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Risk Management
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Agribusiness
Risk Management
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--Emmett J Vaughan
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Background On Risk Management
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The Concept of Risk
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For purposes of this class the general meaning of the word risk will
indicate a situation where an exposure to loss exists
Risk is a condition in which there is a possibility of an adverse
deviation from a desired outcome that is expected or hoped for
Risk is the chance of loss
Risk is the possibility of loss
Risk is uncertainty
The notion of an indeterminate outcome is implicit in each of the definitions; the
outcome must be in question.
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Risk Management
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Degree of Risk
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Degree of Risk
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Degree of Risk
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Degree of Risk
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Uncertainty Theory
Russian Roulette
Think about a gun with 6 chambers
There is more risk when there are two bullets than with one
There is more risk when there are three bullets than when
there are two
When you add the fourth and fifth bullet, the probability of a
deviation from the hoped for outcome is increased, but there
is less uncertainty
When you add the sixth bullet, there is no risk
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Uncertainty Theory
Russian Roulette
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Classifications of Risk
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Classification of Risks
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Methods of Handling Risk
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CONTROL
FINANCING
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Methods of Handling Risk
Risk Financing
Risk Retention
Risk Transfer
o Insurance
o Non-insurance
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Risk Avoidance
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Risk Avoidance
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Risk Avoidance
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Loss ControlReduction
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Loss ControlPrevention
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Segregation/Separation as a
Loss Control Measure
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Loss Reduction/Prevention
Forecasting Loss
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Risk Financing
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Risk Retention
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Transfer
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The Risk Management
Process
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1. Determination of objectives
2. Identification of risks
3. Evaluation of risks
4. Consideration of alternatives and selection of the technique
for dealing with each risk
5. Implementing the decision
6. Evaluation and review
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Determination of Objectives
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Determination of Objectives
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Identification of Risks
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Identification of Risks
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Evaluation of Risks
Once the risks have been identified, the risk manager must
evaluate them
This means measuring the potential size of the loss and
the probability of its occurrence
Ranking should be based on the financial impact of a loss
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Evaluation of Risks
Critical Risks
Include all exposures in which the possible losses are of a magnitude that
would result in bankruptcy
Important Risks
Include those exposures in which the possible losses would not lead to
bankruptcy, but would require the firm to borrow in order to continue
operation
Unimportant Risks
Include those exposures in which the possible losses could be met out of the
existing assets or current income of the firm without imposing undue financial
strain
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Consideration of Alternatives and Selection of
the Risk Treatment Device
Once the risks have been identified and evaluated, the next step
is consideration of the approaches that may be used to deal with
risks and then selection of the technique that should be used
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Evaluation and Review
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Rules of Risk Management
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High Low
Frequency Frequency
Probability Probability
High
Severity Avoid Insurance
Low
Severity Reduce Retain
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Insurance always costs more than the expected value of the loss
People who purchase coverage against small loss exposures are
trying to beat the insurance company at its own game
Insurance should be used as a last resort
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Priority Ranking For Buying Insurance
Essential Insurance
Coverages include those designed to protect against loss exposures
that could result in bankruptcy or required by law
Important Insurance
Coverages include those which protect against loss exposures that
would force the insured to borrow or resort to credit
Optional Insurance
Protects losses that could be met out of existing assets of current
income
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Common Errors in Buying Insurance
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Risk Management and
The Agricultural Industry
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Risk Management and
Speculative Risk
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Agricultural/Farm Production
Risks Relating To Animals
Animal Breeding
Animal Health
Animal Growth
Disease Management
Pest Management
Manure & Nutrient Management
Aquaculture
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Production Risks Relating To
Farming/Agriculture
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Financial Risk
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Financial Risk
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Institutional Risk
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Legal Risk
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Human Resource Risk
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Notes
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