Risk Management

By

Karan Pratap Singh

Research Scholar
Dept. of Mgmt.
Birla Institute of Technology
 Risk
• Definition:-Risk implies future uncertainty about deviation from
expected earnings or expected outcome. Risk measures the
uncertainty that an investor is willing to take to realize a gain from
an investment.

• Risk implies the extend to which any chosen action or an inaction

that may lead to a loss or some unwanted outcome. The notion
implies that a choice may have an influence on the outcome that
exists or has existed.
 Concept
Risk can be defined as the "uncertainty
regarding a loss." Losses, such as auto damage
due to an accident or negligence regarding your
property, can give rise to a liability risk. The loss
involved with these risks is the lessening or
disappearance of value.
 Systematic risk is uncontrollable by an organization and
macro in nature.
Unsystematic risk is controllable by an organization and micro
in nature
Systematic Risk

Systematic risk is due to the influence of external factors on an organization.

Such factors are normally uncontrollable from an organization's point of view.
It is a macro in nature as it affects a large number of organizations operating
under a similar stream or same domain. It cannot be planned by the
organization.
Unsystematic Risk

Unsystematic risk is due to the influence of internal factors prevailing within an

organization. Such factors are normally controllable from an organization's point
of view.
It is a micro in nature as it affects only a particular organization. It can be
planned, so that necessary actions can be taken by the organization to mitigate
(reduce the effect of) the risk.
 Basic Insurance Principles

• Risk Pooling
Rather than face the risk of totaling our car and being required to
replace it out of current income, we enter a pool, joining others for a
known affordable fee, thus sharing the risk with other pool members.
This concept of transferring the individual's risk to the pool is as old as
mankind first banding into tribes.
• Law of Large Numbers
If the pool is small, there is the risk of Adverse Selection meaning that
there are too few members in the pool to make accurate predictions
of the frequency of an occurrence.
For example, if I take one die from a pair of dice and roll it 10 times, I
might well have 4 fives turn up out of the 10 rolls. However, if it is
rolled 100 times, 1000 times, 10,000 times, or 200,000 times, the
sides will come up equally to 3 or 4 decimal points. Thus, it becomes
predictable. When the frequency of the occurrence is accurately
established, losses can be predicted and the amount needed
(premium) from each member of the pool will be known.
 Insurance companies have the right to deny insurance, or issue you a non-standard
policy if they decide that your situation poses a risk too high for their definition of
standard risk.

The law that requires an insurance company to reveal the source of any third-party
information that caused it to deny or issue a nonstandard policy is known as The
Fair Credit Reporting Act.

There are two classes of risk:

(I). Speculative Risks involve the chance of either gain or loss.
For example, buying a lot for $4,500 and hoping to sell it for at least $6,000, is
considered speculation and therefore, uninsurable. Buying into the market, at what is hoped
to be low and selling high later, could result in gain and therefore, is uninsurable.
(II). Pure risks involve, only the chance of loss.
For example, accidental injury, a fire in the garage and a debilitating illness have only the
chance for loss and are therefore, insurable.
(iii) Particular Risk
(iv) Fundamental Risk
(v) Static Risk
(vi) Dynamic Risk
• Pure risk (absolute risk)
Pure risk, also called absolute risk, is a category of threat that is beyond
human control and has only one possible outcome if it occurs: loss. Pure
risk includes such incidents as natural disasters, fire or untimely death.

(i) Personal risks- Personal risks detrimentally affect the income earning power of an
individual.
(i) Risk of premature death.
(ii) Risk of old age.
(iii) Risk of sickness.
(iv) Risk of unemployment

(ii) Property risks-Property owners face the risk of having their property stolen,
damaged or destroyed by various causes. A property may suffer direct loss, indirect loss, losses
arising from extra expenses of maintaining the property or losses brought about by natural
disasters

(iii) Liability risks- The law imposes on us a duty of care to our neighbour and to ensure
that we do not inflict bodily injury on them. For example, if you injure your neighbour or damage
his property, the law would impose fines on you and you may have to pay heavy damages .
Speculative risk is a category of risk that can be taken on voluntarily and will either result in a profit or
loss.
All speculative risks are undertaken as a result of a conscious choice. Almost all financial investment
activities are examples of speculative risk, because such ventures ultimately result in an unknown amount of
success or failure. Speculative risk is a category of risk that, when undertaken, results in an uncertain degree
of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable
circumstances. Speculative risk is the opposite of pure risk.
Almost all investment activities involve speculative risks, as an investor has no idea whether an investment
will be a blazing success or an utter failure.
 Risk Management
•Management of Risk (M_o_R) is a route map for risk management. It can help
organizations identify, assess and control risks and put in place effective
frameworks for making informed decisions.

•Risk management refers to the practice of identifying potential risks in advance,

analyzing them and taking precautionary steps to reduce/curb the risk.

•Risk management is the process of identifying, assessing and controlling threats

to an organization's capital and earnings. These threats, or risks, could stem from a
wide variety of sources, including financial uncertainty, legal liabilities, strategic
management errors, accidents and natural disasters.
 Insurance Risk Management

• Insurance Risk Management is the assessment and

quantification of the likelihood and financial impact of
events that may occur in the customer's world that
require settlement by the insurer; and the ability to
spread the risk of these events occurring across other
insurance underwriter's in the market.
• Risk Management work typically involves the
application of mathematical and statistical modelling to
determine appropriate premium cover and the value of
insurance risk to 'hold' vs 'distribute'
• Insurance Risk Management: Value
– Alignment of the pricing market strategy and reinsurance arrangements to the
organization's risk appetite as well as optimizing the goals of the organization
– Assist clients to recognise risk events and changes to claim rates earlier, so as to
move towards a more market responsive, risk-based pricing approach which
ensures the efficient deployment of capital and a reduction in extreme risk event
losses.
– Enhance the feedback mechanism from claims function to underwriting and
product development processes to improve the performance and profitability of
these processes.
• Insurance Risk Management: Core Services
– Enhanced Risk Strategies
• Create the right risk strategies to achieve the enterprises strategic aims
and implements the optimum frameworks to ensure risk is
appropriately managed.
– Enhanced Risk Performance
Putting words into action – delivering risk performance within agreed
tolerances at the sharp end – day after day.
– Enhanced Risk Management Functions
Create the optimum organizational solutions and equips the enterprise
with the right skills and capabilities to manage risk to achieve strategic
aims
 Risk Management Process

• Identify the Risk

• Analyze the risk
• Evaluate or Rank the Risk
• Treat the Risk
• Monitor and Review the risk
 Risk Transfer
• Risk management strategy in which an insurable risk is
shifted to another party (the insurer) by means of an
insurance policy.
• Risk shifting through non-insurance means, such as a
warranty. See also transfer of risk rule.
• A contractual agreement that transfers risk to a third party,
typically for a fee.
• Risk Treatments- Avoid
- Reduce
- Transfer
-Accept
 Risk Manager
• An individual responsible for managing an organization's
risks and minimizing the adverse impact of losses on the
achievement of the organization's objectives.
– Risk managers have focused on event risks but now extended to
operational risk.
– identifying risks, evaluating risks, selecting the best techniques for
treating identified risks.
– implementing the chosen risk management techniques,
– evaluating and monitoring
 Insurance Risk Manager
• Risk managers or analysts specialize in identifying potential causes of
accidents or loss, recommending and implementing preventive measures,
and devising plans to minimize costs and damage should a loss occur,
including the purchase of insurance. In other words, they coordinate loss
control systems for organizations and businesses which may include
disaster recovery plans and emergency evacuations.
– Direct the purchase of insurance programs
– Manage claims and loss control activities
– Manage relationships with third party service providers including
brokers and insurers
– Prepare loss analyses and budgets
– Identify exposures, recommend solutions, implement approved
programs, promote loss prevention, update and monitor compliance
with insurance procedures and manage safety/risk management
manuals.
 Thanking You……

Best of Luck for Future Endeavour..