Risk Management

Objectives of Risk Management

Pre-loss and post-loss objectives
Measurement and Control of Risk
Risk Management Techniques
Risk control and risk financing

Insurance Risk Management

Rules of Risk Management

There is no return without risk; Rewards go to those who take

risks.
Be transparent; Risk should be fully understood.
Seek experience; Risk is measured and managed by people, not
mathematical models.
Know what you don't know; Question the assumptions you make.
Communicate; Risk should be discussed openly.
Diversify; multiple risks will produce more consistent rewards.
Show discipline, a consistent and rigorous approach will beat a
constantly changing strategy.
Use common sense; It is better to be approximately right, than
to be precisely wrong.
Return is only half the equation; Decisions should be made
only by considering the risk and return of the possibilities.

Risk Management

A process that identifies loss exposures faced by an

organization and selects the most appropriate
techniques for treating such exposures.
A loss exposure is any situation or circumstances in
which a loss is possible, regardless of whether a loss
actually occurs.
Examples:

A plant may be damaged in an earthquake/ flood

Defective products leading to liabilities against the
company
Possible theft of property due to inadequate security

Risk managers, generally, consider only pure loss

exposures faced by the organisation.
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Risk Management Process

Risk Management Techniques

Risk Avoidance

A conscious decision not to expose oneself to a particular risk.

For example:

An eccentric person may not drive his car on the road

simply to avoid the risk of accident.
A seller assume all risks of loss until the goods reach at the
buyers premises.

Possible in case of those persons who have a strong aversion

to risk.

Not always feasible or may not be desirable even when it is

possible.

Risk Avoidance.continued

Relative costs and benefits associated with the activities (that

give rise to the risks) are to be weighed.

Because, when a risk is avoided, potential benefits as well as

costs are given up.

For example: a doctor, who quits practice avoids future

liability risks, at the same time forfeits his income.

Loss Control

When risks can not be avoided, actions may be taken

to reduce the associated losses.

This method of dealing with the risk is known as loss

control.

Rather than abandoning specific activities, loss

control involves making conscious decisions
regarding the manner in which those activities will be
conducted.

Loss Control
types of loss control

Focus of loss control:

When a factory cleans up its storage areas and discards the

oily rags stored there, it is practicing loss control to lessen
the chance that it will suffer a fire.
By removing physical hazards and eliminating unsafe
actions by employees, the frequency of injuries can be
reduced.
In case of a 2-wheeler rider using helmet, he is engaged in
severity reduction.
A factory may maintain spare parts for immediate
replacement damaged equipment (duplication).
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Loss Control
types of loss control

Timing of loss control:

Some loss control methods can be implemented before any

losses occur. For example- employee safety education
programs to reduce both frequency and severity. (pre-loss
activities)
Activities that take place concurrently with losses.
Example- taking steps to check the spread of fire, after it
has started. (concurrent activities)
Post-loss activities have a focus on severity-reduction..
Example- trying to salvage damaged property, rather than
discard it. (post-loss activities)
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Loss Retention

Risk retention involves the assumption of risk.

If a loss occurs, an individual or firm will pay for it

out of whatever funds are available.

Retention can be planned or unplanned, and losses

can either be funded or unfunded in advance.

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Loss Retention

Risk retention involves the assumption of risk.

If a loss occurs, an individual or firm will pay for it out of

whatever funds are available.

Retention can be planned or unplanned, and losses can either

be funded or unfunded in advance.

Example: Risks arising out of accidental injury.

Different ways of loss retention may be:

Credit

Reserve funds

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Risk Transfer

different forms of risk transfer

Indemnity Agreement: A landlord agreeing to indemnify the

tenant for all losses covered by the agreement, regardless of
size.

Diversification: Across various businesses or geographic

locations. Ex-A company with two production centers at
coastal region may suffer from tsunami. But, it can not affect
two different locations at, say, Chennai and Delhi.

Insurance: Most widely used form of risk transfer.

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Questions, if any

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