RISK MANAGEMENT AND INSURANCE IN

BUSINESS

Risk management is a management tool, which can be

used by any organization or department, regardless of
size, for the purpose of minimizing the adverse financial
effects of accidental loss.

In its most basic application, risk management is an

ongoing systematic effort to identify and control the risk
of losses to which an organization is exposed and to
finance those losses, which do occur, in a cost-effective
manner.
Risk management is a management procedure that has an identified
purpose, and which employs recognized techniques and tools.

A “Risk Assessment” will examine exposures to Property, Liability,

Personnel and Net Income. These loss exposures include the following:

 Property: Tangible Property - Facilities, land, equipment;

Intangible Property - Reputation, Goodwill, Accounts Receivable
 Liability: Common Law Duty of Care, Statute Law including,
Occupiers Liability, Auto, Environment Regulations, Workers
Compensation
 Personnel: Key Personnel, Employee
 Revenue: Income Sources, Extra Expenses in the event of a loss

IMPORTANCE OF RISK MANAGEMENT IN

BUSINESS
 Effective risk management will reduce and manage the
hazards associated with the loss exposures within an acceptable
level of risk as well as evaluate services provided.

 The assessment will also assist the organization to

determine their self-insurance and insurance protection needs.
  The assessment will bring an assurance that the
organization will be covered in the event of a significant or
catastrophic loss.

RISK MANAGEMENT PROCESSES

1. Risk Identification

This is the scientific approach to examining each risk's source of harm,

type of failure, immediate and underlying causes, and consequences. The
sources of risks are identified by establishing the full details of the
activities of the organization and their dependence on each other and on
other outside activities.

2. Risk Assessments

Risk assessment is the second stage in the risk management process

where collated data is analysed for potential risks. Risk assessment is
described as short listing of risks starting from low impact highest impact
on the project, out of all threats mentioned in the identification phase.
Risk assessment consists of qualitative risk assessment and qualitative
risk assessment.

3. Risk Mitigation
 Insurance

Insurance is the protection against financial loss provided by

an insurer.
It is an economic device whereby an individual substitutes a
small certain cost (the premium) for a large uncertain
financial loss which would exist if it were not for the
insurance.

Insurance is a device by means of which the risks of two or

more persons or firms are combined through actual or
promised contributions to a fund out of which claimants are
paid.
Requisites of Insurable Risks
The loss produced by the risk must be definite and measurable. The loss must
have financial measurement. In other words, we must be able to tell when a
loss has taken place, and we must be able to set some value to it.
The loss must be fortuitous or accidental. The loss must be the result of a
contingency (emergency), that is, it must be something that may or may not
happen.
The loss must not be catastrophic. All or most of the objects in the group
should not suffer loss at the same time.
Reasonable cost of Transfer. One of the insured’s requirements is not to insure
against a highly probable loss, because the cost of transfer tends to be
excessive. To be insurable the chance of loss must be small.

Types of Insurance
Type of insurance What is the extent of coverage
products
All Risks Insurance It covers loss or damage to the property insured
caused by any accident (wide cover) or on
specified perils basis (restricted cover)

Burglary Insurance It covers loss or damage to the property

because of theft
Business It covers loss of profit arising from physical
Interruption loss or damage to the property insured, thus
Insurance hindering a company from carrying out its
planned level of business
Electronic Shield It provides indemnification for any unforeseen
Insurance or sudden physical loss or damage to electronic
equipment such as computers, thus requiring
replacement or repair.
Employer’s Liability It indemnifies the employer against liability
Insurance lawsuit for employee claims resulting from
bodily injury or disease sustained during the
course of employment.
Equipment It covers loss or damage to equipment, its
Insurance accessories and spare parts caused by
accidental collision or overturning, fire,
external explosion, etc.
Fidelity Guarantee It covers all direct pecuniary loss sustained by
Insurance the insured as a result of acts of dishonesty and
fraud committed by an employee and which is
discovered within the insurance period.
Fire Insurance It covers loss or damage to property caused by
fire or lightning and other extraneous perils
such as explosions, storms, riots, etc.
Money Insurance It provides coverage for loss of money
occurring from money in transit namely when
collecting and/or delivering money from/to
bank or money stolen while in the personal
custody of an employee.
Professional It gives protection to professional who supply
skills or services against their legal liability to
Indemnity compensate parties other than the insured for
Insurance losses sustained because of their professional
negligence.
Product Liability It provides compensation to the insured for
Insurance bodily injury, loss or damage to third parties’
property caused by defective designs,
packaging, etc. of goods sold, supplied, tested,
repaired, and serviced by the insured.
Marine Cargo It is an insurance cover for merchandise that is
Insurance transported by rail, road, air and sea. As SMEs
are venturing more into the export businesses,
the practice of insuring goods in transit
becomes increasingly important to their
business operations.
Benefits of Insurance

Indemnification. The direct advantage of insurance is

indemnification for those who suffer unexpected losses.

Reduced Reserve Requirements. If there is insurance protection the

amount of accumulated funds needed to meet possible losses is
reduced.

Business and Social Stability. Insurance contributes to business

and social stability and to peace of mind by protecting business
firms and the family breadwinner (worker).
 Costs of Insurance

Operating Expenses. Insurers incur expenses such as loss control costs,

loss adjustment expenses, expenses involved in acquiring insureds, state
premium taxes and general administrative expenses. These expenses,
plus a reasonable amount for profit and contingencies, must be covered
by the premium charged.

Moral Hazard. (Un ethically) A second cost of the insurance industry is

the creation of moral hazards. A moral hazard is a condition that
increases the chance that some person will intentionally (1) cause a loss
or (2) increase its severity. Some unscrupulous (immoral) persons can
make, or believe that they can make, a profit by bringing about a loss.