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Basic Concepts in Risk Management and Insurance

The document discusses the key concepts of risk management including: - Defining risk management and its objectives of identifying and treating exposures before and after losses occur. - The four main steps in the risk management process: identifying exposures, analyzing exposures, selecting treatment techniques, and implementing/monitoring the program. - The major risk treatment techniques include risk control methods like avoidance, prevention and reduction or risk financing methods like retention, transfer and insurance.

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Suzan khan
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75 views13 pages

Basic Concepts in Risk Management and Insurance

The document discusses the key concepts of risk management including: - Defining risk management and its objectives of identifying and treating exposures before and after losses occur. - The four main steps in the risk management process: identifying exposures, analyzing exposures, selecting treatment techniques, and implementing/monitoring the program. - The major risk treatment techniques include risk control methods like avoidance, prevention and reduction or risk financing methods like retention, transfer and insurance.

Uploaded by

Suzan khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Basic concepts in Risk

management and Insurance


Introduction to Risk Management
Lecture-3
Learning Objectives
 Define risk management and explain the objectives of risk management.
 Describe the steps in the risk management process.
 Explain the major risk control techniques, including
Avoidance
Loss prevention
Loss reduction
 Explain the major risk financing techniques, including
Retention
Noninsurance transfers
Insurance
 Apply the principles of risk management to a personal risk management program.
Risk Management
Risk Management is a process that identifies loss exposures faced by an
organization and selects the most appropriate techniques for treating such
exposures.

A loss exposure is any situation or circumstance in which a loss is possible,


regardless of whether a loss occures
Objectives of Risk Management
Risk management has two important objectives which are following…..

 Preloss objectives: Important objectives before a loss occurs economy,


reduction of anxiety and meeting legal obligation.

 Postloss objectives: Risk management has certain objectives after a loss


occurs inclueds survival, continued operation, stability of earning.
Steps of Risk Management
There are four steps in risk management process……
1. Identify loss exposures.
2. Analyze the loss exposures. Measuring frequency and severity of loss)
3. Select appropriate techniques for treating the loss exposures
4. Implement and monitor the risk management program
Steps of Risk Management
1) Identify loss exposures: important loss exposures relate to….
Property, Liability, Business income, Human resource, crime loss,
employee benefits, Foreign loss exposure reputation and public image etc.
And risk manager has several sources of information to identify these loss
exposures like Risk analysis questionnaires, physical inspection, Flowchart,
financial statements, Historical loss data.
Steps of Risk Management
2) Analyze the loss exposures: This step involves an estimation of
frequency and severity of loss.

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

Loss Severity refers to the probable size of the losses that may occur.
Steps of Risk Management
3) Select appropriate techniques for treating the loss exposures: In this
step risk manager should choose appropriate technique or combination of
techniques, for treating loss exposures. These techniques can be broadly
classified as either risk control or risk financing.
Risk controlling techniques includes Avoidance, Loss prevention and Loss
reduction.
Where Risk financing techniques includes Retention, noninsurance
transfers and Commercial insurance
Which Method Should be Used?
Risk Management matrix
Loss frequency
Low High
Loss severity Low Risk retention Risk control
High Risk transfer Risk avoidance
Which Method Should be Used?
A matrix can be used in classifying loss exposures according to frequency and severity.
1. Loss exposure characterized by both low frequency and low severity of loss can be handled by
retention like theft of office supplies.
2. Loss exposure characterized by high frequency and high severity should be handled by
avoidance like stop producing defective products.
3. Loss exposure characterized by high frequency but low severity can be handled by risk
controlling techniques like shoplifting losses at store or physical damage by automobiles.
4. Loss exposure characterized by low frequency but high severity of loss can be handled by risk
transfer like taking insurance against fire, natural disaster.
Steps of Risk Management
4. Implement and monitor the risk management program: This step starts
with policy statement.
Risk management policy statement outlines the risk management objectives
of the firm, as well as company policy with respect to treatment of loss
exposures.
Cooperation with other departments like accounting, finance, marketing etc.
Periodic Review and Evaluation
Benefits of Risk Management
An effective risk management program yield the following benefits…
• The pre loss and post loss risk management objectives are more easily
attainable.
• The cost of risk is reduced
• Adverse financial impact of pure loss is reduced
• Society also benefits
Personal Risk Management
Personal Risk Management refers to the identification of pure risks faced by an individual or
family and selecting appropriate technique for treating such loss. Steps are following……
1. Identify loss exposures.
2. Analyze the loss exposures. Measuring frequency and severity of loss)
3. Select appropriate techniques for treating the loss exposures
4. Implement and monitor the program periodically.

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