Download The Risk Management process

Midlands State University
Department of Insurance
The Practice of Insurance IRM 101
Risk Management
Risk management is the identification, evaluation and economic control of those risks that threaten the
assets or earning capabilities of an organization.
The Risk Management process
Risk management takes a far broader view problems posed by risk than does insurance.
Insurance focuses on insurable risks. Risk management looks at risks an organization is exposed
to and evaluates their likely impact on the organization (frequency & severity) and applies risk
management techniques to control them.
Risk Management Methodology
Risk identification
Risk management takes the view that an organization is exposed to risks in a variety of ways and
any one of them may cause financial loss.
The Risk Manager has the following aids to highlight areas where a company is likely to suffer
loss:
(i)
(ii)
(iii)
(iv)
(v)
Organisational charts: show areas of concentration of risk and dependencies
Physical inspection: inspects premises, plant & processes for possible risks
Check lists: takes the place of personal visits and should be carefully designed
Flow charts: look at risks in the production or service flow
Hazard & operability studies (HAZOP): an extremely detailed examination of plant or
process used in high-risk industries e.g. chemical industries.
Risk Evaluation
Both qualitative and quantitative methods can be evaluating the impact of risk on an organisation.
Qualitative evaluation
The Risk Manager can use past experience of similar events in measuring uncertainty of risk.
Quantitative evaluation
Statistical measurement can be applied if adequate and accurate records have been kept in the
past. Modern computer technology makes both records keeping and statistical analysis including
prediction of loss trends possible.
Risk Control
Physical control
This aims at reducing or removing some of the uncertainty of loss to the individual or organisation
and benefits the whole society in the long run from there being fewer losses.
Elimination
This aims at minimizing the uncertainty of loss before or after loss.
Post loss: use guards on dangerous machinery to minimize the risk of injury to employees.
Post Loss: employment of industrial nurse may minimize the effect of an injury.
Financial Control
This aims at using financial mechanism in reducing risks.
Retention
Predictable level of losses can be retained e.g. if fires losses in aggregate from $100 million
upwards, insured can for an excess and save on the premium. The cost of losses can be paid
from operating income and charged as production cost.
A recent development in risk retention is the formation of captive insurance companies. Certain
businesses are o large that they can insure some of their risks themselves and save that element
of premiums that would go towards insurers costs & expenses.
Transfer
Risks can be transferred to some person or company e.g. landlord can transfer risk of fire
damage to rented property by inserting an insurance clause in the lease agreement.
The most common form of risk transfer is by22 way of insurance.
Insurance will always be the most important method for paying for the cost of risk, especially
catastrophic losses. However, the tendency in future will be to retain high frequency low severity
risks.