2. Risk is felt everywhere in the environment Be it an
individual, society or an organization Father will tell son- Dont
speed up the car; Dont visit Srinagar or northeast for Holidays !
WHY ? Risk Immediately we relate it to uncertainty in the outcome
of an event. The outcome may not be favorable What does it imply ?
It implies lack of knowledge about the future and the possibility
of some adverse consequence
3. Tragic events arouse emotions Fire loss Sickness Car
acdt.
4. Risk.. Risk is a threat or probability, which can be of the
following types: Physical damage to the property Death or injury to
self/family members/employees Public liability arising out of the
activities carried out Risk Uncertainty about the outcome of a
situation The possibility of outcome will be unfavorable Risk is
the probability of any outcome different from the one expected
(unfavorable)
5. Risk.. Risk is a threat or probability, which can be of the
following types: Physical damage to the property Death or injury to
self/family members/employees Public liability arising out of the
activities carried out
6. Risk. Risk is the chance of a loss Risk is the possibility
of a loss Risk is uncertainty Risk is the dispersion of actual from
the expected results Risk is the probability of any outcome
different from the one expected (unfavorable)
7. Risk- Defined Definition of Risk 1. Risk is defined as the
combination of the probability of an event and its consequences 2.
Risk is a condition in which there is a possibility of an adverse
deviation from a desired outcome that is expected or hoped for.
There seems to be a possibility of loss Between zero and one; zero-
no possibility and one - certainty The individual hopes that
adversity will not occur, like we dont want our house to be burnt
or motor car to be damaged, etc. But it may or may not happen.
8. Relationship of Uncertainty to Risk Uncertainty refers to a
state of mind characterized by doubt what will or will not happen
in future (Certainty is opposite mental state). Uncertainty is a
psychological reaction to the absence of knowledge about the future
There is a chance of loss or no loss. The possibility of loss is
the risk. An asset shall depreciate in value with its use and time
is certain but it will be damaged in an accidental fire is
uncertain
9. Degree of Risk Degree of Risk- We use terms like: More risk
or less risk High Probability or low probability The higher the
probability of an event shall happen, the greater is the likelihood
of a deviation from the desired outcome The probability of death at
the age of 75 is higher than that at 50; so the degree of risk at
the age of 75 is higher
10. Degree of Risk Zero probability mean impossible to happen
and 01 means certain to happen Therefore the probability of loss is
between zero and one e.g. as the number of bullets in a revolver
increases, so the probability of loss increases. If all the six
bullets placed in the bullet, there is no hope of favorable
result.
11. Degree of Risk Large no. of exposures over a period sets a
trend which can be estimated. Predictions can be made out of these
estimates Suppose from the past experience, an insurer found that
one out of 1000 houses would burnt. If the Co. insures 100,000
houses, it is unlikely that 100 houses would burn. The actual
result will be different- may be less or may be more. But these
houses are insured, The possibility of loss of more than 100 houses
is Insurers risk.
12. Peril, Hazard Peril is a cause of a loss, Fire, theft,
flood, storm, etc. Hazard is condition that may create or increase
the chance of a loss arising from a given peril. Sickness is a
hazard for premature death Physical hazard- physical properties,
e.g. poor construction, property near a river, etc. Moral hazard-
dishonest tendencies in the character of the insured person that
may increase probability of loss Morale hazard- indifferent
attitude towards insured property, careless attitude towards
preventing losses
13. How does a risk arise ? Physical HAZARDS Moral/ Morale
Contribute to PERIL Causes POSSIBILITY OR PROBABILITY OF LOSS
Creates RISK Possible LOSS
14. Classification of Risk Financial and Non Financial Risks
Static and Dynamic Risks Fundamental and Particular Risks Pure and
Speculative Risks In speculative risk- there is a situation in
which there is possibility of loss and also there is possibility of
gain, e.g., gambling Pure risk- there may be a situation in which
there is possibility of loss or no loss. A motor car may face and
accidental damage or may not be damaged.
15. Classification of Risks Dynamic Risks Changes in the
economy Changes in the consumer tastes Changes in the price level
Change or advancement in Technology Pure Risks Result of an
eventLike Fire, Accdt., etc. No change in situation or Causes loss
Fundamental Risks Impersonal in nature- caused By economic, social
and Political phenomenon War, flood, EQ, Terrorism, etc. Static
Risks No change in economy Natural calamities Dishonesty of
individuals, Fire, Accidents, etc. Speculative Risks Result of an
eventGambling, etc Gain/Loss Particular Risks Personal in nature
affecting the IndividualsBurglary, Fire in a house Infidelity of an
employee, etc
16. Financial risk Financial Risk is often defined as the
unexpected variability or volatility of returns. Actual return on
an Investment will be different than expected. This includes the
possibility of losing some or all of the original investment Credit
risk- default in making payments as promised because of cash
flow/collection from buyers problem Market risk- product price
(market conditions), stock price, interest rate, currency rate,
etc. Operational risk- risk of running a business, goodwill, Legal
risk, etc. Liquidity risk- Trading of a security or asset quickly
in the market, etc.
17. Classification of Pure Risk Personal Risks Premature death
Old age or risk of insufficient income during retirement Accident
Sickness or disability or poor health Unemployment Property Risks
Direct loss or physical loss to the propertyFire damage to a house
Indirect or consequential loss- additional expenses for alternative
accommodation Liability Risks Legal liability arising out of
Negligently causing bodily injury or loss/damage to others or their
property; Legal defense cost Risk Arising out of failure of others
When the other person could not perform or carry out his obligation
to provide services as expected
18. Pure Risk Pure Risks Physical effects of Nature Social
effects Personal effects Technical effects Storm E. Q. Flood Theft
Fraud Negligence Riot MBD Failure of safety Device Haz.Process
Death Sickness Injury
19. Costs incurred during a loss-producing event Loss producing
event involves both direct and indirect costs Direct costs - as a
result of damage to the property - as a result of injuries to Self,
family members and employees -as a result of loss in production -
for Accident investigation expenses Indirect costs -Liability costs
associated with a loss Producing event -Loss of market, goodwill or
reputation -Effect on the morale of the workers Costs due to the
existence of the risks -Maintenance Costs- costs incurred while
taking an AMC, preventive maintenance -Costs incurred to prevent
liability losses such as effluent treatment, wastewater treatment,
disposal of wastes etc. -Costs to meet the statutory
requirements
20. Private and social costs ------ Private costs ----those
costs incurred by an individual or corporate firm engaged in a
particular activity Social costs --- Costs arising out of activity
of an individual or a firm , but shared by the society as a whole
indirectly Burden of Risk on Society Size of emergency fund must be
increased- to pay the unexpected losses Society is deprived of
certain goods and services- due to risk of liability lawsuit
manufacturer may discontinue manufacturing certain product, like
medicines, vaccines, etc. Worry and fear are present- accident and
its consequences
21. Acceptability of a Risk A decision in regard to acceptance
or nonacceptance of a risk depends upon The retaining capacity of
the organization or the individual The attitude of a person taking
the decision Size of the loss Probability of the loss Time Cost of
handling the risk Size-> Small Big Low Low Small Low Big High
High Small High Big Probability v
22. Risk Management Risk management decisions need to be made
prior to knowing what the actual outcomes of unknown perils shall
be. It is the study of : -all probable causes -affecting business
and -probabilities of all those outcomes and then
23. Risk Management Risk Management is to reduce the adverse
impact of uncertain events Uncertainties may be related to Business
risks (speculative) or Pure risks Some times it is difficult to
separate the two risks as in case of introduction of new process in
a factory A risk manager therefore adopt a unified approach to deal
with all types of risk. Pure risk can be controlled by Physical
control and financial control
25. Benefits of Managing risk Minimize the negative impact of
risks Saving resources- assets, property, people, time Goodwill
Reduction in legal liabilities and expenses Increasing stability in
the operations of orgn. Ability to face the different circumstances
Protecting environment To know insurance requirement RM is only a
part of Strategic Management
26. Impact of (why) Risk Management Survival of the
organisation Reduced expenses/losses Improvement in Profitability
Peace of mind and confidence Bold decision and risk taking ability
Stability- less fluctuations in profit and cash flow Goodwill-
retaining the customers and vendors Little or no interruption of
operations Peace of mind and confidence shall help in Sound
management decisions & continued growth Safety of Organisation,
employees, image
27. Risk Management Different risk management approaches are
adopted by different organizations depending upon the kind of risks
they are exposed to, the type and size of the organizations and
their financial situation The likely impact of different risks
shall be different, some of which may be retained, other may
require reduction/prevention and some may require to be transferred
to insurance
28. Role of Risk Manager in Risk Management RM has to be
specialised person to forecast & plan RM RM should have
knowledge and skills To deal with the risks that an organization
may face RM has to cooperate and communicate with various sections
or department heads of the orgn. to find the different risks and
Coordinate with the persons handling the risks. To suggest the
approach/alternatives to manage such risks with minimum cost,
choose best one to implement. Risk management should have approval
of top Management so that plans, activities and controls are
established & adhered to in the organization properly
29. Risk Management Process - Risk Identification Risk Analysis
Evaluate Risk Avoidance Physical control Selection of technique
Implementation Risk Financing Transfer-Insurance Monitoring &
Review
30. Risk identification Risk can be assessed/evaluated,
controlled or financed only after have been identified Objective is
to find maximum number of risks Missing a risk can have disastrous
consequences One or more method may be used to identify Risks which
my further differ from Industry to Industry Consultation with heads
of various departments of the organisation shall provide valuable
inputs The risk identified should be loss producing one and proper
record of the same should be maintained The past experience of the
orgainsation and that of the RM shall also help in perceiving
potential risks
31. Identification of Risk Identification of areas of
vulnerability and specific hazards which can interfere with
achieving business targets. Areas to be looked into: Knowledge
about the organization Market in which it operates Business
environment Financial strengths and weaknesses Vulnerability to
unplanned losses Manufacturing process Management system Out of so
many methods of risk identification, a combination of best possible
methods are applied The process of risk identification can be
discussed as under: Perception of the Risk Identification of the
operative causes and perils along with their likely results
32. Risk Identification- Perception of Risk Perception of Risk
Ability to perceive an exposure Identification of possible causes
or perils The likely result Cause/Source: Type of business and
nature of activities carried Production method or processing Place
of activity, at own premises or service to be provided at clients
Environment- in which the organization is working: Legal
environment : laws related to its activity, like public liability,
WC Act, Physical conditions : nearby river, earthquake zone, Social
and political situations, etc. Role of risk manager is to adopt
risk finding techniques which shall be result producing and cost
effective
33. Factory- what are risks? - Production unit Stores,
Assembly, Fin. Goods, Admn. Block.
34. Techniques to Risk Identification: Study & Enquiry
Information Sources and documents: Annual reports, Accounts
(Balance sheet, etc.) Agreements and Contracts Leases agreements-
responsibility of damages or losses to building or other assets or
property under lease Contracts : Construction or other works: their
terms in regard to liabilities of organization like injuries to
workmen and physical damages Purchase and sale : conditions about
liability for the damages and injury Guarantees/Warranties: After
sale service records, expenses so incurred, replacements, etc.
35. Perception of Risk.. Accounting records shall reveal:
Exposure: Value of Stocks and assets like building, plant and
machinery, Furniture Fixtures, office equipments, etc.
Interdependencies between different parts of organization, like
production and sale; dependencies on major suppliers and customers
Organization's financial arrangements and its own financial
position Past experience about losses and expenditure incurred on
them; frequency of such exposures What shall be the duration of
business interruption and size of loss
36. Survey Site Inspection: First hand information to
understand the operations and functions to ascertain Safety or
maintenance of the plants/operations Different Risks in different
sites or operations and their likely impact safety &
maintenance Risk handling capacity available there Consultation
with plant people will develop rapport to appreciate the
controlling of risks Risk management technique required there Time
consuming and may be treated as interference
37. How to Perceive Risk Organization Charts shall reveal:
Nature and extent of the organ. Activities, its products, its size,
its subsidiaries Inter relationship and inter dependencies between
its various parts/units Splitting the organization into individual
units to examine them as profit and cost centers Decision making
and implementing persons; technical persons Organizations weakness
which may be cause of a risk
38. Perception of Risk Flow chart: Process layout Manufacturing
process involved from flow of raw material, different production
stages uptill final customer. It shall reveal the valuation of
produce at each stage Accumulation of stock in different stages,
like at final stage in warehouse Raw material required and sources
and dependencies on the supplier
39. Perception of Risk Flow chart: Process layout. Stage which
is critical in the process, any machine which is very important,
causes of damage like breakdown, wear and tear, lack of maintenance
and its alternative In house repair facility or nearby workshop
capable of repairs in emergency Source of power or energy required
for production Possible period of repair of machinery in worst
circumstances What shall be potential loss or damage to property
and to gross profit
40. FLOW CHART SUPPLIERS OFFICE R & D MATERIALS FINISHED
GOODS STORE TIMBER STORE SHEET METAL & PARTS STORE WOOD
MACHINEING PRESSING & METAL MACHINING PACKING SECTION PAINT
SHOP FINISHED PARTS STORE MAIN ASSEMBLY HEAT TREATMENT PARTS
ASSEMBLY
41. Risks/Perils-Risk exposure analysis Check list: simple in
nature & inexpensive Each peril shall be considered, whether a
potential threat or not to business operation Like fire- what can
be source of fire; type of construction of the building housing the
business, process involvedhazardous or non hazardous, power used;
fire alarm system, fire fighting system, nearby fire station flood
and inundation- proximity to river, nalah and level of ground of
factory Earthquake- type of construction, seismic zone Riot Strike
and Terrorism- law and order situation, political, social
environment Liability arising out of possible exposures- like
pollution, product defect.
42. Threat Analysis Threat analysis: An alternative approach to
check list Listing of potential threats to business and possible
causes Riot, strike resulting to damage to property and partial
closure of business; Picketing- disrupting the business totally by
trade union dissuading workers from working Choking of drainage
system leading to inundation Floods due to nearby river Epidemics
leading to absence and shortage of workers Blocking of road, due to
subsidence or collapse of building Disruption of supplies- water,
power, supplies of raw material etc. due to damage to supply
line
43. Event Analysis Event Analysis: Possible loss producing
events Natural Heavy rains, storm, floods, earthquake, subsidence
Man made- Fire, explosion, Bursting of pipes, Malicious Act, Impact
damage, Aircraft damage, closure of roads, closure of various
supplies like raw material, water, power The reasons for above
possible events are to be identified to find the remedial measures
to be under taken The imagination and prudence of the risk manager
is very relevant to prepare a Hazard Logic trees. To find hazards
which may cause operation of a peril. His coordination with
relevant persons of the organization and outside organization shall
play a vital role to find mitigating factors
44. Fault tree analysis Widely used method of conducting a
detailed quantitative hazard assessment. Fault tree is a graphical
representation of the logistic relation between a particular
accident or other undesirable event- top event and the primary
cause event. Top event is the loss producing event. Top event is
developed down the branches to the intermediate fault events, which
in turn are developed into the primary failures Output exists only
when all the input exist. Output exists only when any of the input
exist
45. Fault Tree Analysis - Explosion in Paint spraying booth
Source of ignition Paint vapors Concentration Failure of Exhaust
fan Continued Flow of paint Breakdown Of fan Failure of Electric
supply Electric spark Failure of Earthing Flames Near booth worker
Cigarette/ beeri in or near booth outsider
46. Cause and Consequence DiagramsNielson This method
incorporates features of bothfault tree analysis as well as event
analysis. Define a critical event- boiler explosion Define both the
possible causes and the possible effects
47. Cause and Consequence Diagrams An event like- a cause and
consequence diagram for boiler explosion FAILURE OF PRIMARY PUMP
SCALE FORMATION SHORTAGE OF WATER PHYSICAL DAMAGE TO BOILER BOILER
EXPLOSION DAMAGE TO OWNERS SURROUNDING PROPERTY DAMAGE TO THIRD
PARTY DEATH/INJURY TO EMPLOYEES
48. Hazard and Operability Studies Hazard identification
studies are carried out at the planning stage of a new plant on the
basis of a plant lay out, flow diagram/ process flow sheet etc.
Also carried at various construction stages of the project To
ensure that any changes if required, can be made as a result of the
studies undertaken During the studies, full description of the
process is understood and attempts are made to find out possible
deviations which may result into adverse consequences (losses).
Proper risk handling decision can be taken on the basis of such
analysis
49. HAZOP Studies Raw material Chemical A and B are transferred
by pump to a reactor where they will react to form the final
product- C A + B ------- C Condition: If the flow of B exceeds than
that of A then it can lead to an explosion Supply tank of A is
empty Effect-Pump fails Intention: Transfer A Explosion due
-Isolation valve is closed To excess of B Deviation: Dont transfer
A -Leakage from pipe To design appropriate risk handling method ?
Chemical A Reactor Chemical B Final product-C
50. Input output analysis The use of process lay out of where
chain of process/sections are involved from input of material to
output of a final product Example is a manufacturing unit having
A,B,C,D,E Section to A 50% 100% B 100% C 100% D SALE D 50% E
Contribution by each section in total sale/revenue
Interdependencies among the sections in a process
51. Safety Audit Safety audit subjects every area of the
organization's activities to a systematic critical examination with
the objective of minimizing the losses. It examines and assesses in
detail the standard of all facets of a particular activity It
extends from Complex technical operations, emergency procedures to
clearance certificates, job descriptions, housekeeping and
attitudes, Industrial relations, etc. Elements of safety audit:
Identification of possible loss producing situations Assessment of
potential losses associated with these risks Selection of measures
to minimise losses Implementation of these measures within the
organization Monitoring the changes Internal Audits External
Audits
52. Identification of operative causes and perils
Interrelationship of the terms hazard, peril and loss producing
event Effect of loss producing Event Peril(s) Hazard(s) Different
techniques are adopted to find hazards involved, in different
organizations Analysis is necessary at each stage of chain: Cause-
Risk- Effect
53. Risk Evaluation For proper risk handling, it is necessary
to calculate the potential impact of the risks identified, on the
organisation A comparison of Potential impact in financial terms by
each risk can be analysed through: Frequency of its likely
occurrence Probability of loss or damage Severity of the effects of
a loss Perception of the probability of loss and its effects
54. Risk evaluation. The risk assessment- to analyze the loss
exposure, which require informations The information in
quantitative form is known as data, which is collected, analysed
and interpreted frequency of loss producing risk; severity of loss;
premium and other costs. For this we need to Examine statistical
data on The particular operation/company The Industry The country
Regionally and worldwide relevant data available
55. Risk evaluation.. Data related to all the aspects of the
organisation in question are examined, like process, Management,
Loss control, turnover, strength of manpower, etc. Constraints of
Statistical method Only historical data is available Cause of risk
cannot be related Data can be manipulated Effects of environmental
changes not taken into account
56. Risk evaluation Adjustments/corrections are also required
to be made for Volume fluctuation- growth or decline trend
Inflation- cost shall be more than the data under study Increase in
Exposure- Increase in the working hours-24 hrs., diversification or
additions Special circumstances- Change in legislation or change in
insurance coverage Influence of the Environment- Economic, social,
political, operational changes The result of statistical assessment
shall help the management assess their impact on the organization
in relation to Property/assets- Building, plant Machinery,
computers, etc. Financial assets- money, debts, insurance, etc
Manpower- employees, boar members, other stakeholders Liability-
public, product liability, directors liability, pollution
liability, etc.
57. Risk evaluation. Now the risks are to be prioritized as per
impact into to handle the risks properly Small and insignificant-
retained or ignored Small size but frequent- may be retained but
may also be significant if aggregated on annual basis Medium sized
but irregular- may be controllable Catastrophe- large losses my
occur rarely but devastating OR another method: Risk Mapping HH-
High Frequency and High Severity LH- Low Frequency and High
Severity HL- High Frequency and Low Severity LL- Low Frequency and
Low Severity
58. Presentation of Data Collect all the relevant data, e.g.
number and size of fire losses suffered by a firm during one year
Collate the data- arrange in order of increasing size to understand
the trend Group the losses of different sizes and number of events
in each class and record it (class frequency). The total range of
the data is usually sub-divided into between six and twenty equal
class intervals, depending upon volume of data The total range of
the observations in the example next slide is from Rs. 00 to
Rs.600, subdivided into 6 number of equal intervals or width of Rs.
100 This table is known as frequency distribution
60. Fire material damages losses for 1980 (Rs.) arranging in
ascending order 5.0 102.5 210.0 330.0 400.0 7.5 105.0 230.0 380.0
495.0 10.0 110.0 250.5 390.0 12.5 110.0 260.0 396.5 15.0 110.0
270.0 20.0 130.5 290.5 20.0 298.5 35.0 170.5 55.5 198.0 75.0 199.5
97.5 99.0 99.5 520.0
61. Frequency distribution for fire material damage losses for
1980 Class interval Class frequency Rs. Mid- point of class
interval Rs. 0- 99.5 14 49.75 100- 199.5 11 149.75 200- 299.5 8
249.75 300- 399.5 4 349.75 400- 499.5 2 449.75 500- 599.5 1 40
549.75 Over 80% of all fire losses are less than Rs.300 and that
35% lie between Rs. 0Rs.99.5 The value lying mid-way between the
upper and lower class limit is known as the class mid-point, to be
used for further statistical analysis
62. Graphical representation of Data Graphs and diagrams are
among the most impressive modes of presenting the data Bar Diagram:
can be vertical or horizontal parallel bars of equal width and of
lengths proportional to the frequency of the particular classes
Specimen bar diagram is given in the next slide drawn from the data
provided
63. Company Ys annual results before and after the introduction
of a risk management programme Year Profits/losses (Rs. 000) 1970
1971 1972 1973 1974 1975 -10 -20 -30 -40 -50 -30 (Risk Management
Programme started 1st January 1975) 10 20 40 40 50 1976 1977 1978
1979 1980
65. Pie diagram Non Skilled 40% Semi Skilled 20% Supervisions
12% Skilled Manual 16%
66. Histogram The area of each rectangle representing the
frequency. Height of each rectangle equals the frequency of the
class interval divided by the class width
67. Fire material damage loss data Class interval Class
frequency Rs. Class Width Rs. Height of histogram rectangle 0-99.5
14 100 14/100=.14 units 100-199.5 11 100 11/100=.11 units 200-299.5
8 100 8/100=.081 units 300-399.5 4 100 4/100=.04 units 400-499.5 2
100 2/100=.02 units 500-599.5 1 100 1/100=.01 units
68. Frequency Class Width 14 0.14 11 0.12 0.10 8 0.08 4 0.06
0.04 2 0.02 1 99.75 199.75 299.75 399.75 499.75 599.75 Loss Size
Rs.
69. Frequency Polygon (curve) Drawing straight line connecting
the mid-points of each class interval along the top of the
rectangles
70. Frequency Class Width 0.14 0.12 0.10 0.08 0.06 0.04 0.02
49.75 149.75 249.75 349.75 449.75 549.75 Loss Size Rs.
71. (a) Frequency Curves Frequency (b) Frequency Size of
employers Liability Loses (Rs.) (c) No. of Defective goods produced
in a week (d) Frequency Frequency (Damage to individual property
within a 5 mile radius of scale earthquake expressed as % of total
value) Size of employers Liability Loses (Rs.) Size of earthquake
Losses (Rs.)
72. Cumulative Frequency Distribution Fire loss data : A fire
insurance company incurred 46 incidents last year distributed by
claims cost as follows: Size of fire loss Rs. Class frequency
Cumulative frequency 0-99.5 14 14 100-199.5 11 25 200-299.5 10 35
300-399.5 06 41 400-499.5 03 44 500-599.5 02 46 46
73. Frequency Class Width 40 30 Cumulative Frequency 20 (Number
of Losses) 10 99.75 199.75 299.75 399.75 499.75 599.75 Size of Loss
Rs.
74. Workmens compensation payment probability Total Claims per
year (f) Likelihood Probability Rs. 0 150 0.150 Rs. 500 430 0.430
Rs. 1,000 250 0.250 Rs. 2,500 100 0.100 Rs. 5,000 45 0.045 Rs.
10,000 20 0.020 Rs. 25,000 04 0.004 Rs. 50,000 01 0.001 1000 Total
1.000 The probability distribution indicates that most likely
losses remained around Rs.500 which can be expected 43% of the
population
75. Number of days it takes to settle a house hold insurance
theft claim . Time taken to Frequency settle claim in days (f) (x)
20 10 30 20 40 30 10 40 4 50 Total 104 fx 200 600 1200 400 200 2600
Mean= 2600/104 or 25 days is the average time taken to settle a
house hold insurance claim
76. Days lost due to machinery breakdown at a factory in last
13 Years Year Days Lost 1 2 7 23 3 0 4 10 5 34 6 47 Mode 7 18
Median 8 0 9 9 10 11 11 29 12 15 13 20 Total 223 Mean=223/13=17.5
The above data is not sufficient to develop a detailed probability
distribution
77. Central tendency ( Clustering) Most probability
distributions tend to cluster around a particular value, which may
be middle of the range of the possible values the distribution
covers Mean, Median and Mode are used to identify such values
Arithmetic mean is the average out of the number of days lost-
223/13=17.5; median is middle number-18; mode is the number most
repeated The arithmetic mean of a probability distribution is
computed much like the arithmetic mean , the only difference is
that instead of dividing by the number of items, each item in the
probability distribution is multiplied by its respective
probability and sum of these products is divided by the sum of the
probabilities
78. The arithmetic mean of a probability distribution- Workmen
compensation Total Claims per year (X) Probability Cumulative
frequency (P) (PX) Rs. 0 0.150 Rs. 0 Rs. 500 0.430 215 Rs. 1,000
0.250 250 Rs. 2,500 0.100 250 Rs. 5,000 0.045 225 Rs. 10,000 0.020
200 Rs. 25,000 0.004 100 Rs. 50,000 0.001 50 Total1.000 PX Rs.
1,290 /1 = Arith. Mean The expected annual total of workmens
compensation claim for the given firm is Rs. 1290 (EXPECTED
VALUE)
79. Expected value Arithmetic mean represents long-run average
expectations Arithmetic mean of a probability distribution usually
referred to as the expected value of that distribution Expected
value of a probability distribution provides information about
where the outcomes tend to occur, on average. It is expected loss
in the example. In the given example on an average the workmen
compensation claims are Rs. 1290 per annum. It shall help the risk
manager to pay premium price for any year. Median of a distribution
is the value in the middle, when the numbers are arranged in
ascending order Mode of distribution is the single value which is
most likely to occur
80. Dispersion ( variability) Should the mean be treated as a
guide to understand the probability of loss in future ? Or further
studied to find out the correctness of the decision by analysing
how far the losses that took place were near to mean The study of
probability distribution indicate two characteristics Central
tendency or clustering Dispersion or variability (from the point
around which the distribution clusters)
81. Dispersion ( variability).. The less the dispersion around
the expected value of a distribution, the greater the likelihood
that actual results will fall within a given range of the expected
value. The less the dispersion or variance, there is less risk in
prediction Variance measures the probable variation in outcomes
around the expected value. A high variance implies that outcomes
are difficult to predict. Measure of dispersion or variance-
Standard deviation of the distribution and other is the coefficient
of variation
82. Year Days Lost Difference Square of from Mean Difference
(variance) 1 7 -10 100 2 23 6 36 3 0 0 0 4 10 -7 49 5 34 17 289 6
47 30 900 7 18 1 1 8 0 17 289 9 9 -8 64 10 11 -6 36 11 29 12 144 12
15 -2 4 13 20 3 9 223/13= 17 (Mean) Standard Deviation =
1,921/(13-1) Variation is very high. 1,921 = sum of squared
differences = 160.083 = 12.6 days approx.
83. Standard deviation The variance of a probability
distribution provides information about the likelihood and
magnitude by which a particular outcome from the distribution will
differ from the expected value. The more is the variance, the more
is the uncertainty about the expected value Square root of variance
is called Standard deviation
84. Claims (X) Rs. Probability (P) (X-E*) (X-E)2 P(X-E)2 Rs. 0
0.150 -1,290 1,664,100 249,615 500 0.430 -790 624,100 2,683,630
1,000 0.100 1,210 13,764,100 619,384.5 2,500 0.100 1,210 1,464,100
146,410 5,000 0.045 3,710 13,764,100 619,384.5 10,000 0.020 8,710
75,864,100 1,517,282 25,000 0.004 23,710 562,164,100 11,243,282
50,000 0.001 48,710 2,372,664,100 2,372,664.1 *Expected Value= 1290
Standard Deviation = 18,853,272.6 = Rs.4,342 approx. & over
Standard deviation provide a measure of the variability of these
distributions Totals 1.000 18,853,272.6 Coefficient of variation =
Standard Deviation/ Arithmetic mean
85. Application Severity is very important, a single cat loss
could wipe out the firm. Maximum possible loss- worst loss that
could happen to the firm during its life time Maximum probable
loss- worst loss that is likely to happen Risk manager has to
analyze cost effectiveness while using any RM technique. For
examples: While taking a policy: Premium cost Service charges by
Ins. Co./Broker Probable average loss Possible variance While
opting for voluntary deductible Premium saving exceeds the average
loss While investing on loss preventive measures, like purchase
cost of Fire Fighting equipment and the saving in premium in
consequence thereof.
86. Probable Maximum Loss An estimate of the monetary loss
which is likely be suffered by the insurer on a single risk at any
one point of time , e.g. as a result of a single fire or
explosion
87. Probable Maximum Loss 1. 2. It is more of a subjective
phenomenon. Depends upon: Technical info about the risk.
Contribution made by each block to the gross profit of the org. 3.
Type of coverage given by the insurers. 4. Past loss experience. 5.
Physical inspection of risk.
88. Probable Maximum Loss Advantages of PML 1. Placement of
reinsurance contract. 2. Whether to retain or transfer.
Disadvantages of PML 1. Subjective phenomenon 2. Requires experts
3. Requires periodic revision.
89. Risk management decisions To decide over the probability of
loss in future with the help of stat-analysis What shall be the
cost of loss control measures to be adopted and to what extent the
average loss shall be reduced What is the cost of premium and
related costs in comparison to average loss What shall be the
capacity of business to sustain a loss by self to decide about the
excess applied by Insurance or voluntary excess to be adopted
90. Decision taking under conditions of Risk and Uncertainty
Risk manager has to take a decision from the various
decisions/options A decision can have more than one outcome, the
result are not known (uncertainty) Manager may also unable to find
out various outcomes Decision theory is based on various techniques
adopted by the manager to deal with different categories of
uncertainty Pure uncertainty Risk Competitive uncertainty
91. Decision taking under Pure Uncertainty Pure uncertainty
When all possible outcomes to a decision are known (probability is
not known) But knowledge of which one will occur is absent Risk
When outcomes are known and probability of each occurring can be
assessed Risk comes in selecting the strategy/ scheme Competitive
uncertainty Decisions after knowing that Rivals using strategy to
minimise the gains
92. Decision making under Pure Uncertainty.. Pure uncertainty
exists when the manager can specify all the possible outcomes of
different strategies but has uncertainty of which one will occur
(probability of the outcomes is not certain) Manager has to decide
about the various options or strategies and the outcomes as
resultant of those strategies Cost of 3 Risk Retention Scheme
Pay-Off Matrix(Rs.000) Risk Retention Scheme Claims Experience in
next 5 yrs- Expected (Rs.000) High Medium Low A 26 7 0 B 15 14 6 C
10 10 10
93. Minimax criterion Decision criteria which may be applied
depending upon managers attitude towards retention of risk A
pessimist or risk averter will assume worst possible result would
occur or highest cost in this case He shall choose scheme A
expecting a high claim experience costing Rs.26,000 Minimax
criterion- minimum out of Max. As per the High claim experience
table given below, the manager shall choose scheme C with minimum
cost Rs.10000 in minimax criterion Scheme High A 26 B 15 C 10 Cost
of Rs. 000s
94. Minimum Criteria An optimistic manager who can take a risk,
would always expect the best to happen and shall opt for the low
claim experience He would choose scheme A with minimum cost under
minimin criterion Scheme Low A 0 B 6 C Cost of 000s 10 Shortcomings
in both the criterions: It is assumed that the risk attitude of the
manager is either risk averse or risk preferer The intermediate or
medium values of the pay off (claims) was ignored
95. Coefficient of Optimization Out of those shortcomings, the
first one about extreme attitude of risk manager can be overcome by
taking weighted average of the results A decision maker shall
choose a number between 0 to 1 indicating his risk attitude An
optimistic manager shall choose higher coefficient as .80 or 4/5
and thereby the expected pay offs for each strategy shall be as
under: Scheme Minimu m cost Maximu m cost Expected Pay-Off Rs. 000
A 0X4/5 + 26X1/5 = 5.2 B 6X4/5 + 15X1/5 = 7.8 C 10X4/5 + 10X1/5 =
10.0 The optimistic manager would choose scheme A which has the
lowest expected cost
96. Insufficient Reason Criterion The second criticism of
ignoring intermediate values of the pay offs. In the absence of
knowledge about the probability of each event, all the events from
high to low claim experience in all strategies, shall be deemed to
happen The payoff for each scheme is then the average payoff in
each row as calculated under: Medium Scheme High Low Expected
PayOff Rs. 000 A 26 X 1/3 + 7 X 1/3 + 0 X 1/3 = 11.00 B 15 X 1/3 +
14 X 1/3 + 6 X 1/3 = 11.67 C 10 X 1/3 + 10 X 1/3 + 10 X 1/3 = 10.00
In this case scheme C would be chosen. This method takes no account
of decision makers risk attitude.
97. Minimax Regret Criterion The risk manager does not want to
regret on the choice of scheme he has opted, and therefore examine
the results of another choice. Regret is measured as the absolute
difference between the pay-off for chosen strategy and the pay-off
for the most effective strategy with the same state of nature Risk
Retention Scheme Claims Experience Rs.000 High Medium Low A
26-10=16 7-7= 0 0 B 15-10= 5 14-7= 7 6 C 10-10= 0 10-7= 3 10 Scheme
Cost of 000s A 16 B 7 C 10
98. Decision making Under Risk Risk Retention Scheme Claims
Experience (probability is known) High Probability 0.5 Medium
Probability 0.3 Low Probability 0.2 A 30 10 50 B 40 30 20 C 20 20
30 The expected Value of each scheme is as follows: Scheme A :
30X0.5 + 10X0.3 + 50X0.2 = Rs. 28,000 Scheme B : 40X0.5 + 30X0.3 +
20X0.2 = Rs. 33,000 Scheme C : 20X0.5 + 20X0.3 + 30X0.2 = Rs.
22,000 Here B should be chosen for having highest expected
value.
99. Subjective Probability Decisions are based on the
probabilities of outcomes, derived from statistical data But it is
not always possible to arrive at a decision due to lack of
sufficient statistical data A subjective decision is taken by risk
manager depending upon the degree of confidence to judge
probabilities of different events based on his experience and
whatever historical data available
100. Subjective Probability.. According to the degree of belief
for the possible occurrence of an event, the risk manager assigns a
probability between 0 to 1 The experience of similar firms or
organizations my also be examined All the available facts and data
must be collected and expert opinions may be sought for by the risk
manager
101. Risk Management Techniques . Risk Financing Risk Control/
Preventive measures -Avoidance -Prevention -Reduction -Segregation
-Contractual By Retention -Operations -Fund/Reserves -Pool -Debt or
equity -Credit -Pool By Transfer -Contract by Jobwork/AMC
-Insurance
102. Other Risk Management Tools RM information System(RMIS)- A
computerized RM database stored & analysed by RMr to predict
and attempt to control future loss levels. RM intranets and Web
sites- with search facilities, answering FAQs and having wealth of
other information Risk Maps- giving details of potential frequency
and severity of the risks faced by the organization Value at
Risk(VAR) analysis worst probable loss likely to occur in a given
time period under regular market condition Insurer can apply VAR to
a portfolio of assets such as mutual fund or pension fund
103. Risk Management Techniques -Risk Control: Avoidance,
Reduction Purpose of Loss control ? Any loss caused by a risk is a
cost to individual, firm or society Cost of injury or damage Cost
of handling and steering the loss Cost of any risk control measures
Cost of financing a loss Cost of arranging finance to recover loss
(loss) Loss control Management is to reduce such cost Prevent
losses, eliminate the cause of loss Protect people and property
from loss/damage Limit the extent of loss, if it happens To recover
the most
104. Risk management techniques Stage immediately after
completion of the risk assessment phase consists of preparing a
Risk Treatment Plan The plan should document the decisions about
how each of the identified risks should be handled by- Avoidance
(eliminate, withdraw from or not become involved)
Reduction/prevention (optimize - mitigate) Retention (accept and
budget) Sharing (transfer - outsource or insure) A combination of
the above
105. Risk Management Techniques -Risk Control: Avoidance,
Reduction Risk avoidance: Drastic method of risk control Abandon
some activity or change the product Change in existing operations
or in the nature of activitiesuse of non hazardous or less
hazardous raw material Change the location of operations- shifting
of factory Such changes cause major inconvenience and disrupt the
business Incur substantial expenses, which may be direct or
indirect cost- new machines or costly raw material; handsome income
forgone by leaving the hazardous production RM should be a
Proactive approach: It is therefore better to have a full risk
appraisal conducted when a new project is coming up and risk
control devices may prove cheaper than the modification at a later
stage
106. Risk Reduction/Prevention Reducing the probability of risk
occurrence: Prevention of accidents improve industrial
relationsattracts skilful labour Improvement in the quality of risk
making it more acceptable Proper maintenance enhances useful life
of machines --indirect savings in cost and increase of productivity
Clearing of waste at more frequent intervals Knowledge &
Training- Sign boards, instruction Advantage: Discounts in
insurance premium Choice of voluntary deductiblesstep towards risk
retention Easier to get reinsurance supportfor insurers
107. Risk Reduction Risk reduction is also called as loss
prevention measure To reduce the probability of loss To reduce the
size of loss (impact) By selecting appropriate scheme out of
various options in relation to the cost involved/incurred Arranging
finance or funds the various scheme available The cost involved in
the activities related to loss prevention must be examined in
relation to potential savings earned in future Loss reduction
schemes require: Allocation of limited funds to different schemes
Various methods of risk financing Risk/Earnings Ratio Study of more
than 500 multinational corporations finds clear correlation between
good physical loss prevention and lower earnings volatility
108. Risk Reduction Classification or Nature of Loss
Control/Reduction Measures: Pre Loss Reduction 1. 2. Avoidance -
Eliminating the cause of loss: Avoiding the risk; use of
non-hazardous material instead of Haz. Reduction - Reducing the
probability of a loss occurring: Improving the risk; Loss
controlling devices are kept in order On occurrence1. 2. Raising an
alarm Measure to control it at source or not to allow it to spread
Post Loss Reduction- Reducing the size of loss: 1. 2. 3. Protective
or quasi-preventive- Protecting things or persons exposed to damage
or injury; Minimizing- to limit loss to as small as possible;
Salvaging- to preserve as much as possible of the value or damaged
property or the rehabilitation of injured persons
109. Loss Control/Loss reduction. Loss Control/ Reduction
Measures : Passive Measures: Inbuilt Which shall , limit the loss
or facilitate recovery Perfect party walls to segregate the blocks
Fire doors Contingency plan Proactive Measures: Taking steps to
limit the loss or maximise the recovery: Sprinklers, Burglar alarms
Training of Salvage operations
110. Risk Reduction Yet Another Classification of Loss Control/
Reduction Measures : Reduce Probability of a loss-producing event
fitting of safety guards to dangerous machinery; safety valves in
pressure vessels removing potential sources of ignition, waste or
bushes; removal of obstacles, spillages and slippery surfaces from
gangways, stairs, etc. separation of pedestrian and vehicular
traffic Reduce Size of the loss expectancy- severity Inundation
keep susceptible goods above floor level; - installation of fire
fighting equipments- sprinkler systems and smoke vents; - provision
of first-aid facilities; - Fittings against water- tight
compartments in ships. And of fire Reducing both, Probability &
Severity of Loss: Education & Training to employees and use of
non combustible walls and doors in buildings
111. Risk Reduction Examples: Minimizing measures: - Wearing
helmets while driving or moving in the works or factory -
Segregation of the sound stocks from the partially burnt or the
completely burnt goods Mixed measures: Construction of fire proof
doors and perfect party wall (14)segregating a hazardous block from
a nonhazardous block Replacing combustible material of building or
poor construction by non-combustible material Education and
Training
112. Probability of a fire in a factory Evaluation of risk
Possible sources (identification) Probability of fire (analysis
& evaluation) Frequency Severity Pre-loss control Limiting the
availability of flammable materials and oxygen Limiting the spread
of fire Post-loss control Salvage materials, stock,
property(minimise Loss) Use of protection devices such as FFE
113. Risk Factor Analysis Chart Activity P&M, Operations
Hazards & loss Equipments involved experience Manufacturing -A
-B Material Management R&D To ascertain: Loss control
like-Method of risk control -Introduction of Protection system
-Training & education -Any change or modification required
-Financing of the risk control -Financing of the loss/damage
Comments/ analysis
114. Loss Control Measures Loss control measures are cost to
the organ. Cost is incurred so as to take benefit in future in
Reducing the probability of loss Reducing the size of loss
115. Risk Reduction 1. 2. 3. Yet Another classification:
Education and training Procedural devices Physical devices
116. Who should be trained---- Employees of the organization
Contractors and sub contractors Suppliers, service providers Third
party visitors
117. Why training: Most of the losses or damages are the
resultant of negligence, carelessness, lack of knowledge. Human
factor plays a major role in all this. The Management of the
Organization must be aware of the Risks and understand the need of
Risk prevention
118. Education and training The management of Education and
training on loss prevention should be recognized at various stages.
Planning Stage: while designing the plant and product, concerned
persons should be educated to ensure the Safety of employees Safety
of Bldg., Plant, Machinery and other assets Safety of the final
product and its safe use
119. Education and training.. Planning Stage.. Segregation of
hazardous blocks Contingency / disaster planning Incorporation of
safety measures in the plant design e.g fire resistant/ earthquake
resistant structure Planning for product safetyensuring quality
control
120. Education and training.. Production Stage: Employees
associated with production need to be educated on safety norms and
loss prevention Personal injuries- can be avoided by knowledge and
carefulness by individuals Workers safety and avoidance of
congestion in work place Security/ security checks Knowledge of
manuals for operation of Machinery The prevention of major hazards
call for the use of technical knowledge
121. Education and training.. Good house keeping- Avoid
smoking, loose wiring, proper storage facility for hazardous and
non hazardous material, accumulation of waste material, Waste
disposal procedure Maintenance of plant and machinery- timely
maintenance and repairs. Guarding/Casing of machinery to avoid
personal accidents Training to use Fire fighting installations
Final product- High Technical standards and Quality control in
producing the final product for the safety of users Education to
visitors/ suppliers/ vendors
122. Education and training.. After Sales service Supply of
goods to customers in sound condition Proper labeling and clear
instruction for use of the product People associated with after
sales service, transporter, servicing employees must be educated
Information system about the usefulness and defects must reach to
management to make changes in design of the product or after sale
services
123. Education and training.. Security: Security holds a very
key position in the process of loss prevention and safety Security
of the organization, including its personnel and assets is very
important Other business risks are espionage, defalcation and
credit risks which require special training and education
programme.
124. Procedural Devices-Management Attitude It is the
responsibility Management to laid down the procedures to be
followed by the people in the site during their operations and on
happening of an event To reduce the probability and severity of
loss Trained to use the safety equipments and also follow the
instructions To make aware about the safety procedures to fellow
employees and outside agencies those are coming to the sites
125. Procedural Devices.. Some examples procedural devices are:
Manning of works/factory entrances for security checks Steps to be
taken for easy and speedy communication Evacuating the visitors and
the third parties to safe places Information to Fire fighting team
and safety team First aid facilities to injured Instructions to
operators to handle the plant and machinery and safety measures
Procedure for plant control, shutdown and maintenance Movement of
material and equipment to safe places Periodic internal audit
system; safety audits
126. Procedural -- No smoking sign Minimum congestion at work
places Vehicles with spark arrestor to enter into premises where
there are presence of flammable vapours Flame proof electrical
fittings in such areas Adequate precautions to be taken at places
where hot work is carried out No storage of hazardous chemicals
near machines - to avoid sparks arising out of static electricity
falling on these
127. Management attitude--Procedural deviations:--- Non
adherence to statutory requirements under Boiler Act/Factorys Act
Smoking being allowed inside the premises Relaxed security norms
---e.g. vehicles without spark arrestors entering inside refinery
premises No formal procedure for waste disposal No formal training
on fire fighting for employees
128. Contingency Planning Risk Management is the concern of top
management Management awareness of risk should lead to the
designing and adoption of contingency plans for unforeseen major or
catastrophic losses There can be instances when a small damage to
property or critical machinery leads to prolonged stoppage of
business Planning should be such that while the salvaging operation
following the loss are being carried, the business should also
continue. It is therefore must that the employees must be trained
to deal with emergency situations
129. Contingency Planning While preparing contingency plan to
deal with major disaster, the management must consider the
following: Identify all potential sources of loss-producing events
which may disrupt the normal operations Determine the
interdependencies between different parts of the organizations
Determine the dependencies upon the suppliers and customers
Identifying the alternative sources of supply or outlet to remove
such dependencies
130. Contingency Planning Find the means of reducing the impact
of the potential hazards as identified, such as : Availability of
Spare plant or machineries related to the trade To hold a larger
stock of raw material or finished goods in different stores/places
Find another supplier or customer to avoid vulnerability of
business to limited suppliers or customers
131. Contingency Planning While adopting above means the extra
cost involved should reasonable in regard to the potential risk
Making arrangements with other business organization in competition
to produce the goods at the time of contingency to reduce the
impact on business Employees must be educated and trained to take
initiative to act and handle the situation. Responsibilities should
assigned to each employee who is part of the team handling
contingency plan so that employee is supposed to know his role in
time of contingency.
132. Training of Employees Knowledge of hazards to which
employees are exposed in course of their work and steps to be taken
to minimise the risk of injury to them or fellow employees Use of
special clothes and use of equipments provided for their safety
Laid down procedure for all employees to take steps in emergencies,
like fire, MB or breakdown of safety devices Immediate relief or
salvaging exercise until expert help arrives, like first-aid and
fir fighting teams Inculcating a sense of responsibility to
safetyconsciousness in the employees
133. Contractors, Suppliers, Retailers and Service Agents The
outside agencies who are involved in the organisations operations
may be given necessary technical training say knowledge of hazards
and steps to be taken, defects in the products, etc. Supplier-
consequences of supplying defective components. Standards of
quality control system and product must be mutually agreed Inward
material if brought inside the site of work must in be informed to
security to take necessary safeguard Identifying the transit
hazards and taking control measures Cash carrying safety
measures
134. Physical Devices Wide range of physical devices are
available to reduce the probability and severity of loss caused by
various risks. Categories of physical devices : Active devices
which continuously operate to reduce the probability of
loss-producing event occurring, like Close circuit TV Thermostats
on boilers and refrigerating equipments, Guards on power presses
and other machines, Overload and other warning devices Devices for
detecting leakage
135. Physical Devices. Passive devices which come into
operation on happening of an event, like Security and alarm system,
automatic fire doors and vents, Automatic switch off devices
Portable fire extinguishing appliances Small bore hose reels
Hydrants and sprinklers Water spray systems Carbon di oxide
flooding systems First aid and salvaging equipments
136. Statutory and other requirements Factories Act, 1948 and
amendments; other safety regulations are to be complied in regard
to: Safety at work Food and drink regulations Transport regulations
covering aircraft, ships and vehicles Safety of persons in hotels,
boarding houses and other premises to which the public has access
Safety of persons adjacent to premises in which dangerous processes
are carried on
137. Statutory and other requirements Safety Safety norms and
implementing the statutory safety requirements are integral parts
of any loss prevention system. Moving and rotating part of machines
like fan belt, conveyor belts etc. should be covered or fenced
Machines should operated by trained male workers, wearing tight
fitting clothing Lifts and hoists should be of good mechanical
construction, and of sound material and maintained periodically
Examination and maintenance of lifting machine, chains, ropes and
lifting tackles periodically
138. Statutory and other requirements- Safety. Workers are to
be provided with screens or goggles for protection of their eyes
where process involves risk of injury to the eyes, like dry
grinding of metals by hand welding or cutting of metals use of
electricity Gas cylinders should be stored in enclosed area with
asbestos roofing and preferably with wall thickness of two bricks
with proper ventilating system
139. Statutory and other requirements Electrical installations
should be proper with no loose wiring, no open switchboards.
Regular checking of wirings and switchboards Installation of right
type of Fire extinguishers at correct places Proper training on
safety aspects should be given to all the employees to ensure safe
operations at the site The safety instructions as well as the
directions to safety exits should be prominently displayed at
strategic locations within the factories
140. Physical hazards ----Storage 1. Over stacking up to the
roof Delay the operation of automatic sprinklers and even if they
operate the distribution of water will be impaired 2. Touch the
electrical installations Highly congested storage area 1. Denial of
access to fire fighters reduce efficiency 2. Heat generation
141. Physical hazards ----Storage Little or no space between
high stacks --- create a flue effect drawing heat upwards to spread
fire vertically Locked warehouses with high stacks --- many a times
small fires which go undetected develop into a large one (since
warehouses are mostly unmanned ) Storage in front of open switch
boards , near transformers, adjacent to electrical installations
--inception of fire as well as propagation Storage in front of fire
extinguishers -- denial of access to the fire fighting
appliances
142. Spontaneous combustion--- Certain materials undergo rise
in temperature without application of external source of heat When
stored in bulk or in close contact with other materials ---a
chemical or physical reaction is initiated which results in
spontaneous development of heat as a result of oxidation Bacterial
reaction in organic materials
143. -
144. Physical hazards ----Electrical Installations Overloading
the circuit----current flowing through the main supply cables
increases as additional current consuming appliances are introduced
into the circuit . Heat generated in the circuit proportionately
increases . H= I 2 R t Loose electrical wirings/ temporary wiring
---increases probability of short circuit Open switch boards ----
possibility of combustible materials settling in between the wires
and igniting subsequently Wooden switch boards
145. Faulty electrical wiring-------
146. Faulty electrical wiring------ High tension wires passing
over storage in open Main switch board inside a warehouse --- in
case of emergency / electrical fire the connections cannot be
discontinued Non-industrial lighting in factories
147. Physical hazards-Housekeeping Congestion in work place
---insufficient floor space Accumulation of chemicals / wastes on
the floor at the work place -- e.g. cut-pieces of cloth in a
garment manufacturing unit Inadequate safety during hot work-- e.g.
necessary precautions not being taken during welding
operations
148. Poor housekeeping---
149. Loose wiring Poor housekeeping
150. Location and exposure hazards-- Hazardous surroundings----
dry bushes, hazardous operations in neighboring factories No space
for fire brigade Buildings in close proximity to each other
Temporary sheds Remote locations Static electricity / frictions
from machines ---e.g. belts passing over pulleys or rollers
generating static sparks
151. Handling the sources of ignition- Electrical
installations---1. 2. 3. 4. 5. 6. 7. Wirings should be in metal
conduits or in armoured PVC cables Non-combustible materials to be
used for switch boards Closed switch boards Power cables in
trenches or through bus bars No overloading of circuit Double
earthing of machines No storage in front of switch boards/ inside
panel rooms
152. Handling the sources of ignition- Storage 1. 2. 3. Proper
stacking and orderly storing Clear space of one and half to two
feet from the roof Preferably storage in pellets and clear space of
one to two feet from walls No storage in gangways, staircase , in
front of FEA Space between high stacks ensure proper air
circulation, space for movement of fire fighting personnel Main
switch outside the storage areas for cutting off electric supply in
case of fire 4. 5. 6.
153. Handling the sources of ignition Spontaneous combustion 1.
Stacks should be spaced from each other as much as possible Regular
inspection for over heating e.g. haystacks Stocks of coal should be
upturned at regular intervals and kept away from main premises
Freshly prepared charcoal should be kept exposed to air for
adequate time before packing and storing Oily rags/ cleaning rags
should be kept in metal bins and the bins should be kept away from
main premises 2. 3. 4. 5.
154. Handling the sources of ignition Waste disposal ---1.
Periodic waste disposal should be carried out and there should be a
formal procedure for the same 2. Wastes should be kept in separate
warehouse away from main blocks 3. Segregation of wastes from other
stocks 4. Install fire fighting extinguishers near waste
storages
155. Fixing of Sum Insured Sum insured represents the value for
which the customer wishes to insure his asset/property Sum insured
represent the maximum liability of the insurance company in the
event of an accident Premium is charged by insurer on sum insured
Sum insured can represent: Market value or
Reinstatement/replacement value
156. Fixing of Sum Insured. Market value is a depreciated
value. New replacement cost less depreciation gives the depreciated
market value as on date of taking a policy Reinstatement value is
the current market price of the plant and machinery or
reinstatement value of the building Policy year 1.4.2005 to
31.3.2006 Original Capitalized cost of Machinery Rs.10,00,00,000 as
on 1.4.1995 Index for April- March 1994-1995 110 Index for
April-March 2004-2005 190 Replacement cost of Machinery
Rs.10,00,00,000x190/11 =Rs.17,27,27,280 Deprecation e.g. @ 5% per
year for 10 yrs. (-) Rs.8,63,63,640 Depreciated Market value of
Machinery on 1.4.2005 = Rs.8,63,63,640
157. Fixing of Sum Insured. The settlement of the loss shall be
based upon the basis of sum insured opted for by the insured If the
sum insured is found less than market value or the
reinstatement/replacement value as the case may be, underinsurance
shall apply Example: Market value Reinstatement value Sum insured
Rs.10,00,000 Rs.20,00,000 Value at time of loss Rs.15,00,000
Rs.30,00,000 Loss Rs.600,000; Loss payable 600000x10/15
600000x20/30 Rs.4,00,000 Rs. 4,00,000
158. Fixing of Sum Insured Reinstatement/Replacement Value:
Large Plant, machineries, equipments: Original capitalised cost as
per books of accounts Inflation/escalation factor up till inception
of the insurance policy to be added to the value This
escalation/inflation is done on certain paramenteters like RBI
Index published by RBI for various machineries and industries. This
value represents the new replacement cost For small
machineries/equipments the current market price of new one at which
they are available may be treated as replacement value
159. Fixing of Sum Insured Building: Either of the method can
be adopted Prevailing PWD rate per square meter can be applied to
the total covered area of the building to get the new reinstatement
value; or The initial constructed cost is escalated/inflated on the
basis of established parameters to arrive at the current
replacement value The improvements done during previous years need
to be added further to the cost Stocks: The maximum quantity of
stocks at risk during the previous year is multiplied by prevailing
market cost without profit
160. Fixing of Sum Insured. On Market value: Plant, Machinery
and equipments An average rate of depreciation ranging between 3% -
5% per year is applied to replacement value Building An average
rate of depreciation ranging between 1.5% - 5% per year is applied
to reinstatement value of the building
161. Fixing of sum insured. Project Insurance: Sum insured
represents the estimated complete constructed cost of the project
However, in case of long duration projects( 3 to 5 yrs) the correct
project cost after completion may be difficult due to uncertain
price inflation rate To avoid such situation the project cost is
declared for insurance with escalation provision The insured gets
the advantage of gradual increase in sum insured as per the
percentage of escalation opted. Estimated Project cost: Rs.10
crores Escalation opted: 25% Sum Insured available on last date of
project insurance: Rs.12.50 crores
162. Relationship- Risk analysis, risk control & risk
financing
163. Financial objectives Risk/Earnings Ratio Study of more
than 500 multinational corporations finds clear correlation between
good physical loss prevention and lower earnings-volatility Risk
control or technique is essential to Ensure stability in earning
and steady growth Maximize profit and cash inflow To reduce the
losses and reduce cash outflow Cost effective cash outflow on
control measures
164. Risk Financing Risk Cost: Control measures- proactive
approach Payment of losses- post loss approach Financing of
risk-cost by: Payment out of current expenses Funded or unfunded
reserve Debt or equity financing Pre or post-loss credit Forming a
captive, a trust, by pooling or through spread-loss plan
165. Risk financing.. Probability and severity of possible
losses High probability and low severity Less probability and high
severity High probability and high severity Capacity to retain the
losses Cost of potential loss is low Cost of the potential loss is
large Disaster if not managed proves counter productiveEarthquake,
floods, storms, etc. Transfer of the Risk- Insurance, etc.
cost
166. Selection of best technique Management Technique depends
upon: Impact of losses on the finance of the organization-
frequency and severity of expected losses Possible effects of the
different techniques on frequency and severity Cost analysis of
such techniques Most cost effective technique: Effective to get
desired objectives Feasible to implement Cost effective- balance
between cost of control and cost of risk
167. Implementation of Management Technique Best technique
decided on the basis of Feasibility of implementation Technical
decisions Managerial decisions . Monitoring and improvement
Achievements as per standard specified or expected results Need for
modification/change in the technique to evaluate the possible risk
level changes in the business environment.
168. Alternatives to Reinsurance or ART Alternative risk
financing market- other than Insurance Market(traditional
reinsurance) Or other techniques to finance the risks Most of these
techniques permit investors in the capital markets to take a more
direct role in providing insurance and reinsurance protection, and
as such the broad field of ART is said to be bringing about a
Convergence of insurance and financial markets. Need for ART came
about when no reinsurance cover is made available or the risk are
not insurable Why ART ? Tailored to specific clients requirement
Spread of risk over time and over many investors Risk assumption by
non-insurer or reinsurer, capital market, financers, etc.
169. ART Another area of covergence is the emergence of pure
insurance risk hedge funds such as Nephila, Fermat, Securis,
Coriolis, Pentalia, Goldman Catastrophe Fund, Stark Catastrophe
Fund, Acuance, Soldidum, various Zurich-based funds managed by
[Clariden Leu] Bank and Banque [AIG] and other such funds. These
function economically like fully collaterallized reinsurers (and
some of them operate through reinsurance vehicles, such as
Nephila's Posiden Re and Goldman's Steamboat Re), but take the form
of hedge funds. A more specialized version is Gamut Re, a tranched
collaterallized risk obligation managed by Nephila. Life insurance
companies have developed a very extensive battery of ART approaches
including Life Insurance Securitisation, full recourse reserve
funding, funded letters of credit, surplus relief reinsurance,
administrative reinsurance and related approaches. Because life
reinsurance is more "financial" to begin with, there is less
separation between the conventional and alternative risk transfer
markets than in the property & casualty sector. Emerging areas
of alternative risk transfer include intellectual property
insurance, automobile insurance securitization and Life
Settlements. It should be possible to adapt these instruments to
other contexts. Professor Lawrence A Cunningham of George
Washington University suggests adapting cat bonds to the risks that
large auditing firms face in cases asserting massive securities law
damages. Professor Cunningham has proposed other innovative ways to
transfer financial risks using alternative risk transfer
mechanisms.
170. ART Market Risk takers and investors like reinsurer, life
insurer, banks, traders, capital market investors Intermediaries
like insurance brokers, investment bankers
171. Key market participants Banks, notably JPMorgan Chase,
Goldman Sachs, Bank of America and Citibank. Insurers, including
AIG, Zurich, USAA and XL Capital Reinsurers, notably Munich Re,
Hannover Re and Swiss Re both directly and through their capital
markets subsidiaries. Brokers including Artex Risk Solutions,
Willis, Marsh, Aon Corporation, Aon Benfield, BB&T Insurance
Services and RK Carvill. Consultants, notably AIR Worldwide Corp,
EQECAT, Milliman International, Patterson Martin, Planalytics,
Inc., Risk Management Solutions, Inc, Tillinghast, Lane
Financial,Navigation Advisors LLC, BB&T Assurance Company,
Ltd., ABS Consulting, Belmont Risk Solutions Ltd, The Taft
Companies, Capstone Associated, Mercer (consulting firm) andWatson
Wyatt. Turnkey service providers include notably for mid market
companies, Capstone Associatied Services, Ltd.
172. Major benefits of ART To increase underwriting capacity
and capital for insurer Protection from catastrophic risks for the
society at large Broader choice of coverage and earning stability
for corporate Opportunity to enter into transactions otherwise
outside the regulatory guidelines for insurance business Protection
of the balance sheet from credit risk
173. Alternative risk transfer and financing techniques Finite
risk insurance Integrated risk management and insuratization
Insurance securitization and insurance derivatives Contingent
capital
174. ART- Finite Risk Reinsurance The reinsurance arrangement
is in the form of package with the limits of liability, aggregate
loss coverage (Enterprise wide Risk Management), long term contract
The client has a programme tailored to its own claims experience It
is a multi-year programme, say 5 yrs., so the insurer is not tied
into annual price negotiations The client is assured not only of
the availability of the product but also that is not subject to the
volatility of price The projected investment income from the
premiums i