Risk Management

Risk Management

Risk management is a process that identifies loss exposure faced by an organisation and select the most appropriate technique for treating such insurance exposures.

Risk manager typically term loss exposure to identify potential loss.

Loss exposure is any situation or circumstances in which a loss is possible, regardless of whether a loss typically occurs.

For e.g. In Corporate the owner of company know the risk of information data they always take insurance.

There are two objective of Risk Management –

• Pre loss Objective
• Post lost Objective

Pre loss Objective

Important objective before a loss occur include economy, reduction of anxiety and meeting legal obligation.

The first objective is that firm should have to prepare for potential loss.

This preparation involve – cost of safety programmes, insurance premium paid, cost associated with different technique.

The second objective is reduction of anxiety.

For e.g. the threat of catastrophic lawsuit because of a defective product can cause greater anxiety than a small loss from a minor fire.

The final objective is to meet the legal obligation.

For e.g. in government regulation it require a firm to install safety device to protect worker from harm to dispose of hazardous waste materials property and to label consumer product appropriately.

Post loss Objective

Risk management also has a certain objective after a loss occurs.

The objective are – survival of firm, stability of earning, continued growth.

And in all the three objective survival of firm is the most important objective.

Survival firm means after loss occur firm resume at least partial operation with time period.

Stability of earning means earning per share can be maintained if firm continue to operate.

Continuous growth means the loss that occur in his/her life beside this then also situation give the ability to grow.

Steps in Risk Management

 Identify Loss Exposure

The first step in risk management process is to identify all major and minor loss exposure.

Important loss exposure include-

Property Loss Exposure

• Building, plant & other structure
• Furniture, equipment, supplies
• Inventory
• Computers and it’s software

Liability Loss Exposure

• Defective product
• Environmental pollution
• Sexual harassment
• Misuse of internet

Business Income Loss

• Loss of income from covered loss
• Continuing expense after loss
• Extra expense

Human resources loss

• Death
• Disability
• Retirement
• Injury

Crime loss

• Robberies
• Fraud & embezzlement
• Theft of intellectual property

Foreign loss

• Act of terrorism
• Plant & business property
• Kidnapping of key personnel

Measure & analyse loss

Risk manager can use several sources of information to identify preceding loss exposure.

They include-

• Historical data
• Financial statement
• Flowchart
• Physical inspection
• Risk analysis

Risk control

Avoidance

• It means certain loss exposure will never happen or undertaken or an existing loss exposed is abandoned.
• For e.g. flood loss can be avoid by building a new plant on high ground above a floodplain.

Loss Prevention

• It refer to that measure that reduce frequency of particular loss.
• For e.g. measure that reduce truck accident include – training, no alcohol.

Loss Reduction

• It refer to the measure that reduce the severity of a loss after it occur.
• For e.g. include installation of automatic sprinkle.

Duplication

• It refer to having a backup of document especially important document or property available in case of loss occurs.
• For e.g. Business files records.

Separation

• It refer to the dividing of assets into 2 or more parts.
• For e.g. Cosmetic Company divide industry in 4 parts.

Diversification

• It refer to reduction of loss by spreading the loss.
• For e.g. mutual fund.

Risk Finance

It refer to that technique that provide the payment of loss after they occur.

Retention

• It refer to that in which firm retain parts or loss that can result from a given loss.
• Retention can either be active or passive.
• Active risk retention means that firm have to be aware of loss and keep the ability to retain the part of loss.
• For e.g. risk manager decide to retain physical damage loss of cars.
• Passive retention is failure to identify a loss and also forget to act.
• For e.g. risk manager fail to identify all company risk that could be damage in earthquake.

Non Insurance Transfer

• It refer to that risk in which pure risk and financial consequences are transferred to another party.
• For e.g. contract, lease.
• A company contract with a construction firm to build a new plant can specify that the construction firm is responsible for any damage to plant while it is being built.

• Insurance

  Insurance is appropriate for loss exposure that have low probability of loss but severity of loss is high.

  Things to keep in mind for buying insurance policy-

  • Know your current life stage
  • Plan for a specific financial goal
  • Calculate an amount of life cover that you need
  • Choose the longest possible term
  • Verify all charges and benefit
  • Understand claim settlement
  • Stay alert for all changes and offers