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Chapter 2 Ins 200

Risk management involves identifying, evaluating, and prioritizing risks to minimize losses. The objectives are to reduce loss impact, reduce fear and worry, and ensure organizational survival after losses. The risk management process includes identifying risks, analyzing them, examining techniques to address risks, selecting programs, and reviewing programs. Sources of risk come from physical, social, political, legal, operational, economic, and cognitive environments. Categories of risk exposures are physical asset exposures, financial asset exposures, liability exposures, and human asset exposures.

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2K views19 pages

Chapter 2 Ins 200

Risk management involves identifying, evaluating, and prioritizing risks to minimize losses. The objectives are to reduce loss impact, reduce fear and worry, and ensure organizational survival after losses. The risk management process includes identifying risks, analyzing them, examining techniques to address risks, selecting programs, and reviewing programs. Sources of risk come from physical, social, political, legal, operational, economic, and cognitive environments. Categories of risk exposures are physical asset exposures, financial asset exposures, liability exposures, and human asset exposures.

Uploaded by

Nur Syhuhada Che Hussin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 2

RISK MANAGEMENT AND


ASSESSMENT
CLO1 Explain the concept of risk and insurance principles that govern the
insurance industry.
LEARNING OBJECTIVES
LO 1 Definition and objectives of risk management
LO 2 Risk management process
LO 3 Sources of risk
LO 4 Categories of risk exposures
LO 1 Definition and objectives of risk management

DEFINITION OF RISK MANAGEMENT

• Risk management is the identification, evaluation, and prioritization


of risks followed by coordinated and economical application of
resources to minimize, monitor, and control the probability or impact
of unfortunate events or to maximize the realization of opportunities.
LO 1 Definition and objectives of risk management

OBJECTIVES OF RISK MANAGEMENT


• The objective of having a risk management can be looked at from two (2) different
perspectives:

• 1) Before Loss Perspectives


- Reduce impact of loss - Organization take preventive measures so that the impact of losses
would have been less severe.
- Reduces fear and worry.
- Compulsory by law.
- E.g. install safety devices to protect
workers from injuries or harm
(helmets, eye-goggles)
LO 1 Definition and objectives of risk management

OBJECTIVES OF RISK MANAGEMENT


2) After Loss Perspectives

- Ensures the survival of the organization even after a loss has taken place.

- So that the organization able to continue its operations either partially or wholly,
the earnings of the organization also can be maintained to ensure the stability of
earnings.

- An effective risk management program will reduce the overall impact of losses
towards the organization and the society in general.
LO 2 Risk management process

RISK MANAGEMENT PROCESS

• Step 1: Risk Identification

• Step 2: Risk Analysis / Evaluation

• Step 3: Examining alternative risk management techniques

• Step 4: Selecting & Implementing risk management program

• Step 5: Evaluation, Review and Control


LO 2 Risk management process

RISK MANAGEMENT PROCESS


1) Risk Identification
• What can be insured & what can be controlled?
• The tools of risk identification must be available to the person whose job is to identify
risk.
• Able to learn of the areas in which it’s exposed to the risk.

2) Risk Analysis Evaluation


• Evaluate the likelihood of loss and the value of loss in terms of :-
• - Frequency of loss
• - Severity of loss
• Measurement process may take the form of quantitative and qualititative.
LO 2 Risk management process

RISK MANAGEMENT PROCESS


3) Examining Alternative Risk Management Techniques
There are 2 main ways to classify the risk management techniques:
a) Risk Control – Preventing losses from happening
• Includes techniques, tools, strategies & processes that seek to avoid, prevent,
reduce or otherwise.
• Includes methods that seek to improve understanding / awareness within an
organization of activities affecting exposure to the risk.
• Methods:-
• Risk Avoidance
• Risk Prevention
• Risk Reductio
- Risk Financing – Paying for those losses that do happen
LO 2 Risk management process
RISK MANAGEMENT PROCESS
3) Examining Alternative Risk Management Techniques
b) Risk Financing – Paying for those losses that do happen
- Retention
Risk manager consciously decides not to transfer the potential loss and uses funds within an
organization to pay for losses it occurs which commonly less expensive than purchasing
insurance.
- Self Insurance & Captive insurance
Special case of planned retention, occurs when the organization has enough resources to
easily absorb the loss that it retains. Eg:Maybank Group is the parent company of Maybank
Assurance S/B.
- Insurance
Transferring the risk of financial consequences of potential accidental losses from insured firm
to an insurer(insurance company)
LO 2 Risk management process
RISK MANAGEMENT PROCESS

4) Selecting & Implementing Risk Management Program


• Select the best and most cost effective risk management programme
• The selection of risk management programme must be based on 2 factors:
- Financial – whether it will affect the organization’s profitability/ rate of return
- Non-Financial – affects the growth of the organization, humanitarian aspects & legal
requirements.
LO 2 Risk management process
RISK MANAGEMENT PROCESS
5) Evaluation, Review and Control
• Must be monitored and controlled systematically.
• Must be periodically reviewed
• An effective risk management programme if carefully control can help the
organization to reduce risk.
LO 3 Sources of risk

SOURCES OF RISK
1. PHYSICAL ENVIRONMENT
2. SOCIAL ENVIRONMENT
3. POLITICAL ENVIRONMENT
4. LEGAL ENVIRONMENT
5. OPERATIONAL ENVIRONMENT
6. ECONOMIC ENVIRONMENT
7. COGNITIVE ENVIRONMENT
LO 3 Sources of risk
SOURCES OF RISK
1) PHYSICAL ENVIRONMENT
Fundamental sources of risk for example earthquake, excessive rainfall and etc.

2) SOCIAL ENVIRONMENT
Human behavior, social structures, institutions are also sources of risk. Changing
cultures can however create opportunities such as when new attitudes regarding
women in the workforce open a door to a significant talent pool.

3) POLITICAL ENVIRONMENT
For example a new prime minister might have dramatic effects on a particular
organizations. On the other hand, it’s also can bring opportunities through fiscal and
monetary policy.
LO 3 Sources of risk
SOURCES OF RISK
4) LEGAL ENVIRONMENT
A great deal of uncertainty and risk arise from the legal system. Standard conduct and
punishment enforced evolve into new standards time by time and this may not be fully
anticipated. It also vary from country to country.

5) OPERATIONAL ENVIRONMENT
Processes and procedure of an organization generate risk and uncertainty .
For example: formal procedure for hiring and firing employees may generate legal
liability. Manufacturing process may generate risk of physical harm.
LO 3 Sources of risk
SOURCES OF RISK
6) ECONOMIC ENVIRONMENT
The dramatic expansion of the global marketplace has created an uncertainty
environment. Inflation , recession are some elements of interdependent economic
systems.

7) COGNITIVE ENVIRONMENT
A risk manager’s ability to understand,see,measure and assess is far from perfect. An
important source of risk for organization is the difference between perception and
reality.
LO 4 Categories of risk exposures
CATEGORIES OF RISK EXPOSURE
1) PHYSICAL ASSET EXPOSURES.
Ownership of property gives rise to possible gains or losses to physical assets and to
intangible assets such goodwill, political support, intellectual property. Property may be
damaged , destroyed , lost or diminished in value.

2) FINANCIAL ASSET EXPOSURES


Ownership of securities such as common stocks, bonds, mortgages create this type of
exposure. This exposure can occur either from ownership of the security or when the
organization issues a security held by others. Loss or gain to a financial consequence
of changing market conditions.
LO 4 Categories of risk exposures
CATEGORIES OF RISK EXPOSURE

3) LIABILITY EXPOSURES
Obligations imposed by the legal system create this type of exposure. Civil and criminal
law impose obligations carried by citizens. Federal and state statutes impose statutory
limitations on activities. Unlike property exposures to risk liability exposures don’t bring
with them speculative risk. It is only pure risk.

4) HUMAN ASSET EXPOSURES


Part of the wealth of an organization arises form its investment in humans, that is the
human resources of the organization. Possible injury or death of managers, employees
and other significant stakeholders are an example of this types of exposures
SUMMARY
At the end of this chapter, students should be able to :-
1) Define risk management and objectives of risk management
2) Explain Risk management process
3) Identify Sources of risk
4) Discuss Categories of risk exposures
THANK YOU
ANY QUESTION ?

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