CHAPTER 2

RISK MANAGEMENT, RISK

ASSESSMENT & RISK
IDENTIFICATION TOOLS

(CONCEPT AND PROCESS)

 CHAPTER OUTLINE
1. Definition and Objectives of Risk Management
2. Risk Management In Islamic Perspective
3. Objective of Risk Management
4. Risk Management Process
5. Human Assessment of Risk
6. Risk Identification Techniques
7. Sources of risk
8. Categories of risk exposure
Oh no! This shoplifting
problem is getting
worse. What to do?

Yes! I got
away. I’ll
steal things
again soon.
What risk that cause our company to suffer
losses?
SHOPLIFTING

How to manage this risk so we can minimize

loss?
INSTALL CCTV

How to finance the losses due to shoplifting?

COMPANY FUNDS , INSURANCE
1. Definition and Objectives of Risk Management

2. Risk Management In Islamic Perspective

3. Objective of Risk Management

4. Risk Management Process

 EVOLUTION, DEFINITION, AND OBJECTIVE OF RISK
MANAGEMENT

Risk management is now considered crucial for

survival of the organization

Climate changes, political uncertainties,

economic forces are among external factors of
emerging needs of risk management in an
organization.

As a systematic approach to identifying,

measuring and controlling risks that can
threaten assets and earnings of oneself, a
business or the organization.

The purpose of risk management is to enable

an organization to progress toward its goal and
objectives (mission) in the most direct, efficient,
and effective path
 RISK MANAGEMENT IN ISLAMIC PERSPECTIVE

* Every human being who is the caliph (vicegerent)

of Allah SWT must accept all His divine stipulations
and give way to His qada’ and qadar (actions and
reactions).
* In fact, efforts and prayers should precede this kind
of belief. Muslims are asked to work hard in order to
be able to change their conditions as God says:
"… Verily never will God change the condition of a
people until they change it themselves (with their
own souls)…" (Qur'an 13:11).
 RISK MANAGEMENT IN ISLAMIC PERSPECTIVE

Risk management in Islamic

The Ummah should anticipate the perspective should be aimed to
risks that will hinder the ultimate reduce the utilization of resources
goal of them which is to attain (financial and non-financial) and
success in the world and to minimize the negative effects
hereafter. of risks or maximize the
opportunities and goals.

The goals must be aligned with

the Shariah
 OBJECTIVES OF RISK MANAGEMENT
Risk Management objectives can be looked into two (2) different
perspectives:

Objectives of Risk
Management

Pre loss Post loss

objectives occurs
 OBJECTIVES PRIOR TO LOSS Before loss

i. REDUCE IMPACT OF LOSS

• Risk management is needed as to be able to anticipate and minimize

losses in the most economical way. A cost-benefit analysis is normally
conducted to ensure that the risk management program is beneficial
to the organization. It is involved analysis of the following;
▪ The cost & benefits of safety training program
▪ Insurance costs
▪ Costs associated with the treatment of risk

• This is to ensure optimal utilization of company resources

 Continue…
ii. REDUCE FEAR AND WORRY
• Reduce fear & worry among staffs, managers & clients.
• A risk management program reduces stress & anxiety & creates peace of mind. A
well-designed risk management program offers mental security & management
can channel its energy & resources towards growth & profitability of the
organization.
• Organization that are able to tackle their risks will experience lesser financial
distress.
iii. REQUIRED BY LAW
• In certain cases, organization need to have a risk management program to comply
with government requirements.
• The Occupancy Safety and Health Act 1994 (OSHA) is an example of statutory
requirement that organizations have to comply with. This act requires all places of
work to put in place health & safety procedures.
 OBJECTIVES AFTER LOSS OCCUR After loss

i. SURVIVAL OF ORGANIZATION
• A well-planned risk management programmed ensures the survival of the organization even
after a loss has taken place.
• When a loss happen, the organization must be able to continues its operation.

ii. STABILITY OF EARNINGS

• A proper risk management will ensure that different classes of risks are handled through risk
control & risk financing. This will minimize the insurance costs.
• business operations do not have to stop and the organizations can concentrate on their
business activities as usual.

iii. SOCIAL RESPONSIBILITY

• A risk management program can be considered as an obligation of the organization towards the
community & society in general.
• When an organization is exposed to losses, many parties will be affected.
• For example, the business operations of a factory after a fire will be disrupted. This adversely
effects not only the management but also the employees, creditors, suppliers, retailers &
consumers.
 RISK MANAGEMENT PROCESS
Identifying
existing and
potential risks

Evaluating,
reviewing and Evaluating
controlling the potential risks
program

Selecting and Examining alternative

Implementing risk risk management
management program techniques
1. IDENTIFYING EXISTING AND POTENTIAL LOSSES

Risk identification is the

process by which an
organization is able to Identification techniques are
learn of the areas in designed to develop
which it is exposed to risk. information on sources of risk,
hazards, risk factors, perils and
exposures to loss.
Types of
Exposure
Loss Tools for Identifying
Classification Exposure

• Property –
buildings, office • Direct damage – i.e.
equipments, damage to building • Financial
machinery, etc… • Indirect damage – i.e. Statements
• Liability – Public loss on profit due to • Physical
liability, product business interruption Inspections
liability, employer • Liability – i.e. court • Risk Analysis
liability, etc… award to third party Questionnaire
• Human – Personal since fire was cause
• Historical Loss
risks covering by negligence of the
Data
Death, Injuries, owner of the building
• Flowchart
Retirement, etc… • Loss of key person –
i.e. Employees • Interview/Disc
• Others – Financial ussions
risks, fraud risks, dies/disable as a
natural disaster result of fire
risks, etc…
 Risk Identification Tools
Risk Analysis Exposure
Orientation
Questionnaires checklists

Insurance Financial
Flowchart
Policy checklist Statements

Combination
Inspections Interviews
approach
 2. EVALUATING POTENTIAL LOSSES

Risk measurement evaluates the likelihood of loss

and the value of loss in terms of frequency and
severity.

This step involves two important aspects of loss

exposures
Frequency
Severity
 HOW CAN YOU DETERMINE AND ESTIMATE THE
IMPACT OF LOSSES
SEVERITY Referring to the
FREQUENCY (Maximum
(Likelihood maximum size of
probable loss exposure
of loss)
occurrence) Referring to the
number of times
the loss occurs Risks which are
expected to cause
huge losses will be
given priority
Priority given to
those with high Group them into
frequency of general classifications
occurrence such as critical,
important and
unimportant.
Continue…

Identifying and determining the loss

exposures alone is not sufficient

Estimating the frequency and severity for

each type of loss exposure and ranked it
according to their relative importance. High
loss exposure will be given priority.

Estimating relative frequency and severity

of each loss exposure as the selection of
appropriate technique will depend on
this.
 3. EXAMINING ALTERNATIVE RISK MANAGEMENT
TECHNIQUES
RM
Techniques

Risk
Risk Control
Financing

Risk Captive
Loss Control Retention
Avoidance Insurer

Loss Loss
Insurance
Prevention Reduction

Contractual
Separation
Transfer
• Methods seek to alter an organization’s exposure to risk.
• Risk control efforts help organization avoid a risk, RM Techniques
prevent loss, lessen the amount of damage if a loss
occurs or reduce undesirable effects of risk on an
organization.
Risk Control

Risk Avoidance Loss Control

Loss Prevention Loss Reduction

Contractual
Separation
Transfer
 1. Risk Avoidance
Risk is proactively avoided or abandoned after rational
consideration.

If someone is afraid of risks, the best way to deal with it is

to avoid it completely.

Example; a manufacturer may stop production of a

defective products to avoid a lawsuit.

However, some risks are unavoidable although risk avoidance

may be chosen as an option in handling certain risks, the
exposures of losses cannot be eliminated entirely.
 2. Loss Control

Loss control is designed to reduce

both the frequency and severity of
losses by changing the
characteristics of the exposure so
that it is more acceptable to the
firm. Divided into:
Loss prevention
Loss reduction
❖ 2.1 Loss Prevention ❖2.2 Loss Reduction
• Seek to reduce the • Designed to reduce or
number of losses lower the severity of
(frequency) of losses losses, should it occur.
• Is used when the • Since some risks are
benefits outweigh the unavoidable, the other
costs involved. alternative is to reduce
• Either imposed by law its impact.
or imposed by • Can be used in two
companies and circumstances: before a
factories to fence loss, e.g. installation of
dangerous machinery fire alarm or after a loss
to reduce the chances e.g. salvage efforts in the
of employees being restoration of a building
injured. burnt down by fire.
 3. Separation

Involves the dispersal of the firm’s

assets in several locations instead of
confining it to one major area.

This measure will reduce the impact

of losses should a major disaster
occurs.

Example, separation of head quarters

and assembly plant in automobile
industry.
 2. LEASING 3. HEDGING
CONTRACTS
An agreement to buy or
An agreement where sell a commodity at a
the owner or landlord certain price to avoid
transfers the risks to losses due to price
the tenants increase or decrease.

4. HOLD-HARMLESS
1. INCORPORATION AGREEMENTS
The owner of the An agreement between a
company transfers retailer and a
the risks to manufacturer whereby
corporation by the later agrees to bear
registering the 4. losses due to the
manufacturer of
company. Contractual defective products thus
Transfer relieving the retailer of
any liability.
Contractual Transfer

❖Advantages ❖Disadvantages

• Can transfer potential • If the party to whom the

losses that are loss is transferred is
commercially uninsurable unable to pay the loss
the firm is still
• Often cost less than responsible
insurance
• Not necessarily cheaper
• Potential loss shifted to a than insurance if
party who is in a better discounts are taken into
position to exercise consideration
control
• Ambiguity in contracts
drafted may not hold in
court.
 RM Techniques

Risk Financing • Risk Financing measures are

methods involving generating
funds to pay for the losses

Retention Captive Insurer

Self Insurance
Insurance
 1. Retention

Retention – the company will bear the

consequences of the loss

Risk or loss exposed are normally assumed or

retained when their impact and consequences
are not too great or in cases when or other
methods seem feasible.

In an organization, the ability to assume a risk

depends on one’s financial ability to replace
property, meet obligations and continue
operations in the event of loss
 2. Self-Insurance

Self insurance implies that the

organization sets up a pool of fund to
retain its loss exposures.

Adequate financial agreement has to

be made in advance of the occurrence
of losses.

The number of loss exposures must be

large enough to ensure the mechanism
of insurance to be operative.
 3. Captive Insurer

A captive insurance company is an

entity to write insurance
arrangement for its parent company.

The captive’s parent may be one

company, several companies or an
entire industry.

Example; Sime Darby Group is the

parent company of Sime AXA
Assurance Sdn Bhd
Self insurance & Captive Insurer

❖Advantages ❖Disadvantages
• Cash flow • Possible higher
advantages losses
• Save money • Possible higher
• Lower expenses expenses
• Encourage loss
prevention
 4.Insurance

Risk financing method of Transferring the risks to another

transferring the financial party involves a contractual
consequences of potential agreement whereby the other
accidental losses from an party assumes the risks and is
insured firm or family to an liable for the loss in the event
insurer of loss.

In an insurance contract, the In return, the insurance

party exposed to the risks (the company agrees to pay a stated
proposer/insured) pays the sum on the happening of
premium to the insurance certain risks specified in the
company. contract.
 4. SELECTION AND IMPLEMENTATION OF THE RISK
MANAGEMENT PROCESS
The selection of a risk management programme/techniques
may be based on two (2) factors, i.e. financial or non-financial
criteria.

Non-
Financial
Whether it will financial Whether it affects
criteria the growth of the
affect the criteria organization,
organization's
humanitarian
profitability or rate
aspects and legal
of return.
requirements.
 Risk Matrix Table
HIGH LOW
TYPE OF RISK
FREQUENCY FREQUENCY
HIGH Risk avoidance loss
prevention and loss
Risk transfer

SEVERITY reduction (e.g. Insurance etc)

Risk retention
Loss prevention and
LOW Risk retention & loss loss reduction if the
reduction cost justifies the
SEVERITY
benefits
 5. EVALUATION, REVIEW AND CONTROL

The risk management program must be monitored and

controlled systematically. It must be periodically reviewed

The techniques that were appropriate last year many not

be the most advisable this year, and constant attention is
required
Evaluation and review of the risk management program
permits the manager to review decisions and discover
mistakes, it is hoped, before they become costly.
Risk Assessment
1. Human Assessment of Risk

2. Sources of risk

3. Categories of risk exposure

4. Risk Identification Techniques

LEARNING OBJECTIVES

Upon completion of the chapter, you should be able to:

➢Describe the range of risk identification techniques that are

available to industry.

➢Explain the advantages and disadvantages of each of the risk

identification techniques.

➢Outline the human assessment of risk, sources of risk and the

concept of actual and perceived risk.

➢Discuss the risk data and sources of risk data.

 DEFINITION OF RISK ASSESSMENT

• The qualitative and quantitative evaluation performed in an

effort to define the risk cause to human health or the

environment by an action or by the presence of a specific

substance.

• It is a continuous and never-ending process

 HUMAN ASSESSMENT OF RISK

choice of a career, choice of a

marriage partner, selecting a
potential investor invest in Personal course to study
speculative risk and hope
for the gain

Business Medical

difficult choices in the

face of uncertainty,
risk when election, decision to operate or not
demonstrating for democracy
Political
 ACTUAL OR PERCEIVED RISK

1. ACTUAL RISK
• The amount of risk which actually exists at given moment in
time
2. PERCEIVED RISK
• Known as perception risk. It is an individual judgment of people
make.
• Our perception of the level of the risk is often different from
the actual level of the risk.

Example: Earthquake in Mount Kinabalu. You perceive/

belief the eruption will not occur, but the actual risk is
happen actually.
4 MAIN FACTORS INFLUENCE INDIVIDUAL
PERCEPTION ACTUAL AND PERCEIVED
Perception toward risk
• People will be influenced in their
perception of risk, depending upon their
level of familiarity with the risk event.
Familiarity • A person, who is very familiar with it every
day, may become too familiar with it and
understand the real level of risk.
• Eg. Personal experience

• People would generally understate the level of

risk where they feel in control of the events.
• Eg, the public’s response to different modes of
transport. People may feel safe using their own
Control transportation compare to a public
transportation like buses because they can
control on the vehicle by being a good driver.
• Eg. Drive slowly
 • People may understate the risk to society
while overestimating their own personal risk.
Personal or • The syndrome of “it won’t happen to me”
Perceptiontoward make
Societal riskpeople really confident they have
escaped accident free not because of luck or
effect chance but due to their own skill and good
judgment.

• There is some evidence to suggest that people do

discriminate between the probability that an event
will occur and the severity of it once it does take
Frequency place.
• There are people who almost ignore the chance and
and concentrate on the effect. For example, the
probability of a major nuclear event is supposedly
Severity low, but this is not influences most people.

• Eg. Nuclear plant ----Low Probability, High Impact

 SOURCES OF RISK

Physical Environment
Social
Political
Legal
Operational
Economic
Cognitive
1. Physical Environment
➢ Comprises all the different factors of nature (eg,
trees, lakes, the ocean, land and so on.
➢ Natural disaster can give bad impact to the entire
country. (eg, earthquake, excessive rainfall and etc.)

2. Social Environment
➢ A person’s social environment includes their living
and working conditions, income level, educational
background and the communities they are part of. All
these have a powerful effect on health.
3. Political Environment
➢ National and international political factors can affect company’s
operation.
➢ This arise from the actions of governments which can be at a local
or foreign level.
➢ Sometimes from the methods of thinking and beliefs of all natures.
➢ Ex.: New PM might have new policies – can be negative/ positive
effects

4. Legal Environment
➢ Uncertainty and risk arise from the legal system.
➢ Vary from country to country (buyer’s and seller’s legal systems are
different especially for international trade)
➢ Physical attributes of the product, packaging, labeling, advertising
etc will be influenced by the law
➢ Example: Malaysia does not permit any cigarette/liquor advertising
on TV
5. Operational Environment

➢ The situation surrounding and potentially affecting

something
➢ For example, electronic or mechanical equipment may be
affected by high temperatures, vibration, dust and other
parameters.
➢ Processes and procedures of an organization generate risk
and uncertainty. (eg. Formal procedure for hiring and firing
employees may generate legal liability)
6. Economic Environment
➢Sources ofthat
Something riskeffect on the working of the business
➢ Includes system, policies and nature of an economy, trade
cycles, economic resources, level of income, distribution of
income and wealth etc.
➢ Very dynamic and complex in nature – changing overtime

7. COGNITIVE(Perception) ENVIRONMENT
➢Depends on the judgment of the risk manager in order to get the
information on the risk assess.
➢Can be either true/not true
➢Risk manager overstate/understate certain type of risk depending
on the perception of himself.
Categories of risk exposures

Physical Financial
Asset Asset
Exposures Exposures

Human
Liability
Asset
Exposures
Exposures
1. PHYSICAL ASSET EXPOSURES
• Ownership of property gives rise to possible gains or losses to
physical assets. Eg. Property may be damaged, destroyed, lost or
may diminish in value.
2. FINANCIAL ASSET EXPOSURES
• Ownership of securities such as stock, bond. Eg Loss or gain to
financial asset.
3. LIABILITY ASSET EXPOSURES
• Obligation imposed by legal system create this exposures. Eg. Civil
and criminal law impose an obligations to citizen. (intervention of
federal and state government). Failed to follow traffic rules, GST.
4. HUMAN ASSET EXPOSURES
Part of the vital organization arises from its investment in human.
Eg. Possible injury or death of managers, employees and other
significant stakeholders.
RISK IDENTIFICATION TOOLS
Risk identification tools/techniques
Physical
Inspections

Fault Trees Check Lists

Hazard &
Operatibility Flow Charts
Studies(HAZOP)
1. Physical Inspections
Physical
• Inspectioninspections
of premises, plant / processes
• Can be time consuming
• Before the actual visit – need preparatory work
(finding out the information about the
businesses). For example, the nature of the
services or product manufactured, the physical
layout of the premises and etc.
• Need some form of guide as below:
Figure 1.0
Number Description Condition Faults Action
of plan of unit
 Physical Inspections
Physical inspections
Advantages Disadvantages

1. Do not rely on anyone 1. Extremely time consuming to

else for the information carry out – maybe the company
about the risk could have 10/ more premises in
2. Allows the person and out the country
carrying out the 2. Tendency for people to believe
inspection to build up a that the person who carries out
good relationship with the physical inspection is the only
the people at the site. one whose job it is to identify
Will most helpful for risk.
future inspection. 3. There must be actually
3. Can be done at very something there for you to
short notice. physically inspect. It can be
useless if the premises were still
in design stage.
2. Checklist

• Pro-forma checklist is sent to the site for completion

by someone there
• Cuts the time and cost of identification
• Acts as the source information about risk
• It has to be drawn up very carefully
• First time to construct – to consult as widely as
possible in order to ensure that all aspects of risks
are taken into account
 Types Of Checklist

• Risk Analysis Questionnaires – The key tool in the risk identification

process. It is also called fact finders. It is designed to lead the risk manager to
the discovery of risk through a series of detailed & penetrating questions. The
questionnaires are designed to include both insurable & uninsurable risks.

• Exposure Checklists – It is a listing of common exposures. They are useful

to jog the memory before and after inspections, but usually should not be
used during an inspection.

• Insurance Policy Checklists – It include a catalogue of the various

insurance policies or types of insurance that a given business might need.
Characteristics of Checklist

1. Simple to understand and complete

2. Free from ambiguity – the drafts of check lists
must be compiled and tested before they get to
the hands of the ultimate user.
3. Should be short.
4. Should not be threatening.
Checklist- example

FIRE CHECK LIST

Please read the following list and ensure that all the items are satisfactory.
Sign the form and return it to…………………………………………..

• Fire doors
• Fire exits
• Fire alarms
• Extinguishers
• Stacking of goods
• Removal of waste
Checklist- example
FIRE CHECK LIST

Answer all the following questions concerning the risk of fire at your premises.
Where a ‘no’ has been ticked, a note of the action you are taking or want
taken should also provided.

• Are all the fire doors clear? YES NO ACTION

• Is all the fire exits suitably marked?
• Has the fire alarm been tested in
Accordance with regulations?
Check LIST
ADVANTAGES DISADVANTAGES
1. Quick and effective means 1. The information which
ADVANTAGES
2. Cost very low DISADVANTAGES
comes to the risk
3. Allow for easy comparison
of risks by year / by unit identifier is second-hand
4. Can be adapted very easily 2. Can be low response rate
to changes in the makeup to the check lists – time
of a business
can be wasted
5. Encourage others to get
involved in the job of risk 3. The forms can contain
identification ambiguities
4. Never be sure of the
manner in which the
form was completed.
Circumstances (Conditions) for doing
a check list

• When there are repetition of similar types of

exposure to risk. Eg, chain of retail shops,
restaurants or filling stations.
• When the company does not have sufficient in-
house staff to carry out the job of risk
identification.
 3. Flow
3Flow charts
charts
• More detail than the check list and more specific
than the physical inspection.
• In many organizations there are some kind of
flow. This could take in the form of:
1 2 3

Production Service Flow Money Flow

Flow • The flow of • The flow of
• The flow of raw people in a case money in the
material and of restaurant or various types of
finished good. hotel businesses. financial
institution.
Flow charts
• There are some risk in each of the stages in the flow and
any interruption to the flow will have consequences for
revenue and profit.
• Therefore, a flow charts can be used to identify the key
stages and structure the analysis of the risks at each
stage.
• The most common form of flow is probably the
production flow.
Flow Charts
ADVANTAGES DISADVANTAGES

1. Allow complicated plant 1. Can be time consuming

ADVANTAGES DISADVANTAGES
to construct & the end
& processes to be broken result may not seem to be
down into smaller and enough
more manageable parts. 2. Can become too
2. More detailed analysis simplistic in their
approach
3. Qualitative – simple to 3. The risks which are
follow and to understand identified are still very
general
4. No measure of the
likelihood of
events/problem is
included.
 Example- production flow

STEP 4

STEP 3

Structured
STEP 2
analysis of
the charts

STEP 1
EXAMPLE- PRODUCTION FLOW
 STEP 1- Understanding the flow
➢ Understanding of what is produced, the source of raw materials, the main customers,
the sources of power, and the stages in the process of manufactured and so on.

 STEP 2- Representing the flow (Sample flowchart)

➢ Try to illustrate the flow to some kind of drawing. (Figure 3.4) – page46

 STEP 3- The risk flow chart

➢ Change the drawing of the flow into a form which can be useful for risk identification
called as risk flow chart. (Figure 3.5) – page 47
➢ This risk flow chart is better than drawing as far as risk identification is concerned.
➢ The management could ask a number of ‘what if’ type of questions for example, ‘What
if the raw material store is damaged?’, ‘What if the processing plant breaks down?’ and
etc.
EXAMPLE- PRODUCTION FLOW

• STEP 4- Structured analysis of the chart (systematic approach)

➢ Rather than leave the task of using the chart to unstructured
questioning, it would be better to have some systematic approach.
➢ The one most suggested is based on the use of a pro forma below:

Stage Loss Likely Possible Action

producing Causes consequences
event

Process Plant out of -Fire -Loss revenue

Plant action -Explosion -Loss profit
-Strike -Market
-Lack of raw Standing
material -Plant damage
4. Hazop & Operatibility studies

• HAZOP – Extremely detailed examination of a

plant or process which is used extensively in the
process industries – chemical industry
• In high risk industry – everyone knows general
problem areas – what required is a method of
identifying the particular sources of risk
problems.
• HAZOP approach is to start with the broad
intention of the whole plant and then work down
to the fine detail.
(4) Main Questions with HAZOP studies are concerned:

1. THE INTENTION OF PART EXAMINE

• A particular section of the plant is selected and the intention of that section is
defined. Eg. Pump to inject petrol. Intention must defined clearly

2. THE DEVIATIONS FROM THE DECLARED

• The deviation from the intentions should be listed (no flow from the pump, more or
less flow). A list of “guide words” has been compiled and each one in turn is applied
to the property under consideration.

3. THE CAUSES OF THE DEVIATION

• List of the causes for each of deviation is drawn up. All possible causes are listed.
(tank empty, pump not working)

4. THE CONSEQUENCES OF THE DEVIATION

• Various deviations are the listed and will give rise to a number of possible actions
which the team may want to implement once the study is over.
• Eg. No petrol gets to vehicle, petrol leaks from the pipes and action undertaken –
regular maintenance of the pump should start
Hazop
ADVANTAGES DISADVANTAGES

1. Extremely detailed and if

ADVANTAGES 1. Extremely time consuming and
DISADVANTAGES
done properly – is the expensive – a number of
most comprehensive risk people have to be taken away
identification which their normal work at regular
intervals to work on HAZOP.
could be done
2. It may be that complicated
2. Makes use of a wide sections of plant are simplified
range of abilities and to fit into the HAZOP style and
knowledge of the process this may lead to risks being
missed.
5. Fault trees
• This technique had its origin many years ago,
during the early days of the American spaces
program – so many possible faults during a
project of launching a space craft.
• Therefore, some mechanism has been
established to detect these faults before they
occurred.
• Simple domestic example – ‘How many of u
have sat in the car one morning and it just would
not start?’
Faultcartrees
The is fairly complicated piece of machinery and
there are the number of possible reasons why it
should not start.
Battery Electrical
No Petrol Lost Keys
Flat faults

These are only four possible reasons but they are

sufficient to illustrate the point.
One of this possible reasons can be caused by a
number of subsidiary reasons. For example, Battery
flat can be caused by the cold weather or the battery
was in need of changing.
Fault trees

No Battery Electrical Lost

Petrol FlatFlat
Battery faults Keys

Battery
Weather
need
cold
changing

Or / And
Fault Tree
Advantages Disadvantages
1. Structures approach to 1. Time involves in drawing
Advantages
risk identification – by Disadvantages
fault tree and to learn the
drawing a tree appropriate techniques.
2. An excellent way in 2. Problems in deriving the
reducing complicated
events into their probabilities.
components chart.
3. It gives some structure to
the identification of all
the possible risky events
in a problem.
Common Features Of Risk
Identification
❖Must given top priority
❖There is multiple risk identification technique
available
❖Continuous effort
❖Efficient record management is essential
❖Requires cooperation from various department
❖Consume monetary cost
❖Demand a common sense and imagination plus
detailed assessment
 ..END OF CHAPTER TWO..

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