Nature of Risk Management

8/3/2019 Nature of Risk Management

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NATURE OF RISK MANAGEMENT

Risk management aims at controlling the risk exposure of afirm. It is a rational approach towards controlling the Pure Riskto which an organization or an individual is exposed to. Riskmanagement function can be groups with other managementfunction such as Financial Management, Human ResourceManagement, etc

An overview of different risks will help us to understand thenature of risk management. Organization and individual areexposed to a wide array of risk in their day to day operations,such as:

i. Fire riskii. Risk of theft

iii. Loss of customer

iv. Delay in delivery of raw materials


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NATURE OF RISK MANAGEMENT

V. Breakdown of machinery

VI. Accident

VII. Bad debts

VIII. Change in industrial policy whenever the government

changesIX. Changes in financial market

X. Changes in taxation etc.

The perspective of risk management varies from oneindividual to another individual. Organization have their own

views on risk. Many scholars and practitioners agree that riskmanagement is an evolving science while a distinct minorityfeels that it is going to disappear in the years to come. Inbetween there are many views on the nature of riskmanagement.


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DISTINCTION BETWEEN RISK MANAGEMENTAND INSURANCE MANAGENENT

The science of risk management is wider in scope than that ofinsurance management. Risk management includes both risks:pure and speculative, which are insurable and uninsurable innature, whereas the scope of insurance management is limitedonly to those activities which can be insured. Moreoverphilosophically also these two are unique in their point of view.

Insurance management uses methods which may differ fromrisk management such as preventing occurrence of loss orretaining the loss. Usually, an insurance manager of a companyunderwrites policies to cover the underlying risk. But aninsurance company while assuming risk, analyzes it fromdifferent point of view; like,

a. When considering deduction, the extent of saving made by the

insurance company and the extent to which that saving willmeet the risk.b. When considering loss prevention measures, the extent to which

the loss prevention measures reduce insurance cost.


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DISTINCTION BETWEEN RISK MANAGENTAND INSURANCE MANAGENENT

While the insurance manager tries to minimize the risk managerperceives insurance as one of the methods to protect hisbusiness against the perceived risks. Thus the emphasis of therisk manager is to identify those risks which can be retained. Asthe cost of risk manager takes up insurance when all otheroptions are exhausted. Risk is insured only in unavoidablecircumstances. The risk manager has to justify the need forinsurance before undertaking the policy. Though riskmanagement is different from insurance management; its scopeis narrow as it does not cover the business risk.


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RISK MANAGEMENT PROCESS

Six distinct steps in risk management process, which

are stated below:

a. Determination of objectives

b. Identification of risksc. Evaluation of risk exposures

d. Consideration and selection of Risk Managementtechnique

e. Implementation of decisions

f. Evaluation and review


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DETERMINATION OF OBJECTIVES

It is very important for an organization to identify the objectives

of the risk management function. This includes the expectationsthat the organization has from the risk manager. The efficiencyof the risk management may be seriously hampered if its

objectives are not clearly specified. The clear delineation of therisk management process as a holistic approach rather thanisolated individual problems to be dealt with. In order toascertain the risk management objective of the organization, itis very important to link the priorities, goals and objective ofrisk management with that of the organization as it is essential

for the risk management program to protect the organizationfrom various exposures.


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DETERMINATION OF OBJECTIVES

Exp: the organization would like to protect itself from running out

of cash or becoming insolvent, or from a lock out. Moreover theorganization would like to ensure safety for its workers. Thewould like to control its cost, have good understanding and terms

with its shareholder( suppliers, dealers, customer, retailers, etc)and fulfill its social obligation. Thus, there are varies objectives ofrisk management, which the organization would like to meet.These objectives may be classified into two broad categories.They are:

Post loss objectives Pre loss objectives

1. survival of the organization Economy

2. Perpetuity of the organizations operation Reduction in anxiety

3. Steady flow of income Social obligation

4. Social obligation Fulfillment of external

Obligation


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IDENTIFACATION OF THEOBJECTIVES

Identification of the objectives of a risk management programdepends upon the type of the organization. However, theguiding principle of development of objectives for anorganization remains the same: to save the organization fromthe perceived risks.

Usually, the organization develops a risk management policywhich lays down the objectives of risk management. Theultimate responsibility of the welfare of the organization restswith the top management because of which they lay down theimportant policy decisions. However, the risk manager can

provide valuable suggestions which will help the topmanagement in arriving at well developed policies.


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IDENTIFICATION OF RISK

The second objective of the risk management process is toidentify the potential risk to which the organization can beexposed to. Therefore, the risk manager has to analyze variessystem of the organization in detail and identify the maximumpossible risk expose of the firm. The risk manager usually

undertakes a systematic study of identifying the potential risks. Afew other methods used in general are check list, questionnaire,flowchart, financial statement analysis and close examination ofcompany operations.

It is important for the risk managers to have clear understandingof the various processes of the organization and orient theirthinking towards these processes. They should have in-depthknowledge about the aims and objectives of organization as wellas specific characteristic of the organization which distinguishes itfrom others. The past organization. Discussion with departmentofficials concerned can help him assess the current operations andactivities. A brief description of techniques applied by riskmanagers to identify organizational risk is given below:


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IDENTIFICATION OF RISKRisk Analysis QuestionnaireChecklist Of ExposuresInsurance Policy ChecklistFlow ChartsAnalysis Of Financial StatementsOther Records Of The CompanyInspectionDiscussion

Combination Approach

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Nature of Risk Management