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RISK MANAGEMENT

Risk management is the systematic approach to protecting business resources and income against potential losses, ensuring stability, growth, and profitability. Learn about different types of risks, exposure analysis, risk control, risk transfer, risk financing, and the causes and types of losses.

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RISK MANAGEMENT

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  1. RISK MANAGEMENT

  2. WHAT IS RISK?? • Risk is defined as the chance of having a loss due to occurrence of an event • The risk is always associated with the loss aspects since the word itself has the association of DANGER OF LOSS • The definition can be “ PROBABAILITY OF THE OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN

  3. CLASSIFICATION OF RISKS • SPECULATIVE RISKS & PURE RISKS • DYNAMIC RISKS & STATIC RISKS • FUNDAMENTAL RISKS • PARTICULAR RISKS

  4. SPECULATIVE RISKS PURE RISKS • Operation of this leads to profit /loss • Leads to speculation like investment of capital in a new venture • Operation is desired • These do not change with the risk • The operation of these perils does bring in loss/damage to property/assets/ liability • Not desired Classification of Risks

  5. DYNAMIC RISKS STATIC RISKS • Changes with the change in fashion, buying behaviour, trends, technology etc • It denotes dynamic nature of the customer behaviour and the products they like to own or use • If an organization is not prepared then it may go out of existence • Like pure risks these risks remain static and do not change due to other reasons like that of dynamic risks • The operation of these risks always bring about losses • Operation is not desired • May result in partial or total cessation of activities Classification of Risks

  6. PARTICULAR RISKS FUNDAMENTAL RISKS • Risks which relate to one or few firms, factories or organizations only • Losses are suffered by one or few more members of the society • Relates to the society at large • Losses are suffered by large section of the society/nation(s) • Losses may be due to natural catastrophes, riots, epidemics etc Classification of Risks

  7. ICEBERG OF LOSSES INSURED LOSSES UNINSURED LOSSES LOSS OF GOODWILL LOSS OF MARKET LOSS OF CUSTOMERS LOSS OF SHAREHOLDER VALUE LOSS OF KEY EMPLOYEES LOSS OF COSTS INCURRED UNINSURED LOSSES

  8. Risk Management- Definition Risk Management is defined as the systematic way of ensuring protection of business resources and income against losses so that the aim , goals and vision of the company can be reached. Thus Risk Management creates stability and contributes to growth and assures profitability of the Organization.

  9. ADVANTAGES OF RM • To achieve the objectives of the Organization • To ensure that the goals short term and long term are achieved without any disruption or delay • To optimize the utilization of the resources • To have knowledgeable of insurance arrangements and have considered decisions on insurances to be availed

  10. Development of Risk Management • The Industries / Business houses want to have incident free/ accident free working to achieve their objectives • For this purpose it is necessary to understand the loss producing events , the nature of losses/ extent of losses to come up with the loss control measures. EXPOSURE ANALYSIS • Risk Management aims to help the owners to have control on loss incidents and to reduce the extent of losses by proper study of the exposures and actions to be taken to control the same

  11. Risk Management process The steps in Risk Management process are: • 1. Risk analysis- Risk identification & Risk evaluation (Risk measurement) (Risk quantification) • 2. Risk control - Risk avoidance (Risk minimization) • 3. Risk transfer- Insurance with Professional Insurance companies • 4.Risk financing- Risk retention • 5. Rolling review

  12. How the loss is caused? • Loss is caused by the operation of perils which refers to the causes for the losses • Loss or damage is caused by the operation of perils such as fire, explosion, flood, storm etc • The loss potential ( extent of loss) depends on conditions which are favourable for the incident to assume large proportions. This is known as hazard or potential of the loss. More the potential severe will be the extent of loss • PERIL ( CAUSE)----------------LOSS(EFFECT) • HAZARD

  13. Causes of losses • Perils- such as fire, explosion etc • Human factors- such as negligence, carelessness, inadequate training, inadequate supervision, lack of proper systems and controls • Inadequate maintenance ( predictive/ routine/ annual maintenance) • Failure of Plant/ machinery due to breakdowns (failure of safety devices) • Natural perils such as flood, cyclone, earthquake, landslide, rockslide & subsidence • Extraneous: Accidents involving Gas or chemical in nearby units

  14. TYPES OF LOSSES • Property losses- losses which can happen to the Assets • Pecuniary losses- Financial Loss which can be caused by business interruption due to the loss to the assets, financial loss due to infidel acts of employees, storekeepers and other employees • Liability losses- Loss to the Third Party property or third party personnel due to activities of the Organisation • Personal injuries- accidents resulting in fatal or non-fatal injuries to the employees

  15. HAZARD • Hazard is defined as conditions existing which are favourable for the loss becoming severe • CLASSIFICATIONS OF HAZARD • Physical hazard- relating to physical properties. • Moral hazards -relating to the moral behavoiur of the clients • Morale hazard -Relating to the morale & working conditions of the employees & employer-employee relationships

  16. RISK ANALYSIS • Risk analysis is the process of identifying and evaluating risk factors, present or anticipated, and determining both the probability and the impact of identified risk factors. • It is a preliminary step in establishing a risk management strategy, which is intended to increase the possibility that the application development project produces the desired outcome while minimizing risk factors. • It entails both preventive and corrective actions to each of the identified risk factors, particularly those with a medium to high rating level.

  17. RISK ANALYSIS- METHOD • LIST ALL POSSIBLE RISKS • INVESTIGATE BY • STUDY • INQUIRY • DOCUMENT REVIEW • PHYSICAL INSPECTION • ANALYSE EACH RISK

  18. RISK EVALUATION • Methods available are • Study of Organisational charts/ balance sheets, accounting records • Process flow diagrams, P & I diagrams • Input- output analysis- contribution from various sections, inter-dependencies • Study of completed checklists • Threat analysis- Denial of access, Loss of services

  19. EVALUATION METHODS • INPUT – OUTPUT ANALYSIS –To trace the flow of goods and services to identify the contribution of parts of organisation to the total earnings and to analyse exposures.

  20. EVALUATION OF RISKS-THREAT • ANALYSE THE THREATS TO BUSINESS • DENIAL OF ACCESS- CHEMICAL LEAKAGE, COLLAPSE OF NEARBY BUILDINGS, STRIKE, PICKETING, DAMAGE TO WATER/SEWER MAINS, GOVT RESTRICTIONS • LOSS OF SERVICES –WATER, POWER,RAINS, FLOODS, CYCLONES

  21. RISK HANDLING METHODS ADOPTION OF LOSS CONTROL MEASURES • Loss control measures involve the nature of the devices utilized and the human factor • For any system to be effective the employees concerned need to be properly trained and knowledgeable. • The Management need to ensure that the systems employed are in good working order the employees are regularly trained.

  22. RISK AVOIDANCE • This is also known as Risk Elimination • Identify the risk and if possible avoid the risk by eliminating the source • It is like avoiding a location due to seismic activity in the area Ex:- Avoiding a low lying location which is susceptible for flooding

  23. RISK CONTROL/PLANNING Risk planning and control, as a shared or centralized activity must accomplish the following tasks: • Identify concerns that can impact the project implementation • Identify risks, review/assess their intensity and document the risk owners. • Evaluate the risks with reference to probability of their occurrence and possible consequences • Assess the plausible options for accommodating the recognized risks

  24. CONT…. • Prioritise the efforts required for managing the risks • Develop/discuss and adopt risk management plans • Authorize the implementation of the risk management plans • Monitor the risk management efforts and • Initiate the remedial actions as considered necessary

  25. RISK RETENTION • To keep the costs under control, after analyzing the risks the Management, may decide to retain some of such losses to its account. • Once a decision is taken , then necessary provision needs to be made to avoid such a loss ,if happens, eating into the operating budget • Special contingency funds are therefore to be created for this purpose

  26. RISK TRANSFER • Risk transfer involves payment by one party (the transferor) to another (the transferee, or risk bearer). • The transferee agrees to assume a risk that the transferor desires to escape.

  27. TOOLS OF RISK TRANSFER • INCORPORATION • DIVERSIFICATION • HEDGING • INSURANCE

  28. CONTRIBUTIONS OF RM TO THE BUSINESS • Achievement of objectives/ goals • Reduced anxiety due to losses are of reasonable magnitude and does not cause serious loss situations • Goodwill is maintained by meeting the obligations • The business is able to survive competition • Successful and continued operations • Resultant growth and sustained earnings • Better care for employees and society at large • Reduction of expenses • Better relationships between customers, suppliers, employees

  29. A CASE STUDY Chemical plant 1. Site selection 2. Improper Layout a. location of the plant in the downwind direction. b. higher transportation cost. c. process area very close to the public living. d. wrong material selection. 3. Risk assessment a storage b. fire protection c. toxicity d. hazard index rating e. fire and explosion hazard f. compatibility

  30. 4. Process safety management a. reliability assessment of process equipment b. safety trips and interlocks c. quality testing tools d. removal of fugitive emissions. 5. Electrical safety a. no hazard classification and proper electrical fittings b. protection against static electricity c. lightening arrestor

  31. 6. Safety Audits • a. conceptual stage • b. extension stage • c. commissioning and trial run • d. operation stage • e. periodic. • Emergency Planning • a. on site • b. off site • c. integral multidisciplinary disaster approach • 8. Training • 9. Implementation

  32. The best / successful project would be: Get suggestions - as many as possible Assess risks integrated with business planning and evaluate. Subject them to critical review Set priorities based on the requirements Choose the project If the risk is high If Manageable Proceed

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