risk Management The main function of risk management was insurance buying,it is still widely used But, organizations have reduced their reliance on the conventional techniques They have realized insurance did not meet all organizational needs And internal activities could control the impact of risk and uncertainty of the organization. 06/26/09
39
Risk and Risk Management
Development of Risk Management Technical and financial aspects of risk management are integrated under one function. Most large medium organizations adopt risk management techniques because of their benefits and legislation compliance 06/26/09
40
Risk and Risk Management
Decisions of dealing with risk To retain the risk To deal with the risk through loss prevention To transfer the risk through insurance
06/26/09
41
Risk and Risk Management
Decision to retain risk Could be with or without a reserve or fund. Events of high frequency and low severity fall in this category. Cost could be paid out of current income and cost is less than the insurance premium.
06/26/09
42
Risk and Risk Management
Decision to deal through loss prevention To take preventative steps to eliminate loss as far as possible. To anticipate risk and take steps to ensure that incidence of risk is minimum. If risk happens take steps to minimise the effect of loss. 06/26/09
43
Risk and Risk Management
Decisions to transfer risk This is to transfer financial effects of risk to other party. Insurance is a risk transfer mechanism. This exchanges uncertainty with certainty. 06/26/09
44
Risk and Risk Management Buying Insurance One of the techniques for dealing with pure risk. Mistake of buying too little or too much. Rely on the entire decision making process on insurance agent or brokers. 06/26/09
45
Risk and Risk Management
Alternative to buying insurance Captive insurance company. Risk retention group. Risk sharing pools Self insurance.
06/26/09
46
Risk and Risk Management
Thank you!
06/26/09
47
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