Risk Management

Risk management as a scientific approach aims at the reduction and elimination of risk faced by
the business enterprises or an individual. In broader term ‘ Risk management ‘ is the process of
protecting one’s property and health. But in narrower sense it is considered as a managerial
function of business in which a scientific approach deals with business risks.

Risk management is concerned with the process or function that involves managing risk. Risk
management seeks to make best decision about how to deal with a particular risk.

According to P. K. Gupta…….

“ Risk Management is an integral process of delineating specific areas of risk, developing a

comprehensive plan, integrating the plan, and conducting ongoing evaluation.”

Corporate Risk Management

Corporate risk management is a process by which potential loss exposures which an organization
may face are identified and techniques for handling such exposures are selected. In the old days
only pure loss exposures were considered by the risk manager, but now a day’s newer form of
risk management are emerging that consider certain speculative risk as well.

However corporate risk management should not be confused with insurance management.
Corporate risk management is a wider concept and all techniques including insurance are
covered under it.

Objectives of corporate risk management

Objectives of corporate risk management are as follows:

1. Economical – Costs of risk and risk management are kept within reasonable bounds. It
involves an analysis of the cost of safety programs, insurance premiums paid and the
costs of associated with the different techniques for handling losses.

2. Reduction of anxiety - Certain loss exposures can cause greater worry and anxiety for
the risk manager e.g. lawsuit from a defective product can cause greater anxiety and fear
 than a small loss from a minor fire to other cause. He wants to reduce the anxiety and fear
associated with all loss exposures.

3. Compliance with government regulations – To meet any legal obligations. For

example government regulations may require a firm to install safety device to protect
workers from harm, to dispose of detrimental waste materials properly etc. the risk
manager must see that these legal obligations are met.

4. Social responsibility – A severe loss can adversely affect employees, suppliers, creditors
and the society in general. For example a severe loss that shuts down a plant in small
town for a long period can cause great economic distress in the town. For a good image,
firm should satisfy its local responsibility desire.

5. Survival – After a loss occurs, the firm should be able to resume at least partial
operations within reasonable time period.

6. Continued growth of the firm – A company is supposed to grow by developing new

products and markets or by acquiring or merging with other companies. The risk manager
must consider the effect that a loss will have on firm’s ability to grow.

7. Stability of earning – Earning of the firm can be maintained if the firm continues to
operate. A firm incurs additional expenses to achieve this objective.

8. To continue operations – The ability to operate after a loss is extremely important. For
example a banks, railways etc. must continue to operate after a loss.
Steps in the Corporate Risk Management:

1. Identifying significant potential

loss exposures.

2. Evaluating potential losses.

3. Developing and selecting methods for

treatment of loss exposures.

4. Implementing the program.

1. Identifying significant potential loss exposures – The first step in this process
is risk identification. There are various methods of identifying risk exposures. These
includes:

• Analyzing of the firm’s financial statements.

 • Surveys of employees.

• Discussion with manager’s throughout the firm.

• Physical inspection of plant and operations.

• Flowcharts showing flow of production and delivery.

• Historical loss data.

• Understanding economic, legal, and regulatory factors affecting business.

• Overall understanding of business………..etc.

2. Evaluating potential losses – The second step in corporate risk management

process is measurement and evaluation of risk in order to know the frequency and
severity of future losses.

Loss frequency: It refers to the probable number of losses that may occur during some
given time period.

Loss severity: It refers to the probable size of the losses that may occur.

3. Developing and selecting methods for treatment of loss exposures –

Various methods are available to tackle the problem of risk and a few of those are
mentioned as under:

• Avoidance of risk – Avoidance is perhaps the most drastic method of handling

risks. Generally it involves activities such as ceasing to continue the activity
which creates the risk or changing the way of performing the activity. For
example, when a person buys a motor car, he assumes the risk of accident and
liability to pay compensation to third party in the event of accident but the best
way to avoid such risk is not to buy the car at all.

• Risk reduction or prevention – Risk reduction or prevention includes all those

methods which are employed to reduce the probability of loss creating events. For
example: in order to avoid or prevent loss of fire, the use of fire proof building,
 slogans prohibiting smoking, installation of fire fighting apparatus etc. and for
avoiding theft, the use of solid locks and appointing guards or chowkidar etc.

• Retention of risk – One best way of handling risks is to retain risks with self. It is
the easiest and cheapest way of dealing with relatively small losses by paying out
of one’s own recourses.

• Non insurance transfer of risk – Risks may be transferred by making

contractual arrangement to transfer responsibility for any losses which are
outcomes of the occurrence of specified uncertain event.

• Insurance – one another way of handling risk is to take help of insurance. The
basic objective of insurance is to transfer the risk of a person to the insurance
company which has easily spread it over a large number of persons insuring
similar risks.

Which method to be adopted?

Risk Management Matrix

Type of Loss severity Loss frequency Appropriate risk management

loss technique
1. High High Avoidance
2. High Low Insurance
 3. Low High Loss prevention and retention
4. Low Low Retention

4. Implementing the program – After selection of risk management techniques this is

fourth step which includes implementation of the risk management program.

Personal Risk Management

Personal risk management is the process by which potential loss exposures which an individual
may face are identified and techniques for handling such exposures are selected.
Steps in personal risk management

2. Identifying significant potential

loss exposures.

2. Evaluating potential losses.

3. Developing and selecting methods for

treatment of loss exposures.

4. Implementing the program.

1. Identifying significant potential loss exposures – This is the first step. Here
various potential losses which can cause serious financial problems are identified. They
can be divided under the following three categories:

a. Personal risks:

• Drop in earnings prior to retirement due to the death or disability.

• Increased medical expenses due to sickness or accident.

• Loss of earned income from unemployment.

b. Property risks:

• Theft of car, motor cycle.

• Real estate and personal property can be damaged or destroyed because of fire,
windstorms and many other causes.

• Indirect losses including extra expenses. Loss of rent, shifting to another home
during the period of reconstruction.

c. Liability risks:

• Any liability which one has to compensate for personal injury or damage to their
property.

2. Evaluating potential losses – The second step in coporate risk management process
is measurement and evaluation of risk in order to know the frequency and severity of
future losses.

Loss frequency: It refers to the probable number of losses that may occur during some
given time period.

Loss severity: It refers to the probable size of the losses that may occur.

3. Developing and selecting methods for treatment of loss exposures –

Various methods are available to tackle the problem of risk like

• Avoidance.

• Risk reduction or prevention.

• Retention of risk.

• Non insurance transfer of risk.

• Insurance.
 4. Implementing the program – After selection of risk management techniques this is
fourth step which includes implementation of the risk management program.

Risk Management vs. Insurance Management

• No doubt that risk management is broader than insurance management. Because risk
management deals with both insurable and uninsurable risks and also the choice of
methods for dealing with these risks. While insurance management deals with insurable
risk only.

• Risk manager differs from insurance management in philosophy. Insurance manager

takes insurance as accepted standard to deal with risk. The insurance manager views
insurance programs and ask

“Are there any risks that I should retain?” “How much I can save in insurance costs if I
retain them?”

The risk manager in contrast views insurance as one of the method to deal with risks. His
question is: “Which risks must I insure?”

• Under risk management, insurance is considered the last option and should be used only
when necessary. So risk management is more than insurance management.