Risk Management

 

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INDEX

Particulars 1. What What is R Risk isk? ?

2. Classificat Classification ion of R Risk  isk 

3. Iceberg Iceberg of Losses

4. Risk Mana Management gement a. Int Introd roduct uction ion b. Meaning Meaning and Obje Objectives ctives c. Advantages Advantages of of Risk Manag Management ement d. Development Development of Risk Management Management e.

Role of insurance in Risk Management

5. Risk Managem Management ent Proc Process ess a. Risk Risk Analysi Analysis s b. Risk Risk Control Control c. Risk Risk Tran Transf sfer er d. Risk Finan Financing cing e. Rollin Rolling g Review Review

6. Contribution of Risk Management to the b business usiness 2

 

7. Case Case St Study udy

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WHAT IS RISK??

Risk is defined as the chance of having a loss due to occurrence of an event.

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 The risk is always associated with the loss aspects since the word itself has the association of DANGER OF LOSS.  The definition can be “PROBABAILITY OF THE OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN.

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Economic risk (referred simply as risk) is the possibility of  losing economic security. Most economic risk derives from variation from the expected outcome.

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Modern society provides many examples of risk. A homeowner faces a large potential for variation associated with the possibility of economic loss caused by a house h ouse fire. A driver faces a potential economic loss if his car is damaged. A larger possible economic risk exists with respect to potential damages a driver might have to pay if  he injures a third party in a car accident acc ident for which he is responsible.

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Historically, economic risk was managed through informal agreements within a defined community. If someone’s barn burned down and a herd of milking cows was destroyed, the community would pitch in to rebuild the barn and to provide the farmer with enough cows to replenish the milking stock. This cooperative (pooling) concept became formalized in the insurance industry

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Under a formal insurance arrangement, each insurance policy purchaser (policyholder) still implicitly pools his risk with all other policyholders. However, it is no longer necessary for any individual 4

 

policyholder to know or have any direct connection with any other policyholder

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CLASSIFICATION OF RISKS

SPECULATIVE RISKS 

Operation of this leads to profit /loss

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Leads to speculation like investment of capital in a new venture

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Operation is desired

PURE RISKS  These do not change with the risk

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 The operation of these perils does bring in loss/damage to property/assets/ liability

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Not desired

DYNAMIC RISKS 

Changes with the change in fashion, buying behaviour, trends, technology etc

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It denotes dynamic nature of the customer cus tomer behaviour and the products they like to own or use

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If an organization is not prepared then it may go out of  existence

STATIC RISKS

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Like pure risks these risks remain static and do not change c hange due to other reasons like that of dynamic risks

 The operation of these risks always bring about losses

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Operation is not desired May result in partial or total cessation of activities

PARTICULAR RISKS Risks which relate to one or few firms, factories or organizations only

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Losses are suffered by one or few more members of the society

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FUNDAMENTAL RISKS 

Relates to the society at large

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Losses are suffered by large section of the society/nation(s)

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Losses may be due to natural catastrophes, riots, epidemics etc

ACCEPTABLE RISKS •

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Potential loss may be so minimal that some risks are acceptable  These risks are acceptable without any prevention being taken

NON-ACCEPTABLE RISKS 7

 

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Major risks are non-acceptable

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Ways are to be found to reduce, avoid or transfer the risk

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ICEBERG OF LOSSES

INSURED LOSSES & UNINSURED LOSSES Insured losses are the costs cos ts that are generally covered by an insurance policy. Uninsured losses are simply the costs that are not covered by any insurance policy. Example of losses that could possibly occur: •

Loss of Life/Health

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Loss of Motor vehicle

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Loss of Property

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Loss of Goods in transit

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Loss due to accident, sickness and unemployment

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Loss of Goodwill

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Loss of Market

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Loss of customers

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Loss of shareholder value

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Loss of key employees

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Loss of costs incurred

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Loss due to frauds

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Loss on investment

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RISK MANAGEMENT

INTODUCTION Every organization is exposed tto o various risks. While many of  them are pure risks like fire, explosion, chemical release etc., some of them are speculative. Pure risks are handled as operational and safety issues by professionals and finance personnel have to address the risks arising out of failure of  above operational and safety measures. Together they need to ensure that the organization is able to withstand any risks or failure of systems and can continue its operations without much struggle. Risk Management and insurance planning is required for any organization to review their risk management strategies and to opt for risk transfer measures like availing insurance cover etc. Many a times the coordination between the technical or operational departments and finance department is difficult and an unbiased study on technical risk management measures adopted and insurance practices followed will help the management of the organization to manage the risk effectively and profitably.

DEFINITION Risk Management is defined as the systematic way of ensuring protection of business resources and income against losses so that the aim , goals and vision of the company can be reached.  Thus Risk Management creates stability and contributes to growth and assures profitability of the Organization.

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OBJECTIVES Broadly the Risk Management studies are conducted with the following objectives •

 To carry out a systematic, critical appraisal of all potential risks involving personnel, plant,and services andand operations (risk identification, assessment control)

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 To review the insurance coverage and to identify areas of  coverage to optimize the risk exposure

ADVANTAGES OF RISK MANAGEMENT Risk management provides a clear and structured approach app roach to identifying risks. Having a clear understanding of all risks allows an organization to measure and prioritize them and take the appropriate actions to reduce losses. Risk management has other benefits for an organization, including: •

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 To achieve the objectives of the Organization  To ensure that the goals short term and long term are achieved without any disruption or delay  To have knowledgeable of insurance arrangements and have considered decisions on insurances to be availed Saving resources: Time, assets, income, property and people are all valuable resources that can be saved if  fewer claims occur. Protecting the reputation and public image of the organization. Preventing or reducing legal liability and increasing the stability of operations. Protecting people from harm.

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Protecting the environment. Enhancing the ability to prepare for various circumstances.

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Reducing liabilities.

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Assisting in clearly defining insurance needs.

An effective risk management practice does not eliminate risks. However, having an effective and operational risk management practice shows an insurer that your organization is committed to loss reduction or prevention. It makes your organization a better risk to insure.

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DEVELOPMENT OF RISK MANAGEMENT  The Industries / Business houses want to have incident free/ accident free working to achieve their objectives

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For this purpose it is necessary to understand the loss producing events , the nature of losses/ extent of losses to come up with the loss control measures. EXPOSURE ANALYSIS

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Risk Management aims to help the owners to have control on loss incidents and to reduce the extent of losses by proper study of the exposures and actions to be taken to control the same

ROLE OF INSURANCE IN RISK MANAGEMENT  

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Insurance is a valuable risk-financing tool. Few organizations have the reserves or funds necessary to take on the risk themselves and pay the total costs following a loss. Purchasing insurance, however, is not risk management. A thorough and thoughtful risk management plan is the commitment to prevent harm. Many risks are not insurable, including brand integrity, potential loss of tax-exempt status for volunteer groups, public goodwill and continuing donor support.

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RISK MANAGEMENT PROCESS

HOW THE LOSS IS CAUSED? 

Loss is caused by the operation of perils which refers to the causes for the losses

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Loss or damage is caused by the operation of perils such as fire, explosion, flood, storm etc

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 The loss potential (extent of loss) depends on conditions which are favourable for the incident to assume large proportions. This is known as hazard or potential of the loss. More the potential severe will be the extent of loss

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PERIL ( CAUSE)----------------LOSS(EFFECT) HAZARD

CAUSES OF LOSSES 

Perils- such as fire, explosion etc

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Human factors- such as negligence, carelessness, inadequate training, inadequate supervision, lack of  proper systems and controls

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Inadequate maintenance ( predictive/ routine/ annual maintenance)

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Failure of Plant/ machinery due to breakdowns (failure of  safety devices)

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Natural perils such as flood, cyclone, earthquake, landslide, rockslide & subsidence

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Extraneous: Accidents involving Gas or chemical in nearby units

TYPES OF LOSSES 

Property losses- losses which can happen to the Assets

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Pecuniary losses- Financial Loss which can be caused by business interruption due to the loss to the assets, financial loss due to infidel acts of employees, storekeepers and other employees

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Liability losses- Loss to the Third Party property or third party personnel due to activities of the Organisation

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Personal injuries- accidents resulting in fatal or non-fatal injuries to the employees

HAZARD Hazard is defined as conditions existing which are favourable for the loss becoming severe

CLASSIFICATIONS OF HAZARD •

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Physical hazard- Relating to physical properties. Moral hazards -Relating to the moral behavior of the clients Morale hazard -Relating to the morale & working conditions of the employees & employer-employee relationships

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STEPS IN RISK MANAGEMENT PROCESS

I. RI RISK SK RISK A ANA NALY LYSI SISS- RIS RISK K IDEN ID(RISK  ENTI TIFI FICA CATI TION ON AND EVALUATION MEASUREMENT) (RISK QUANTIFICATION)

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Risk analysis is the process of identifying and evaluating risk factors, present or anticipated, and determining both the probability and the impact of identified risk factors. It is a preliminary step in establishing a risk management strategy, which is intended to increase the possibility that the application development project produces the desired outcome while minimizing risk factors. It entails both preventive and corrective actions to each of  the identified risk factors, particularly those with a medium to high rating level.

RISK ANALYSIS- METHOD 

List all possible risk

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Investigate by

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Study

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Inquiry

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Document review

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Physical Inspection

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Analyze each risk 16

 

RISK EVALUATION Methods available are •

Study of Organizational charts/ balance sheets, accounting records

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Process flow diagrams, P & I diagrams Input- output analysis- contribution from various sections, inter-dependencies Study of completed checklists  Threat analysis- Denial of access, Loss of services

EVALUATION METHODS •

INPUT – OUTPUT ANALYSIS  To trace the flow of goods and services to identify ide ntify the contribution of parts of organization to the total earnings and to analyze exposures.

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EVALUATION OF RISKS-THREAT o

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Analyze the threats to business Denial of Access- Chemical leakage, collapse of  nearby buildings, strike, picketing, damage to water/sewer mains, government restrictions Loss of Services- Water, power, rains, floods, cyclones

RISK HANDLING METHODS 17

 

ADOPTION OF LOSS CONTROL MEASURES Loss control measures involve the nature of the devices utilized and the human factor

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For any system to be effective the employees concerned

need to be properly trained and knowledgeable.   The Management needs to ensure that the systems employed are in good working order the employees are regularly trained.

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RISK RISK A AVO VOID IDAN ANCE CE-R -RIS ISK K CONT CONTRO ROL L ((RI RISK  SK  MINIMIZATION)

RISK AVOIDANCE •

 This is also known as Risk Elimination

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Identify the risk and if possible avoid the risk by eliminating the source

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It is like avoiding a location due to seismic activity in the

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area Ex:- Avoiding a low lying location which is susceptible for flooding

RISK CONTROL/PLANNING Risk planning and control, as a shared or centralized activity must accomplish the following tasks: 

Identify concerns that can impact the project implementation 18

 

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Identify risks, review/assess their intensity and document the risk owners.

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Evaluate the risks with reference to probability of their occurrence and possible consequences

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Assess the plausible options for accommodating the recognized risks

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Prioritise the efforts required for managing the risks

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Develop/discuss and adopt risk management plans

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Authorize the implementation of the risk management plans

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Monitor the risk management efforts and

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Initiate the remedial actions as considered necessary

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RISK TRANSFER

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Risk transfer involves payment by one party (the transferor) to another (the transferee, or risk bearer).

 The transferee agrees to assume a risk that the transferor desires to escape.

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TOOLS OF RISK TRANSFER 19

 

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Incorporation

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Diversification

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Hedging

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Insurance

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RI RISK SK RETEN ETENTI TION ON-R -RIS ISK K FIN FINAN ANCI CIN NG

 To keep the costs under control, con trol, after analyzing the risks the Management, may decide to retain some of such losses to its account.

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Once a decision is taken , then necessary provision needs to be made to avoid such a loss ,if happens, eating into the operating budget

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Special contingency funds are therefore to be created for this purpose

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ROLLING REVIEW

In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, en vironment, trading patterns, or government policies).

 The initial assessment made of the existence and level of risks must be evaluated on a regular basis.

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 You need to measure the effectiveness of risk profiles and update as necessary. •

Reliable reporting of examination results

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Compliance measurement activities

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Feedback from the business community Results analysis and data comparisons  To determine the accuracy of planning assumptions assu mptions and the effectiveness of the measures taken to treat the risk.

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CONTRIBUTIONS OF RISK MANAGEMENT TO THE BUSINESS

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Achievement of objectives/ goals

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Reduced anxiety due to losses are of reasonable magnitude and does not cause serious loss situations

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Goodwill is maintained by meeting the obligations

 The business is able to survive competition

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Successful and continued operations

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Resultant growth and sustained earnings

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Better care for employees and society at large

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Reduction of expenses

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Better relationships between customers, suppliers, employees

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A CASE STUDY  CHEMICAL PLANT

1. Site Site sel select ection ion

2. Improp Improper er Lay Layout out a. location location of the plant iin n the downwi downwind nd direct direction. ion. b. higher transportat transportation ion cost. c. process process area very very cl close ose to tthe he publi public c living. living. d. wrong material material select selection. ion.

3. Risk Risk asse assessm ssment ent a. sto storage rage b. fire fire p prot rotect ection ion c. tox oxiicity city d. hazard hazard iindex ndex rating rating e. fire fire and expl explosi osion on hazard hazard f. comp compat atib ibil ilit ity y

4. Proces Process s safety man managem agement ent a. reliabilit reliability y asses assessment sment of pr process ocess b. equi equipm pmen entt c. safety safety ttrip rips s and in inter terloc locks ks 23

 

d. quality quality testi testing ng tools tools e. remova removall of fug fugiti itive ve f. emissions

5. Electr Electrica icall saf safety ety a. no hazard hazard classif classificati ication on and proper b. electr electrica icall fit fittin tings gs c. protection protection against against st static atic electricity electricity d. lighten lightening ing arres arrestor tor

6. Safet Safety y Audit Audits s a. concept conceptual ual stage stage b. extens extension ion stage stage c. commis commissio sionin ning g and tr trial ial rrun un d. operati operation on sta stage ge e. peri period odic ic

7. Emerge Emergency ncy P Plan lannin ning g a. on si sitte b. off off s sit ite e c. integral integral multidis multidisciplin ciplinary ary dis disaster aster ap approach proach

8. Trai Traini ning ng

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9. Implem Implementa entatio tion n

The best / successful project would be: Get suggestions - as many as possible Assess risk integrated with business planning and evaluate Subject them to critical review Set priorities based on the requirements

Choose the project If the risk is high If Manageable

Proceed

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