Risk Assessment and Risk

Management Techniques
 Learning Objectives

• To understand the Risk Management process.

• To examine methods of handling risk and to mitigate the

extent of loss.
 Learning Outcomes
Upon completion of this chapter, you should be able to :

• Explain the Risk Management process.

• Identify the best Risk Management techniques to use for

different categories of risk.
Risk Management Process

Identifying existing and potential risks

Evaluating potential risks

Examining alternatives Risk Management techniques

Selecting and implementing Risk Management program

Evaluating, reviewing and controlling the Risk Management program

 1. Identifying Existing and Potential Risks

• Process by which an organization / individual is able to learn of the areas

in which it is exposed to risk.

• To develop information on sources of risks, hazards, risk factors, perils and

exposures to loss.

• Since it is not easy to identify risks, everyone in the organization is

responsible to identify loss exposures.

• There are nine (9) Risk Identification Tools available.

 Risk Identification Tools

• The process to gain general knowledge about the

Orientation goals and functions of organization, the practices and
its operations.

• Designed to lead the risk manager to the discovery of

Risk Analysis Questionnaire risks through a series detailed and related questions
about the organization.

• A listing of common exposures that can be used

Exposure Checklist effectively with other tools to reduce the chance of
overlooking a serious exposure,
 Risk Identification Tools

• A catalogue of the various policies or types of

Insurance Policy Checklist
insurance that a given business might need.

• Analysis of flow chart of the firm’s operation may alert

Flow Chart the risk manager to singular aspects of the firm’s
operations that give rise to special risks.

• The assets listing in the balance sheet and income

Financial Statements statement may alert the risk manager to the existence
of assets and expenses of company.
 Risk Identification Tools

• An examination of the firm’s various operations sites

Inspections
and discussions with managers and workers.

• Some information is not recorded in documents and

Interviews exists only in the minds of employees. It can be
conducted with internal and external parties.

• All the tools listed are brought together to solve the

Combination Approach
problem.
 2. Evaluating Potential Risks

• Important to evaluate potential risks so that they can be categorized based

on the degree of risks (frequency and severity).

• Risks can be classified into such high/low frequency and high/low severity.

• Different level of risks required different risk management techniques to be

applied (refer to Risk Matrix).
 Risk Matrix
Types of Risk Low Frequency High Frequency
A B
Low Severity • Risk Retention. • Loss Prevention.
• Loss prevention and loss • Loss reduction if cost can
reduction if the cost be justified.
justifies the benefits.
C D
High Severity • Risk Transfer (Insurance) • Risk Avoidance
• Loss prevention and loss • Loss prevention and loss
reduction if the cost reduction if possible.
justifies the benefits.
3. Examining Alternatives Risk Management Techniques

Risk
Management
Techniques

Risk Control Risk Financing

Contractual
Avoidance Loss Control Separation Retention Transfer Hedging
Transfer

Prevention Reduction
 Risk Avoidance
• Risk is proactively avoided after rational consideration.

• Possibility of loss = 0.

• If someone is afraid of risks, the best way to deal with it is to avoid it

completely.

• Example: a manufacturer may stop production of a defective products to

avoid a lawsuit.
 Loss Control
Loss Prevention Loss Reduction
Reduce the number of loss Reduce or lower the impact of losses
(Frequency) (Severity)
Either imposed by law or imposed by Can be used in two (2)
government and companies. circumstances : before and after loss.
Example : Fencing dangerous Example : Before a loss – installation
machinery to reduce the chances of of fire alarm, water sprinklers, fire
employees being injured. extinguishers and etc.
Example : Used proper attires at Example : After a loss – salvage
workplace. efforts in the restoration of a building
burnt down by fire.
 Separation
• Involves the dispersal of the firm’s assets in several locations instead of
confining it to one major area.

• This measure will reduce the impact of losses should a major disaster
occurs.

• Example : separation of head quarters and assembly plant in automobile

industry.
 Contractual Transfer

Incorporation Leasing Contract Hedging Hold-harmless

Agreement

• The owner of the • An agreement • An agreement to • An agreement

company transfers where the owner or buy or sell a between a retailer
the risks to landlord transfers commodity at a and a manufacturer
corporation by the risks to the certain price to whereby the later
registering the tenants. avoid losses due to agrees to bear
company as price increase or losses due to the
partnership. decrease. manufacturer of
defective products
thus relieving the
retailer of any
liability.
 Retention
• Retention – the company will bear the consequences of the loss.

• Risk or loss exposed are normally assumed or retained when their impact
and consequences are not too great.

• In an organization, the ability to assume a risk depends on one’s financial

ability.
 Self Insurance
• Self insurance - the organization sets up a pool of fund to retain its loss
exposures.

• Adequate financial agreement has to be made in advance of the

occurrence of losses.

• The number of loss exposures must be large enough to ensure the

mechanism of insurance to be operative.
 Captive Insurance
• A captive insurance company is an entity to write insurance arrangement
for its parent company.

• The captive’s parent may be one company, several companies or an entire

industry.

• Example: Sime Darby Group is the parent company of Sime AXA

Assurance Sdn Bhd.
 Insurance
• Risk transfer mechanism.

• Transferring the financial consequences of potential accidental losses from

an insured business or family to an insurer.

• In an insurance contract, the party exposed to the risks (the

proposer/insured) pays the premium to the insurance company. In return,
the insurance company agrees to pay a stated sum on the happening of
certain risks specified in the contract.
4. Selecting and Implementing Risk Management Program

• The selection may based on two (2) factors:

• Financial criteria – whether it will affects the organization’s profitability or

rate of return.

• Non financial criteria – whether it affects the growth of the organization,

humanitarian aspects and legal requirements.
5. Evaluating, Reviewing and Controlling Risk Management Program

• Evaluate, review and control are important to the Risk Management process for
two (2) reasons:

• Solutions that were appropriate in the past

Things Change may no longer be appropriate.
• New risks emerge and old risks disappear.

• Risk exposures may be overlooked.

Mistakes are Made • Measures selected to address risks may
not have been the most appropriate.
Thank You
UBM588
Introduction to Risk and Insurance

MOHD FAIZOL RIZAL BIN MOHD RASID

Resource Person UBM588

Faculty of Business and Management
Universiti Teknologi MARA
Puncak Alam Campus
42300, Selangor Darul Ehsan
faizolrizal@[Link]
+6013-6925402