RISK MANAGEMENTRISK MANAGEMENT

WHAT IS RISK??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

CLASSIFICATION OF RISKSCLASSIFICATION OF RISKSSPECULATIVE RISKS & PURE

RISKS

DYNAMIC RISKS & STATIC RISKS

FUNDAMENTAL RISKS

PARTICULAR RISKS

Classification of RisksClassification of Risks

SPECULATIVE RISKS PURE RISKSOperation 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

Classification of RisksClassification of Risks

DYNAMIC RISKS STATIC RISKSChanges 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 desiredMay result in partial or

total cessation of activities

Classification of RisksClassification 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

ICEBERG OF LOSSESICEBERG OF LOSSES

INSURED LOSSES

UNINSURED LOSSESUNINSURED LOSSES

LOSS OF GOODWILLLOSS OF MARKETLOSS OF CUSTOMERSLOSS OF SHAREHOLDER VALUELOSS OF KEY EMPLOYEESLOSS OF COSTS INCURRED

Risk Management- Risk Management- DefinitionDefinitionRisk 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.

ADVANTAGES OF RMADVANTAGES OF RMTo achieve the objectives of the

OrganizationTo 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

Development of Risk Development of Risk ManagementManagement 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

Risk Management processRisk Management processThe 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

How the loss is caused?How the loss is caused?Loss is caused by the operation of perils

which refers to the causes for the lossesLoss 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

Causes of lossesCauses of lossesPerils- such as fire, explosion etcHuman 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

TYPES OF LOSSESTYPES OF LOSSESProperty 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

HAZARDHAZARDHazard is defined as conditions

existing which are favourable for the loss becoming severe

CLASSIFICATIONS OF HAZARDPhysical hazard- relating to

physical properties.Moral hazards -relating to the

moral behavoiur of the clientsMorale hazard -Relating to the

morale & working conditions of the employees & employer-employee relationships

RISK ANALYSISRISK ANALYSISRisk 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.

RISK ANALYSIS- RISK ANALYSIS- METHODMETHODLIST ALL POSSIBLE RISKS INVESTIGATE BY STUDYINQUIRYDOCUMENT REVIEWPHYSICAL INSPECTIONANALYSE EACH RISK

RISK EVALUATIONRISK EVALUATIONMethods available areStudy of Organisational charts/

balance sheets, accounting recordsProcess flow diagrams, P & I

diagramsInput- output analysis- contribution

from various sections, inter-dependencies

Study of completed checklistsThreat analysis- Denial of access,

Loss of services

EVALUATION METHODSEVALUATION METHODSINPUT – 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.

EVALUATION OF RISKS-EVALUATION OF RISKS-THREAT 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

RISK HANDLING RISK HANDLING METHODSMETHODSADOPTION OF LOSS CONTROL

MEASURESLoss 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.

RISK AVOIDANCERISK AVOIDANCEThis is also known as Risk

EliminationIdentify 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

RISK CONTROL/PLANNINGRISK 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

CONT….CONT….Prioritise the efforts required for

managing the risksDevelop/discuss and adopt risk

management plansAuthorize the implementation of the

risk management plansMonitor the risk management

efforts andInitiate the remedial actions as

considered necessary

RISK RETENTIONRISK RETENTIONTo 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

RISK TRANSFERRISK TRANSFERRisk 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.

TOOLS OF RISK TRANSFERTOOLS OF RISK TRANSFERINCORPORATION

DIVERSIFICATION

HEDGING

INSURANCE

CONTRIBUTIONS OF RM CONTRIBUTIONS OF RM TO THE BUSINESSTO THE BUSINESSAchievement of objectives/ goalsReduced 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 competitionSuccessful and continued operationsResultant growth and sustained earningsBetter care for employees and society at

largeReduction of expensesBetter relationships between customers,

suppliers, employees

A CASE STUDYChemical 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

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

6. Safety Audits

a. conceptual stage b. extension stage c. commissioning and trial run

d. operation stage e. periodic.

7.Emergency Planning a. on site b. off site c. integral multidisciplinary disaster approach

8. Training

9. Implementation

Proceed

If Manageable

If the risk is high

Choose the project

Set priorities based on the requirements

Subject them to critical review

Assess risks integrated with business planning and evaluate.

The best / successful project would be:

Get suggestions - as many as possible