RISK MANAGEMENT

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RISK MANAGEMENT
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WHAT IS RISK??

• Risk is defined as the chance of having a loss
  due to occurrence of an event
• The risk is always associated with the loss
  aspects since the word itself has the association
  of DANGER OF LOSS
• The definition can be PROBABAILITY OF THE
  OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN

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CLASSIFICATION OF RISKS

• SPECULATIVE RISKS PURE RISKS
• DYNAMIC RISKS STATIC RISKS
• FUNDAMENTAL RISKS
• PARTICULAR RISKS

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Classification of Risks

• SPECULATIVE RISKS

• PURE RISKS

• Operation of this leads to profit /loss
• Leads to speculation like investment of capital
  in a new venture
• Operation is desired

• These do not change with the risk
• The operation of these perils does bring in
  loss/damage to property/assets/ liability
• Not desired

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Classification of Risks

• DYNAMIC RISKS

• STATIC RISKS

• Changes with the change in fashion, buying
  behaviour, trends, technology etc
• It denotes dynamic nature of the customer
  behaviour and the products they like to own or
  use
• If an organization is not prepared then it may go
  out of existence

• Like pure risks these risks remain static and do
  not change due to other reasons like that of
  dynamic risks
• The operation of these risks always bring about
  losses
• Operation is not desired
• May result in partial or total cessation of
  activities

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Classification of Risks

• PARTICULAR RISKS

• FUNDAMENTAL RISKS

• Risks which relate to one or few firms, factories
  or organizations only
• Losses are suffered by one or few more members of
  the society

• Relates to the society at large
• Losses are suffered by large section of the
  society/nation(s)
• Losses may be due to natural catastrophes, riots,
  epidemics etc

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ICEBERG OF LOSSES
INSURED LOSSES
UNINSURED LOSSES LOSS OF GOODWILL LOSS OF
MARKET LOSS OF CUSTOMERS LOSS OF SHAREHOLDER
VALUE LOSS OF KEY EMPLOYEES LOSS OF COSTS
INCURRED
UNINSURED LOSSES
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Risk Management- Definition

• Risk Management is defined as the systematic way
  of ensuring protection of business resources and
  income against losses so that the aim , goals and
  vision of the company can be reached.
• Thus Risk Management creates stability and
  contributes to growth and assures profitability
  of the Organization.

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ADVANTAGES OF RM

• To achieve the objectives of the Organization
• To ensure that the goals short term and long term
  are achieved without any disruption or delay
• To optimize the utilization of the resources
• To have knowledgeable of insurance arrangements
  and have considered decisions on insurances to be
  availed

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Development of Risk Management

• The Industries / Business houses want to have
  incident free/ accident free working to achieve
  their objectives
• For this purpose it is necessary to understand
  the loss producing events , the nature of losses/
  extent of losses to come up with the loss control
  measures. EXPOSURE ANALYSIS
• Risk Management aims to help the owners to have
  control on loss incidents and to reduce the
  extent of losses by proper study of the exposures
  and actions to be taken to control the same

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Risk Management process

• The steps in Risk Management process are
• 1. Risk analysis- Risk identification
• Risk evaluation
• (Risk measurement)
• (Risk quantification)
• 2. Risk control - Risk avoidance
• (Risk
  minimization)
• 3. Risk transfer- Insurance with Professional
• Insurance companies
• 4.Risk financing- Risk retention
• 5. Rolling review

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How the loss is caused?

• Loss is caused by the operation of perils which
  refers to the causes for the losses
• Loss or damage is caused by the operation of
  perils such as fire, explosion, flood, storm etc
• The loss potential ( extent of loss) depends on
  conditions which are favourable for the incident
  to assume large proportions. This is known as
  hazard or potential of the loss. More the
  potential severe will be the extent of loss
• PERIL ( CAUSE)----------------LOSS(EFFECT)
• HAZARD

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Causes of losses

• Perils- such as fire, explosion etc
• Human factors- such as negligence, carelessness,
  inadequate training, inadequate supervision, lack
  of proper systems and controls
• Inadequate maintenance ( predictive/ routine/
  annual maintenance)
• Failure of Plant/ machinery due to breakdowns
  (failure of safety devices)
• Natural perils such as flood, cyclone,
  earthquake, landslide, rockslide subsidence
• Extraneous Accidents involving Gas or chemical
  in nearby units

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TYPES OF LOSSES

• Property losses- losses which can happen to the
  Assets
• Pecuniary losses- Financial Loss which can be
  caused by business interruption due to the loss
  to the assets, financial loss due to infidel acts
  of employees, storekeepers and other employees
• Liability losses- Loss to the Third Party
  property or third party personnel due to
  activities of the Organisation
• Personal injuries- accidents resulting in fatal
  or non-fatal injuries to the employees

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HAZARD

• Hazard is defined as conditions existing which
  are favourable for the loss becoming severe
• CLASSIFICATIONS OF HAZARD
• Physical hazard- relating to physical properties.
• Moral hazards -relating to the moral
  behavoiur of the clients
• Morale hazard -Relating to the morale working
  conditions of the employees employer-employee
  relationships

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RISK ANALYSIS

• Risk analysis is the process of identifying and
  evaluating risk factors, present or anticipated,
  and determining both the probability and the
  impact of identified risk factors.
• It is a preliminary step in establishing a risk
  management strategy, which is intended to
  increase the possibility that the application
  development project produces the desired outcome
  while minimizing risk factors.
• It entails both preventive and corrective actions
  to each of the identified risk factors,
  particularly those with a medium to high rating
  level.

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RISK ANALYSIS- METHOD

• LIST ALL POSSIBLE RISKS
• INVESTIGATE BY
• STUDY
• INQUIRY
• DOCUMENT REVIEW
• PHYSICAL INSPECTION
• ANALYSE EACH RISK

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RISK EVALUATION

• Methods available are
• Study of Organisational charts/ balance sheets,
  accounting records
• Process flow diagrams, P I diagrams
• Input- output analysis- contribution from various
  sections, inter-dependencies
• Study of completed checklists
• Threat analysis- Denial of access, Loss of
  services

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EVALUATION METHODS

• INPUT OUTPUT ANALYSIS To trace the flow of
  goods and services to identify the contribution
  of parts of organisation to the total earnings
  and to analyse exposures.

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EVALUATION OF RISKS-THREAT

• ANALYSE THE THREATS TO BUSINESS
• DENIAL OF ACCESS- CHEMICAL LEAKAGE, COLLAPSE OF
  NEARBY BUILDINGS, STRIKE, PICKETING, DAMAGE TO
  WATER/SEWER MAINS, GOVT RESTRICTIONS
• LOSS OF SERVICES WATER, POWER,RAINS, FLOODS,
  CYCLONES

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RISK HANDLING METHODS

• ADOPTION OF LOSS CONTROL MEASURES
• Loss control measures involve the nature of the
  devices utilized and the human factor
• For any system to be effective the employees
  concerned need to be properly trained and
  knowledgeable.
• The Management need to ensure that the systems
  employed are in good working order the employees
  are regularly trained.

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RISK AVOIDANCE

• This is also known as Risk Elimination
• Identify the risk and if possible avoid the risk
  by eliminating the source
• It is like avoiding a location due to seismic
  activity in the area
• Ex- Avoiding a low lying location which is
  susceptible for flooding

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RISK CONTROL/PLANNING

• Risk planning and control, as a shared or
  centralized activity must accomplish the
  following tasks
• Identify concerns that can impact the project
  implementation
• Identify risks, review/assess their intensity and
  document the risk owners.
• Evaluate the risks with reference to probability
  of their occurrence and possible consequences
• Assess the plausible options for accommodating
  the recognized risks

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CONT.

• Prioritise the efforts required for managing the
  risks
• Develop/discuss and adopt risk management plans
• Authorize the implementation of the risk
  management plans
• Monitor the risk management efforts and
• Initiate the remedial actions as considered
  necessary

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RISK RETENTION

• To keep the costs under control, after analyzing
  the risks the Management, may decide to retain
  some of such losses to its account.
• Once a decision is taken , then necessary
  provision needs to be made to avoid such a loss
  ,if happens, eating into the operating budget
• Special contingency funds are therefore to be
  created for this purpose

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RISK TRANSFER

• Risk transfer involves payment by one party (the
  transferor) to another (the transferee, or risk
  bearer).
• The transferee agrees to assume a risk that the
  transferor desires to escape.

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TOOLS OF RISK TRANSFER

• INCORPORATION
• DIVERSIFICATION
• HEDGING
• INSURANCE

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CONTRIBUTIONS OF RM TO THE BUSINESS

• Achievement of objectives/ goals
• Reduced anxiety due to losses are of reasonable
  magnitude and does not cause serious loss
  situations
• Goodwill is maintained by meeting the obligations
• The business is able to survive competition
• Successful and continued operations
• Resultant growth and sustained earnings
• Better care for employees and society at large
• Reduction of expenses
• Better relationships between customers,
  suppliers, employees

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A CASE STUDY
Chemical plant 1. Site selection 2. Improper
Layout a. location of the
plant in the downwind
direction. b. higher
transportation cost. c. process area very
close to the public living. d. wrong
material selection. 3. Risk assessment
a storage b. fire
protection c. toxicity d. hazard
index rating e. fire and explosion hazard
f. compatibility

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4. Process safety management a.
reliability assessment of process
equipment b. safety trips and
interlocks c. quality testing tools d.
removal of fugitive
emissions. 5. Electrical safety a. no
hazard classification and proper
electrical fittings b.
protection against static electricity c.
lightening arrestor
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• 6. Safety Audits
• a. conceptual stage
• b. extension stage
• c. commissioning and trial run
• d. operation stage
• e. periodic.
• Emergency Planning
• a. on site
• b. off site

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The best / successful project would be
Get suggestions - as many as possible
Assess risks integrated with business planning
and evaluate.
Subject them to critical review
Set priorities based on the requirements
Choose the project
If the risk is high
If Manageable
Proceed