Revised Chp. 2 - The Nature of Risk Management Risk...

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Unformatted text preview: The Nature of Risk Management Risk management is a scientific approach to the problem of dealing with the pure risks facing individuals and organizations. It evolved from corporate insurance management, which focused on the risk of accidental loss to assets and income of the organization Risk Management Defined Risk management is a scientific approach to dealing with pure risks by anticipating possible accidental losses and designing and implementing procedures that minimize the occurrence of loss or the financial impact of the losses that do occur. Risk Management Tools Risk Control Avoidance Reduction, Prevention, Segregation, Duplication Risk Financing Retention Transfer Risk Transfer Risk ways: transfer is accomplished in several Purchase of insurance Hedging Holdharmless agreements Subcontracting certain activities Surety bonds Risk Sharing Risk sharing is sometimes cited as an additional way of dealing with risk. Risk sharing may be viewed as a special case of risk transfer and risk retention. The risk of the individual is transferred to the group. The risks of a number of individuals are retained collectively. The Role of Enterprise Risk Management Event Risk( destruction of property, worker injury) Financial Risk( market risk, interest rate risk, credit risk) Operational Risk( hiring practices, customer service) Strategic Risk( joint ventures, mergers and acquisitions) Risk Management's Contribution to the Organization Risk management can contribute to the organization's general goals in several ways: Guaranteeing that the organization will not be prevented from pursuing other goals as a result of losses associated with pure risks. Controlling the cost of risk for the organization; that is, by achieving the goal of economy. Reducing expenses through risk control measures. Position in the Organization Most risk managers have a financial orientation, reporting to a vice president-finance, treasurer, or comptroller. In some cases, the risk manager reports to an executive VP or to the president, illustrating the company-wide scope of risk management activities. Risk Management Objectives Pre-Loss Objectives Economy Reduction in Anxiety Meeting Externally Imposed Obligations Post-Loss Objectives Survival Continuity of operations Earnings Stability Continued Growth Social Responsibility Social Responsibility The Risk Management Process 1. 2. 3. 4. 5. 6. Determination of objectives Identification of risks Evaluation of risks Consideration of alternatives selection of the tool Implementing the decision Evaluation and review Risk Identification Techniques Risk identification requires a general knowledge of the goals and functions of the organization; what it does and where it does it. This knowledge can be gained through Inspections interviews examination of records and documents analysis of documents use of flow charts an internal communication system Prouty Measures of Severity Richard Prouty , the risk manager of a large national corporation suggested a classification for measuring loss severity, based on a system used by insurance underwriters. The maximum possible loss (MPL) is the worst loss that could occur, given the worst possible combination of circumstances. The probable maximum loss (PML), on the other hand, is the loss that is likely, given the most likely combination of circumstances. One Probability and Priority Rankings suggested approach almost nil (in the opinion of the risk manager, the event is probably not going to happen), slight (while the event is possible, it has not happened and is unlikely to occur in the future), moderate, (the event has occasionally happened and will probably happen again), definite (the event has happened regularly in the past and is expected to occur regularly in the future). ...
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This note was uploaded on 04/17/2008 for the course RMI 2301 taught by Professor Bennett during the Spring '08 term at St. Johns Duplicate.

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