Risk and Risk Management
Overview
Terminology
Risk
Perils, Hazards
Risk Management process
Terminology
Risk
Deviation from expectation
Worse than expected
Better than expected
Uncertainty concerning a loss
Uncertainty
Loss (cf. Loss exposure)
Pure vs Speculative
Fundamental vs Particular
Systematic vs Nonsystematic (Diversifiable)
Objective vs Subjective
Terminology
Pure Risk Risk
Speculative
Loss or gain
no loss
No loss/gain
Fire
Investment
Risk management & Insurance
Finance
Enterprise Risk Management deals with
managing both risks in a firm
Terminology
Perils
(Immediate) Causes of loss
Hazards
Physical hazards
Moral hazards
Morale hazards
Risk Management
Risk management
A systematic process for managing (pure) risks
faced by an individual or organization.
A systematic process for:
the identification and evaluation of pure loss
exposures faced by an organization or individual
and for the selection and administration of the most
appropriate technique for treating such exposures
Risk Management
Risk management Not the Same as
Insurance Management
Risk management is a broader concept.
Insurance is one of several methods the risk
manager can use to treat loss exposures.
Risk management provides for the periodic
evaluation of all techniques for meeting losses,
not just insurance.
Risk Management
Risk management
Two way
Pre-loss risk management
Should prepare for potential loss in the economical
way possible
Post-loss risk management
Survival of the organization
Continuation of operation
Stability of earnings
Risk Management Process
Identify risks or exposures to loss
Evaluate risks or exposures to loss
Identify and select risk
management techniques
Implement and monitor
Identify Risks
Organization
Individual
Property
Liability
Business income
Premature death or disability
Death or disability of key persons
Unemployment
Job-related injuries or disease
Sickness
Fraud, dishonesty, crime
Liability
International operation
Identify Risks
Physical inspection
Questionnaire
Financial statement analysis
Flowchart
Contract analysis
Statistical analysis of past losses
Risk management information system (RMIS)
Evaluate Risks
Risk management matrix
Frequency
Severity
High
Frequency
Low
Low High
Severity
Evaluate Risks
Risk mapping
High
Frequency
Low
Low High
Severity
Identify and select
RM techniques
Risk avoidance
Risk retention (Risk assumption)
Self-insured
Captive
Risk reduction (control)
Loss prevention – frequency
Loss reduction – severity
Risk transfer
Insurance
Non-insurance
Example: Sprinkler, Hold-harmless agreement, ignorance,
safety education, smoke alarm, deductible, warm-up, rent
Identify and select
RM techniques
Risk mapping
Critical issue tolerance boundary or risk-
tolerance boundary
Prioritize risks
Implement and Monitor
Are techniques implemented correct?
If not, …
Insurance
Advantages Disadvantages
Uncertainty is reduced Insurance premium may
Insurers can provide. be a major cost.
their expertise such as Moral and morale
loss control services. hazards may be
Insurance premium is created.
tax-deductible. Time and effort have to
Insurance proceeds are be spent.
tax-free. Insurance may not be
renewed.