Rift Valley University

Hachalu Hundessa Campus

Program: Masters of Project Management

Course: Project Risk Management

Instructor: Fanta Tariku (PhD Candidate)

Email: ftarikumisera@[Link]

Phone:+251-924464113
 CHAPTER ONE

RISK AND RELATED TOPICS

In the present day context, individuals
have a strong desire for financial
security and protection against those
events that threaten their financial
security. Financial security can be
threatened by numerous factors such
as;
 If the family head is killed in an
accident
 Destruction of property by fire,
floods, earth quakes and other natural
factors.
 Infected by serious diseases such as
AIDS, Cancer, Heart disease, etc
Definition of Risk:
“Risk is defined as uncertainty
concerning the occurrence of a
loss”
For example, the risk of being
killed in an auto accident for a
truck driver is present because
uncertainty is present.
 RISK Vs UNCERTAINTY:
 The dictionary meaning of risk is “the
possibility of meeting danger or
suffering harm or loss”
 The dictionary meaning of uncertainty
is “the state of being uncertain”.
 Here, uncertain means “feeling doubt
about”.
 Thus, uncertainty of meeting with a
loss or damage is known as risk.
Although risk is defined as uncertainty,
employees in the insurance industry often
use the term risk to identify the property
or life being insured.
 RISK & PROBABILITY

It is necessary to distinguish

carefully between risk and
probability.
 Probability refers to the long run chance of
occurrence, or relative frequency of some event.
Chance of loss is closely related
to the concept of risk. “Chance
of loss” is defined as the
probability that an event will
occur. Probability has both
objective and subjective aspects.
 Objective Probability:
Refers to the long-run relative frequency of
an event based on the assumptions of an
infinite number of observations and of no
change in the underlying conditions.
 Subjective Probability:
Is the individual’s personal estimate of the
chance of loss. It need not coincide with
objective probability.
 For example, people who buy a lottery
ticket on their birthday may believe
that it is their lucky day and over-
estimate the small chance of winning.
 some may think that their wedding
anniversary day as a lucky day.
 RISK, PERIL & HAZARD
 Peril is defined as the cause of loss. If a house
burns because of fire, the peril (the cause of
loss) is the fire.
 Likewise, some common perils that cause
damage or loss to the property include
lightening, windstorm, tornadoes, earthquakes,
theft and burglary.
 A hazard is a condition that creates or increases
the chance of loss. There are three types of hazards;
 i) Physical hazard
 ii) Moral hazard
 iii) Morale hazard
 i) PhysicalHazard:
 A physical hazard is a physical condition that
increases the chance of loss. Examples of physical
hazards are icy roads that increase the chance of an
auto accident.
 ii) Moral Hazard:
 Moral hazard is dishonesty or character
defects in an individual that increase the
frequency or severity of loss. For example, the
dishonest persons may fake an accident to
collect the insurance or they intentionally burn
unsold merchandise that is insured.
 Moral hazard is present in all forms of
insurance and it is difficult to control.
Dishonest individuals often rationalize their
actions on the ground that “the insurer has
plenty of money”.
 iii) Morale Hazard:
 is carelessness or indifference to a loss
because of the existence of insurance. Ex.
of morale hazard include leaving a door
unlocked that allows a burglar to enter, rash
driving without proper signaling. Careless
acts like these increase the chances of loss.
CLASSIFICATION OF RISK:
 Risks may be classified in many ways;
however, there are certain distinctions that are
particularly important for our purposes. The
major categories of risk are:
Objectives versus Subjective Risks
Financial vs. non financial Risks
Pure vs. Speculative Risks
Static vs. dynamic Risks
Fundamental vs. Particular Risks
1. Objective Risk vs. Subjective risk:
 Objective Risk
is the relative variation of actual loss from the
expected loss. For example, assume that a property
insurer has 1000 houses insured over a long period
of time, and on average, 1% (or) 100 houses burn
each year.
However, we cannot expect 100 houses to burn each
year exactly. In some years, 90 houses may burn,
while other years 110 houses may burn. Thus, there
is a variation of 10 houses (square root of 100) from
the expected number of 100, or a variation of 10%.
This relative variation of an actual loss from
expected loss is known as objective risk.
 Subjective Risk:

 is uncertainty based on a person’s mental

condition or state of mind. For example, a person
who has drunk more in the bar may attempt to
drive home on his own and he may uncertain
whether he or she will arrive home safely
without being arrested by the police for drunken
driving. This mental uncertainty is called
subjective risk.
 The impact of subjective risk varies depending
on the individual.
 ) Financial and Non- Financial Risks
 2

 Financial risks:-is one where the out

come can be measured in monetary
terms. It is the risks that out comes will
cause financial losses.
 Example:-Material damage to
the property
 :-Theft of property
 :-Lost of Business profit following
fire
 Non-Financial Risk:-is a risk that doesn’t
have a financial implication or their
outcome is not directly measurable
financially but by other, like psychological
or mental effect the risk may create.
 Example:- Moral failure because of
bulling boss
 : - Risk of selecting a marriage partner
 3) Pure Risk Vs speculative risk:
 Pure Risk
is a situation in which there are only the possibilities
of loss or no loss. The only possible outcomes are
adverse (loss) and neutral (no loss). Examples of
pure risks include premature death, job-related
accidents, etc.
 Types of Pure Risk:
 The following are the important types of pure
risks;
 i) Personal risks
 ii) Property risks
 iii) Liability risks
 i)Personal Risks:
 Personal risks are risks that directly
affect an individual. Examples of personal
risks are possibility of the complete loss or
reduction of earned income, extra expenses,
etc. There are four major personal risks..
 a) Risk of premature death
 b) Risk of insufficient income during
retirement
 c) Risk of poor health
 d) Risk of unemployment
 Property Risks:
 (ii)

 Persons owning property are exposed to

the risk of having their property damaged
or lost from numerous causes. Personal
property can be damaged because of fire,
lightning, windstorms and numerous other
causes.
 There are two major types of loss in the
damage of property;
 a) Direct loss
 b) Indirect loss
 A direct loss is defined as a financial loss
that results directly from the physical
damage, destruction, or theft of the
property. For example, if a factory is
damaged by a fire, the physical damage to
that is known as direct loss.
 An indirect loss is a financial loss that
results indirectly from the occurrence of a
direct physical damage or theft loss. It is
also known as consequential loss.
 (iii) Liability Risks:
 is another type of pure risk that most persons
face. One can be made legally liable, if he or she
do something that result in bodily injury or
property damage to someone else. The court of
law may order that person to pay substantial
damages to the person who is injured.
 Motorists are being held legally liable for the
negligent operation of their vehicles. Producers
are also being sued because of defective products
that harm or injure customers.
 Speculative Risk:
 Is a situation in which either profit or loss is possible.
 For example, if Mr.X purchases 100 shares of ABC
Company, he would gain if the price of that share price
increases but he would lose if the price declines. Thus,
here there are possibilities of both profit and loss.
 Speculative risk can be differentiated from the pure
risk in three ways;
(i) Private insurers generally insure only pure risks.
Speculative risks are not considered insurable and other
techniques must used to cope with risk.
(ii) The law of large numbers can be applied
more easily to pure risks than to speculative
risks. The law of large numbers is
important because it enables insurers to
predict loss in advance. But, it cannot be
applied to speculative risks in order to
predict future loss experience.
 ( iii) Society may benefit from a speculative
risk even though a loss occurs, but it is
harmed if a pure risk is present and loss
occurs. For example, a firm may develop
new technology for producing cheaply. As
a result, some competitors may fail.
4. Static Risks Vs Dynamic risk:
 Dynamic risks are those resulting from
changes in the economy such as changes in
the price level, consumer tests, income and
output and technology may cause financial
loss to members of the economy.
 Static risk-it involves those losses that
would occur even if there were no changes
in the economy. These losses arise from
causes other than the changes in the
economy such as the perils of nature.
 [Link] Vs particular risk:
 A fundamental risk is a risk that affects
the entire economy or large number of
persons or groups within the economy.
Examples include high inflation, cyclical
unemployment & war.
 The risk of a natural disaster is another
important fundamental risk. Tornadoes,
earthquakes, floods and forest fires can
result in property damage as well as the
loss of numerous lives.
 A particular risk is a risk that affects only
individuals and not the entire community.
Examples are car thefts, bank robberies, etc.
Here, only individuals experiencing such losses
are affected, not the entire economy.
 The distinction between a fundamental and
particular risk is important since government
assistance may be necessary to insure a
fundamental risk.
 Social insurance and government insurance
programs, as well as government guarantees and
subsidies, may be necessary to insure certain
fundamental risks.
 For example, the risk of unemployment generally
is not insurable by private insurers but can be
insured publicly by State Unemployment
Compensation Programs.
Burden of risk on society
 Loss of property and money are the primary
reason that individuals attempt to avoid or
alleviate its impact and hence these is the
primary Burdon on society. In addition to this
risk entails three major burdens on society.
1. The size of an emergency fund
will be increased.
2. Worry and fear are present
3. Loss of certain goods and
services

End of Chapter One !!

  CHAPTER TWO
 RISK MANAGEMENT

• In the previous sections we have identified

several types of pure risks that affect
individuals and businesses.
• In this chapter, after sources of risks are
identified and measured; a decision can be
made as to how the risk should be handled.
• The process used to systematically manage
pure risk exposures is known as risk
management.
 Definition of Risk Management:
 “Risk Management is defined as a
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”.
 As a general rule, the risk manager is
concerned with only management of pure
risks, not speculative risks.
 Objectives of Risk Management:
 The objectives of risk management can be broadly classified into two;
 1) Pre-loss Objectives
 2) Post-loss Objectives
(1) Pre-loss Objectives: An organization has
many risk management objectives prior to the
occurrence of a loss.
• The most important of such objectives are as
follows;
(a) The first objective is that the firm should
prepare for potential losses in the most possible
economical way. This involves an analysis of
safety program expenses, insurance premiums
and the costs associated with the different
techniques of handling losses.
 (b) The second objective is the reduction of
anxiety.
 (c) The third pre-loss objective is to meet any
externally imposed obligations.
 This means that the firm must meet certain
obligations imposed on it by the outsiders. For
example, government regulations may require
a firm to install safety devices to protect
workers from harm. Similarly, a firm’s creditors
may require that property pledged as collateral
for a loan must be insured. Thus, the risk
manager is expected to see that these externally
imposed obligations are met properly.
 (2) Post-loss Objectives:
 Post-loss objectives are those which operate after the
occurrence of a loss. They are as follows;
 (a) The first post-loss objective is survival of the firm. It
means that after a loss occurs, the firm can at least
continue partial operation within some reasonable time
period.
 (b) The second post-loss objective is to continue
operating. For some firms, the ability to operate after a
severe loss is an extremely important objective.
 (c) Stability of earnings is the third post-loss objective.
The firm wants to maintain its earnings per share after a
loss occurs.
 (d) Another important post-loss objective is
continued growth of the firm.
 (e) The fifth and the final post-loss
objective is the social responsibility. This is
to minimize the impact that loss has on
other persons and on society.
Thus, there are the pre-loss and post-loss
objectives of risk management. A prudent
risk manager must keep these objectives in
mind while handling and managing the risk.
 Risk Management Process
 Whether the concern is with a business
or an individual situation, the same
general steps should be used to analyze
systematically and deal with risk.
 This is known as risk management
process.
 In order to have an effective risk
management program, the risk
manager must go though certain steps.
There are four steps in the risk
management process. These are:
I. Identification of potential
losses
II. Measuring the losses
III. Selection of the risk management
tools
Iv. Implementing and monitoring the
decision made
 (1) Identifying the potential losses
 The first and foremost step in the risk
management process is to identify all pure risk
exposures.
 It is the responsibility of the risk manager.
 These potential losses include the following:
 Property losses => all losses of the firm related to
its asset/properties. E.g. property damaged by
different perils.
 Business income losses => reduction or total
losing of its income which generated through
firm’s contribution. e.g. reduction in sell or
market share.
Liability losses => refers to injuries
caused to other people or/and
damages caused on theirs property. It is
also called third party liability losses.
Liability losses can emerge through
manufacturing and selling of
defective product, company’s motor
accident to others, firms or industrial
waste, professional activities made by
the firm to others, etc.
 Death or inability of key people => Suffering of
factory’s owners, executive directors and other firm’s
key persons Physical injuries or death.
 Job-related injuries or disease => Suffering of
factory’s employee physical injuries or death at work
sites.
 Fraud, criminal acts and dishonesty of employees =>
dishonest act or character defect of firm’s employee that
create loss on it.
 Employee benefits loss exposures => losses to a firm
regarding its employees benefit packages.
 A risk manager has several sources of information that
can be used to identify major and minor loss exposures.
They are as follows:
 (a) Physical inspection of company’s plant &
machineries can identify major loss exposures.
 (b) Extensive risk analysis questionnaire can be
used to discover hidden loss exposures that are
common to many firms.
 (c) Flow charts that show production and delivery
processes can reveal production bottlenecks where a
loss can have severe financial consequences to the
firm.
 (d) Financial statements can be used to identify the
major assets that must be protected.
 (e) Departmental & historical claims data can be
invaluable in identifying major loss exposures.
 Risk managers must also be aware of new
loss exposures that may be emerging. More
recently misuse of the internet and e-mail
transmissions by employees have exposed
employers to potential legal liability
because of transmission of pornographic
material and theft of confidential
information.
 (2) Evaluating Potential Losses
 The second step in the risk management
process is to evaluate or measure the impact
of losses on the firm. This involves an
estimation of the potential frequency and
severity of loss.
 Loss frequency refers to the probable number of
losses that may occur during some given period of
time.
 Loss severity refers to the probable size of the
losses that may occur.
Once the risk manager estimates the
frequency and severity of loss for each
type of loss exposure, the various loss
exposures can be ranked according
to their relative importance to
manage. For example, a loss exposure
with the potential for bankrupting the
firm is much more important than a
exposure with a small loss potential.
Although the risk manager
must consider both loss
frequency and loss severity,
severity is more emphasized.
Both the maximum possible loss
and maximum probable loss must
be estimated.
The maximum possible loss is the
worst loss that could possibly happen to
the firm during its lifetime.
The maximum probable loss is the
worst loss that is likely to happen.
For example, if a plant is totally destroyed
by flood, the risk manager may estimate that
replacement cost, removal costs and other
costs will total Birr10 million
Thus, the maximum possible loss is
10million Birr.
The risk manager may choose to
ignore events that occur so
infrequently.
 The risk manager also estimates that
flood causing more than 8 million Birr of
damage to the plant is so unlikely that
such a flood would not occur more than
once in 30 years.
 Thus, for this risk manager, the maximum
probable loss is 8 million Birr.
 Catastrophic losses are difficult to predict
because they occur infrequently. E.g. earth
quake for Ethiopians. However, their
potential impact on the firm must be given
high priority.
 In contrast, certain losses such as physical
damage losses to automobiles and trucks,
occur with greater frequency, but are
usually relatively small.
 This can be predicted with greater accuracy.
 (3) Selection of Risk Management Tools
The third step is to identify the available tools of risk management. The
major tools of risk management are the following:
I) Avoidance
II) Loss control risk control techniques
III) Retention
IV) Non-insurance transfers risk financing techniques
V) Insurance
 I) Avoidance:
 Avoidance means that a certain loss
exposure is never acquired, or an existing
loss exposure is abandoned {discarded}.
 For example, a firm can avoid earthquake
loss by not building a plant in an earthquake
prone area.
 The major advantage of avoidance is that the
chance of loss is reduced to zero, if the
loss exposure is not acquired.
 However, avoidance has two disadvantages.
 First, it may not be possible to avoid all
losses.
 For example, a company cannot avoid the
pre-mature death of a key executive.
 Second, it may not be practical or feasible to
avoid certain loss exposure.
 For example, the pharmaceutical company
can avoid losses arising from the production
of a particular drug. However, without any drug
production, the firm will not be in business.
 (II) Loss Control:
 It is another method of handling loss in a risk
management program.
 Is designed to reduce both the frequency and
severity of losses.
 Loss control deals with an exposure that the
firm does not want to abandon. The purpose of
loss control activities is to change the
characteristics of the exposure that is more
acceptable to the firm. Thus, the firm wishes to
keep the exposure but wants to reduce the
frequency and severity of losses.
 The following are the examples that
illustrate how loss control measures reduce
the frequency and severity of losses.
Measures that reduce loss frequency are
quality control checks, driver examination,
strict enforcement of safety rules and
improvement in product design.
Measures that reduce loss severity are the
installation of an automatic sprinkler or
burglar alarm system, early treatment of
injuries and rehabilitation of injured
workers.
(III) Retention:
• Retention means that the firm retains part or
all of the losses that result from a given loss
exposure.
• It can be effectively used when three
conditions exist.
First, no other method of treatment is
available.
Second, the worst possible loss is not
serious. For example, physical damage losses to automobiles
in a large firm’s fleet will not bankrupt the firm.
 Finally, losses are highly predictable.
Retention can be effectively used for
workers compensation claims, physical
damage losses to automobiles, etc.
Determining Retention Levels:
 If retention is used, the risk manager
must determine the firm’s retention
level, which is the Dollar / Birr
amount of losses that the firm will
retain.
A financially strong firm can
have a higher retention level than
one whose financial position is
weak.
 Though there are many methods
of determining retention level,
the following two methods are
very important.
 First, a Corporation can determine the
maximum uninsured loss it can absorb
without adversely affecting the company’s
earnings and dividend policy.
 One rough rule is that the maximum
retention can be set at 5% of the company’s
annual earnings before taxes from current
operations.
 Second approach is to determine the
maximum retention as a percentage of the
firm’s net working capital, such as between
1% and 5%.
 Although this method does not reflect the
firm’s overall financial position for
absorbing a loss, it measures the firm’s
ability to fund a loss.
Paying losses:
 If retention is used, the risk manager
must have some method for paying
losses. Normally, a firm can pay losses
by one of the following three methods:
(a) The firm can pay losses out of its
current net income, with the losses
treated as expenses for that year.
However, when large number of
losses could exceed current net
income, other assets may have to
be liquidated to pay losses.
(b) Another method is to borrow
the necessary funds from a bank.
 A line of credit is established and
used to pay losses as they occur.
 However, interest must be paid on
the loan and loan repayments can
aggravate cash flow problems the
firm may have.
 (c)Another method for paying losses
is from firm’s own reserve.
 The advantages are as follows;
 (a) The firm can save money in the long
run if its actual losses are less than the loss
allowance in the insurer’s premium.
 (b) The services provided by the insurer may
be provided by the firm at a lower cost.
Some expenses may be reduced, including
loss-adjustment expenses, general
administrative expenses, commissions and
brokerage, etc.
(c)Since the risk exposure is
retained, there may be
greater care for loss prevention.
(d)Cash flow may be
increased since the firm can
use the funds that normally
would be held by the insurer.
 Disadvantages of Retention:
 The following are the
disadvantages:
 (a) The losses retained by the firm
may be greater than the loss
allowance.
 (b) Actually, expenses may be higher
as the firm may have to hire outside
experts such as safety engineers.
Thus, insurers may be able to
provide loss control services
less expensively.
(c) Income taxes may also be
higher. The premiums paid to
an insurer are income-tax
deductible.
 (IV) Non-Insurance Transfers:
 Non-insurance Transfers is another
method of handling losses.
 Non-insurance transfers are methods
other than insurance by which a pure risk
and its potential financial consequences
are transferred to another party.
 Examples of non-insurance transfers include
contracts, leases and hold-harmless
agreements.
 For example, a company’s contract with
a construction firm to build a new
plant can specify that the
construction firm is responsible for
any damage to the plant which it is
being built.
 A firm’s computer lease can specify that
maintenance, repairs and any physical
damage loss to the computer are the
responsibility of the computer firm.
Otherwise, a firm may insert a hold-
harmless clause in a contract, by
which one party assumes legal
liability on behalf of another party.
Thus, a publishing firm may insert a
hold-harmless clause in a contract,
by which the author and not the
publisher is held legally liable if
anybody sued the publisher.
Advantages of Non-Insurance
Transfers:
 (a) The risk manager can transfer some
potential losses that are not
commercially insurable.
 (b) Non-Insurance transfers often cost
less than insurance.
 (c) The potential loss may be shifted to
someone who is in a better position to
exercise loss control.
Disadvantages of Non-Insurance
Transfers:
(a)The transfer of potential loss
would become impossible, if the
contract language is ambiguous.
(b)If the party to whom the potential
loss is transferred is unable to pay
the loss, the firm is still responsible
for the loss.
 (c)Non-Insurance Transfers may not
always reduce insurance costs since an
insurer may not give credit for the
transfers.
 (V) Insurance:
 Insurance is also used in a risk
management program.
 Insurance is appropriate tool for loss
exposures that have a low frequency of
loss but the severity of loss is high.
 If the risk manager uses insurance to treat
certain loss exposures, five key areas
must be emphasized. They are as follows;
 (i) Selection of insurance coverage’s
 (ii) Selection of an insurer
 (iii) Negotiation of terms
 (iv)Dissemination of information
concerning insurance coverage
 (v)Periodic review of the insurance
program
 (i) Selection of insurance coverage’s:
The risk manager must select the
insurance coverage’s needed.
Since there may not be enough
money in the risk management
budget to insure all possible losses,
the need for insurance can be divided
into three categories;
(a) Essential Insurance
(b) Desirable Insurance
(c) Available Insurance
 Essential Insurance includes those
coverage’s required by law or by contract,
such as workers compensation insurance.
It also includes those coverage’s that will
protect the firm against a loss that threatens
the firm’s survival.
 Desirable insurance is protection against
losses that may cause the firm financial
difficulty, but not bankruptcy.
 Available insurance is coverage for slight
losses that would simply creates an inconvenience for the
firm.
 (ii) Selection of an Insurer:
 The next step is that the risk manager
must select an insurer or several
insurers.
 Here, several important factors are to
be considered by the risk manager.
 These include the financial strength
of the insurer, risk management
services provided by the insurer and
the cost and terms of protection.
The insurer’s financial strength is
determined by the size of policy
owner’s surplus, underwriting &
investment results, adequacy of
reserves for outstanding liabilities, etc.
The risk manager can identify the
financial strength of the insurer by
referring the rating given to that
insurance company.
Besides the financial strength,
the risk manager must also
consider the risk management
services by the insurer and the
cost & terms of protection.
(iii) Negotiation of terms:
 After the insurer is selected, the
terms of the insurance contract
must be negotiated.
If printed policies, endorsements and
forms all used, the risk manager and
insurer must agree on the
documents that will form the basis of
the contract.
If a specially tailored manuscript
policy is written for the firm, the
language and meaning of the
contractual provisions must be clear
to both parties.
If the firm is large, the premiums are
negotiable between the firm and
insurer.
(iv)Dissemination of information
concerning insurance coverage’s:
Information concerning insurance
coverage’s must be given to other
people in the firm.
The firm’s employees must be
informed about the insurance
coverage’s, the records that
must be kept, the risk
management services that the
insurer will provide, etc.
.
(v) Periodic review of the insurance
program:
 The entire process of obtaining
insurance must be evaluated
periodically.
 This involves an analysis of agent and
broker relationships, coverage needed,
cost of insurance, quality of loss-
control services provided, whether
claims are paid promptly, etc.
Advantages of Insurance:
(a) The firm will be indemnified
after a loss occurs. Thus, the firm can
continue to operate.
(b)Uncertainty is reduced. Thus,
worry and fear are reduced for the
managers and employees, which
should improve their productivity.
(c)Insurers can provide
valuable risk management
services, such as loss-control
services, claims adjusting,
etc.
(d)Insurance premiums are
income-tax deductible as a
business expense.
 Disadvantages of Insurance:
 (a) The payment of premiums is a
major cost. Under the retention
technique, the premiums could be
invested in the business until needed to
pay claims, but if insurance is used,
premiums must be paid in advance.
 (b) Considerable time and effort must be
spent in negotiating the insurance
coverage’s.
(c)The risk manager may take less

care to loss-control program since

he/she has insured. But, such a
careless attitude toward loss
control could increase the number
of non-insured losses as well.
 Risk Management Tools Matrix

 In determining the appropriate method

or methods of handling losses, the
above matrix can be used. It classifies
the various loss exposures according to
frequency and severity.
The first loss exposure is characterized
by both low frequency and low
severity of loss. One example of this
type of exposure would be the potential
theft of a secretary’s Note pad.
This type of exposure can be best
handled by retention, since the loss
occurs infrequently and when it
occurs it does not cause financial
harm.
The second type of exposure is more
serious.
Losses occur frequently, but severity is
relatively low.
Examples of this type of exposure
include physical damage losses to
automobiles, shoplifting and food
spoilage.
Loss control should be used here to
reduce the frequency of losses.
In addition, since losses occur
regularly and are predictable, the
retention technique can also be used.
The third type of exposure can be met
by insurance. Insurance is best suited for
low frequency, high severity losses.
High severity means that a catastrophic
potential is present, while a low
probability of loss indicates that the
purchase of insurance is economically
feasible.
 Examples include fires, explosion and
other natural disasters.
Here, the risk manager could also
use a combination of retention
and insurance to deal with these
exposures.
The fourth and most serious type
of exposure is characterized by both
high frequency and high severity.
This type of risk exposure is best
handled by avoidance.
For example, if a person has
drunken and if he attempts to
drive home in that drunken
stage, the chance of meeting
with an accident is more.
This loss exposure can be
avoided by not driving at the
drunken stage or by having a
driver to drive a car.
IV} Implementation of the
decision made
 Implementation follows all of the planned
methods for mitigating the effect of the
risks.
 Purchase insurance policies for the risks that
have been decided to be transferred to an
insurer,
 avoid all risks that can be avoided without
sacrificing the entity's goals, reduce others,
and retain the rest
 Individual Assignment (5%)

Prepare a short note on the following points.

Q1. Insurance can be classified as either private or
government insurance.
 Private insurance includes life and health
insurance and property and liability insurance.
Government insurance includes social insurance
programs and all other government insurances
plan.