Risk Management

Defining Risk
The possibility of unfavourable results following from any occurence.

In business the risk may be defined as the danger of loss from

unforseen circumstances in future.
CLASSIFICATION OF RISK- PRACTICAL POINT OF VIEW

Financial and non financial risk

Fundamental and particular risk
Pure and speculative risk
Pure and speculative risk
Basis Pure Risk Speculative Risk

Meaning Pure risk involves no possibility of Speculative Risk involves three

gain; either a loss ocurrs or no loss possible outcomes: loss, gain or no
ocurrs change

Example An example of pure risk is the risk Trading in stock market may result
of becoming disabled as a result of in making either a profit or loss or
illness or injury. neither a profit nor loss i.e. no
change in the investment value.

Insurance Pure risk - the risk of loss without Speculative Risk cannot be insured
the possibility of gain- is the only
type of risk that can be insured.
Risk Management
Risk management is a structured approach to managing uncertainity
related to threat, through a sequence of human activities including:

Risk assessment

Strategies development to manage it

Mitigation of risk using managerial resources.

Risk Management process
Risk identification
Assessment of risk
Potential risk treatments
Risk management plans
Implementation
Risk Identification

Identifying the potential risk

source analysis: Internal sources or external sources

e.g. stakeholders of a project, employees of the company, weather over an airport

problem analysis: That are related to identifying threats

e.g: threat of loosing money, threat of abuse of privacy information, accidents or
casualties.
assessment of risk
once the risk is identified, they must then be assessed as to their
potential of severity of loss and the probability of occurance.
R=ROXIE
Where:

R=risk
RO=rate of occurance
IE=Impact of the event
Potential risk treatment
once the risk have been identified and assessed, all techniques to
manage the risk fall into one or more of these four major categories

avoidance (elimination)
reduction (mitigation)
retention(acceptance and budgeting)
transfer (insurance or hedging)
Four Ways to Manage Risk
avoidance remove all possibility of loss NOT realistic!
Examples:
To avoid automobile accidents, dont drive
Not flying because airplane will be hijacked.
Reduction minimize chance that a loss will occur.
Examples:
Wearing a bike helmet
Ensuring equipment is in good working order
Having appropriate equipment on hand
Risk Management Programs such as: Vehicle safety training; Lift
and Transfer training; etc.
Four Ways to Manage Risk
Transfer the Risk to Others
Example:
Buy an insurance policy with minimal or no deductibles, so you
have a known cost of risk premium only.

Contract the risk to another company that is either strong

financially or insures against the risk, such as:
Pharmacy
Dietary
Laundry
contractor
Four Ways to Manage Risk
Accepting some or all of the consequences of the risk

This involves accepting the losses that occur through:

Full self-insurance
war : since most property are not insured against war.
Create a risk management plan
select appropriate controls or counter measures to measure each risk.
risk mitigation needs to be approved by the appropriate level of
management.
Implementation
FOLLOW ALL THE PLANNED METHODS FOR MITIGATING THE EFFECT
OF ISKS.
PURCHASE INSURANCE POLICIES FOR THE RISKS THAT HAVE BEEN
DECIDED TO BE TRANSFERRED TO AN INSURER
AVOID ALL THE RISK THAT CAN BE AVOIDED