RISK AND INSURANCE MANAGEMENT

MEANING OF RISK

Risk is uncertainty of occurrence of any unforeseen event. It is also defined as the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). Financial Risk is defined as the unexpected variability or volatility of returns and thus includes both potential worse-than-expected as well as better-than-expected returns. Financial Risk may also be defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

RISK MANAGEMENT

A logical and systematic process that enables improvement in decision making, identifies opportunities and helps in avoiding or minimizing losses. Risk management is the identification, assessment, and prioritization of risks (whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk.

TYPES OF RISKS
Risks

Financial Risks

Non-Financial Risks

Credit Risk

Market Risk

Operating Risk

Systematic Risk

Interest Rate Risk

Liquidity Risk

Political Risk

Human Risk

Foreign Exchange Risk

Technology Risk

Country Risk

FINANCIAL RISKS

Credit risk: It is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds in their portfolios. Market Risk: This is the most familiar of all risks. Also referred to as volatility, market risk is the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market. Volatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior.

Interest Rate Risk: It is the risk that an investment's value will change as a result of a change in interest rates. it is the risk of loans-borrowings. Thus, a borrower with a variable rate undergoes a rate risk when rates increase because he has to pay more. Conversely, a lender undergoes a risk when rates decrease because he loses incomes. Liquidity Risk: It is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss or make the required profit. In simple words it is the risk on the easiness to buy or resell an asset. For a bank, it is the risk to be in the inability to face a massive withdrawal of deposits by the customers.

Foreign Exchange Risk: When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign-exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of India and invest in some American stock in US dollars, even if the share value appreciates, you may lose money if the Indian dollar depreciates in relation to the American dollar.

NON-FINANCIAL RISKS

Operating Risk: It is the risk of loss due to inadequate monitoring system, management failure, defective controls, frauds and human errors. It arises as a result of failure of operating system in the due to certain reasons like fraudulent activities, natural disaster, human error, omission or sabotage etc. Systematic Risk: This type of risk is seen when the failure of one financial institution spreads as chain reaction to threaten the financial stability of the financial system as a whole. Political Risk: - Political risk represents the financial risk that a country's government will suddenly change its policies. This is a major reason why developing countries lack foreign investment.

Human Risk: Labour unrest, lack of motivation, inadequate skills lead to Human Risk. Technological Risk: Obsolescence, mismatches, breakdowns, adoption of latest technology by competitors, etc, come under technology risk Country risk: refers to the risk that a country won't be able to honor its financial commitments. When a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit.

TRANSLATION EXPOSURE

It is the risk of changes in the reported home currency accounting results of foreign operations due to changes in currency exchange rates. The risk that the balance sheet and income statement may be adversely affected by foreign exchange rate changes. The risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or income in a foreign currency. It is also known as "accounting exposure".

MANAGEMENT OF TRANSLATION EXPOSURE