1. Risk management

2.  Finance: The probability that an actual return on an
investment will be lower than the expected return.
 Food industry: The possibility that due to a certain hazard
in food there will be an negative effect to a certain
magnitude.
 Insurance: A situation where the probability of a variable is
known but when a mode of occurrence or the actual value
of the occurrence is not.
 Securities trading: The probability of a loss or drop in
value.

3. Risk
1. The probability of
winning or losing
something worthy is
known as risk.
2. Risk can be
measured.
3. It is controllable
4. Risk can be
minimised.
Uncertainty
1. Uncertainty implies a
situation where future
events are not known.
2. Uncertainty cannot be
measured.
3. It is uncontrollable
4. Uncertainty can not
be minimised.

4.  Preparation for a test (risk)
 Surprise test (uncertainty)
 football match between two teams wherein past
performance of the players are known.(risk)
 football match between two teams wherein past
performance of the players are unknown.(uncertainty)

5.  The risk can be classified into several categories:
1. Financial and non-financial risk
2. Static and dynamic risk
3. Fundamental and particular risk
4. Pure and speculative risk
5. Quantifiable and non-quantifiable risks

6.  When the risk is concerned with the financial loss then
it is termed financial risk.
 When the possibility of financial loss does not exist ,
such situations are called as non-financial in nature.
Example: selection of a career

7.  Dynamic risk are those which are arising from the
changes in the economy or environment.
ex: inflation level, income level , price level etc.
- these type of risk are very difficult to anticipate and
quanitify.
 Static risk are more or less predictable and they are not
affected by economic condition.
-they are caused by dishonesty, mistakes of man
like theft, steal etc.

8. Dynamic risk
 Losses are not easily
predicatable.
 They result from change in
the economic condition.
 They are not covered by
insurance
 These risk benefit the
society
Static risk
 Losses can be predicted
 They occur even if there is
no change in the economic
condition.
 They are covererd by
insurance
 These risk do not benefit the
society

9.  Fundamental risk also called as group risk
 they affect the economy
 ex: earthquakes, floods, wars, unemployment, 26/11
attack
 Particular risk also called as individual risk
 they affect small group of the society.
 These risk are insurable
 Ex: theft, robbery, fire etc.

10. Pure risk are the risk where there is a possibility of
Loss or No Loss.
There is no gain to the individual or to the organization.
Ex: 1. If a machine in an organization produces 10,000
units per day and one day it breaks down then the
company will incur a loss and if it does not then
there is no loss.
2. A car meets an accident.
In both the case either there is a loss or there is no
loss.

11.  It is a situation where there is either Profit for the firm
or there is loss.
 Ex: Investing in stock market hoping that the prices
may rise.
◦ If price rise then there is a profit
◦ If price fall then there is a loss
In speculation risk both profit and loss exist.

12. Pure risk
 Insurable
 Pure risk does not benefit
the society.
 Ex: insurance towards
personal accidents etc.
Speculative risk
 This kind of risk can not be
insured.
 Society is benefited from
speculative risk
 Ex: a firm develop a new
technology from which it can
produce the inexpensive
computers then the
competitors may be forced to
produce computers at a lower
cost.

13.  Pure risk is classified into three categories
1. Personal risk
2. Property risk
3. Liability risk

14.  The risk that directly affect the individual
 It involves the possibility of complete loss or reduction
of earned income.
 There are 4 major personal risk
◦ Risk of premature death
◦ Risk of insufficient income during retirement
◦ Risk of poor health
◦ Risk of unemployment

15.  It refers to the risk of having property damaged or lost
because of fire, windstorm, earthquake and numerous
other causes.
◦ Types of property risk
 Direct loss
 Indirect loss
Example
◦ physical damage of a factory due to a fire.(direct loss)
◦ rebuilding of a factory.(indirect loss)

16.  These are the risk arising out of the
intentional or unintentional injury to the
person or damages to their properties
through negligence or carelessness.
 Ex: workmen’s compensation law

17.  Risk which can be measured in numerical scales are
known to be quantifiable while the risk which can not
be measured in numerical terms are known to be non-
quantifiable risk.
 -tension or loss of peace.

18. • Risk has been described as “sugar and salt of life”.
• People take risk to achieve certain goals.
• Care has to be taken to avoid the loss.( selection of
career)
Definition
Thus risk management is an integrated process of
delineating specific area or risk, developing a
comprehensive plan, integrating the plan, and
conducting ongoing evaluation.

19.  Risk means some danger or loss may be
involved in carrying out an activity.
 Risk management is used to protect against
loss or danger arising from a risky activity.

20. Risk management may be defined as “ the
identification, analysis and economic control
of those risks which can threaten, the assets
or earning capacity of an enterprise”.

21. 1. Avoid Risks or Prevention of Risks
For example-
1.Avoid fly,(avoid travelling by airplane)
2.Avoid fire,
3.Avoid going to the border at the time of war
tensions
4.Avoid travelling during monsoon
5.Avoid going to ice lands(manali) in summer as
there can be ice slides.

22. • The risk which can not be avoided, can be
reduced.
• Ex:-
• 1. loss on sale
• 2. loss on account of marketing
• 3. reorganisation of firm- amalgamation,
joint venture, conversion into company -
which help in improving managerial ability,
financial strength etc.

23.  Insure the goods
 Ex:- marine insurance, fire insurance, life
insurance etc.

24.  Directly accept small risk
 Ex:- debtors

25.  Spreading of risk is termed as ‘Averaging of
Risk’.
 EX-
 1. By entering business in different
geographical states within a country or
different.
 2. incorprating as public company
(shareholders take the risk)
 3. entering into “Reinsurance business”

26. 1. risk management is a scientific approach to
the problem of dealing with only pure risks
and not any other risks faced by the
individual and business.
2. Risk management gives importance to
insurable and uninsurable risks and to use
suitable techniques for problems dealing
with all pure risks.
3. It mainly emphasises reducing the cost of
handling risk by using appropriate methods.

27. 1. To create the right corporate policies and
strategy
2. It si essential for effective managing of
people and process.
3. To evaluate the risk of the business
4. For effective handling of spreading the risk,
monitoring and insuring againt.
5. To introduce various plans and techniques
to minimise the risk
6. To give advice and make suggestions for
handling the risk

28. 7. To create awareness about risk among
people.
8. To avoid cost, disruption and unhappiness
in relating to risks.
9. To decide which risks are worth pursuing,
and which should be shunned.
10. To fix the sum assured under the policy and
to decide on whether to insure or not.
11. To select the appropriate technique or
methods to manage the risks.

30. 1. Defining the objectives of the risk management
• It is the first step in the risk management process.
• This step identifies the risk associated with the project
• One should have knowledge about organisation, the market
in which it is operating, legal,environmental, political, social
and climatic environment in which the firm is carrying out
its business.
• This is very imporatant step because any failure in this step
will cause major loss for the organisation.

31. 1. The Financial Statement Method
◦ reflect the firm’s real assets, liability, financial budget, etc
◦ risk managers can assess the risk by assessing the firm’s financial
situation
2. The Flow-Chart Method
◦ investigating the firm’s businesses and its internal operation
◦ assess the firm bears what type of risk
◦ looking at the flowcharts and using risk analysis questionnaire

32. 3. On-Site Inspections
◦ by observing the firm’s facilities and operation directly
4. Interactions with other Departments
◦ the risk manager keeps continuous contact with the managers
from other dept.
◦ obtain information about the source of risk in other dept.
5. Contract Analysis
◦ looking at the contracts the firm entered into
◦ assess the firm’s obligation and liability

33. 6. Statistical Records of Losses
◦ looking at the records of losses
◦ find out the reasons for the occurrence of the loss, the nature of
the risk, the degree to which the firm is being affected, etc
7. Checklist method

34.  Property loss
 Liability loss
 Business income loss
 Death or disability
 Unemployment
 Robbery etc.

35. This step evaluates and measures the risk identified.
It studies how frequently the loss occurs and what is the
size of the loss.
Shortlist the risk that possibly have the highest impact
and should be managed first.

36. Once the risk is evaluated it has to be controlled.
Risk can controlled by using different techniques like
Risk control
1. Loss avoidance
2. Loss prevention
3. Loss reduction methods of handling risk
Risk financing
1. Risk retention
2. Non-insurance transfers
3. Commercial insurance

37.  This the last step in risk management process
 For effective risk management programme, a risk
management policy statement is necessary.
 This statement outlines the risk management objectives of
the firm as well as the company policy with respect to the
treatment of loss exposures.
 Risk treatment manual can be developed
 Which will be usefull for the new employees of the firm.
 The risk management programme should be periodically
reviewed and evaluated to determine whether the objectives
are being attained.

38. 1. Principle of risk identification
2. Principle of risk analysis
3. Principle of risk assessment
4. Principle of taking corrective decision
5. Principle of evaluation
6. Principle of alternative course of action
7. Principle of risk control
8. Principle of risk retention
9. Principle of risk transfer

39.  Meaning
It is a contract between the insurer and
insured whereby the insurer undertakes to
pay the insured a fixed amount, in exchange
for a fixed sum(premium), on the happening
of a certain event (like at a certain age or on
death) or compensate the actual loss when it
takes place due to the risk insured.

40.  Insurance is the means by which the risks of
loss or damage can be shifted to another
party(the insure) on payment of a change
known as Premium.
 It is a form of co-operation through which all
the insured, who are subject to a risk, pay a
premium and only one or few among them
who actually suffer the loss or damage is/are
compensated. ( ex:- damage to house
property)

41.  The number of parties exposed to a risk are
very large and only few of them might
actually suffer loss during a certain period.
 The insurer(the company) acts as an agency
to spread the actual loss suffered by a few
insured parties among large number of
parties.

42.  Insured
The person or party who seeks protection
against a particular risk and pays a certain
amount in consideration to the recovery of
the financial loss is known as insured.
 Insurer
The party (i.e.- insurance company) which
undertakes to protect the insured from the
specified risks and the loss, so caused in
consideration to a certain premium received
from the insured is known as insurer.

43.  Premium
It is the fees paid by the insured to the
insurer as the consideration of the insurance
contract for the assurance of the recovery of
financial loss so caused.
 Insured amount
It is the agreed financial value of the future
loss caused by certain certain events.
Insurance is made for recovery of this value.

44.  Insurance policy
It is the contract between the insured and the
insurer containing the details of the terms
and conditions of a certain insurace.

45.  Also termed as “insurance of insurance”.
 Means an insurer who has assumed a large
risk may arrange with another insurer to
insure a portion of the insured risk.
 In reinsurance, therefore, one insurer insures
the risk which has been undertaken by
another insurer.

46.  The original insurer who transfers a part of
the insurance contract is called the reinsured
and the second insurer is called the reinsurer.
 Premium
 Ex- insure 10,00,000
insurance company – 5,00,000
another insurance company-5,00,000