RISK MANAGEMENT

ELECT 2 1 Semester 2011 2012 10:30-11:30, MWF, Room 127

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RISK AND ITS MANAGEMENT

A. Definition of Risk Magnitude of a negative impact that can result from its occurrence. Any situation where there is uncertainty about what outcome will occur. Expected losses associated with a situation. B. Classification of Risk 1. Business Risk - The probability of loss inherent in an organization's operations and environment that may impair its ability to provide returns on investment.. Types of Business Risk 1.1Price Risk refers to uncertainty over the magnitude of cash flows due to possible changes in output and input prices. 1.1.a. Output Price Risk refers to the risk of changes in the prices that a firm can demand for its goods and services. 1.1.b. Input Price Risk refers to the risk of changes in the prices that a firm must pay. 1.2Credit Risk the risk that a firms customers and the parties to which it has lent money will delay or fail to make promised payments. 1.3Pure Risk the risk reduction in value of business assets due to physical damage, theft and expropriation, the risk of legal liability for damages for harm to customers, suppliers, shareholders and other parties, the risk of paying benefits to injured workers and the risk of death, illness and disability to employees. 2. Personal Risk risks faced by individuals and families such as but not limited to earnings risk, medical expense risk, liability risk, physical asset risk, financial asset risk and longevity risk. C. Definition of Management The act, manner, or practice of managing; handling, supervision, or control.

D. Definition of Risk Management Process or method of identifying, anticipating, analyzing, evaluating and producing effective and efficient ways of managing, controlling as well as eradicating risks. The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. The process of analyzing exposure to risk and determining how to best handle such exposure. Involves identification of potential direct and indirect losses, evaluation of their potential frequency and severity, development and selection of methods for managing risk to maximize business value, implementation of these methods and ongoing monitoring. Importance of Risk Management 1. Risk Management clarifies the importance and events for tackling the risks that your establishment may face. 2. Risk Identification RM outlines various categories of risks faced by new businesses. 3. Prevention of crime 4. Business Recovery Planning minimizes disaster on your business. 5. Scams discusses scams and how would they hamper your business. 6. Data Security E. Principles of Risk Management 1. Organizational Context encompasses the political, economic, social, technological, legal and environmental backdrop of an organization. 2. Involvement of Stakeholders determines the identity and role of the stakeholder, the level of influence that the stakeholder has over and outside of the organization, the level of investment that the stakeholder has in the organization and the type, probability and potential impact of the risk. FMCMS 1

3. Organizational Objectives understands the objectives of the organization in order to ensure a tailored approach. 4. Reporting accurately and clearly representing data and the transmission of this data to the appropriate staff members, managers and stakeholders. 5. Roles and Responsibilities individual functions and accountability must be transparent both within and outside the organization. 6. Support Structure - the provision within an organization of standardized guidelines, information, training and funding for individuals managing risks that may arise in any specific area or project. 7. Early Warning Indicators are predefined and quantified triggers that alert individuals responsible for risk management. 8. Review Cycle review of identified risks and ensures that risk managers remain sensitive to new risks and to the effectiveness of current policies. 9. Supportive Culture essential for ensuring that everybody with risk management responsibilities feels confident raising, discussing and managing risks. 10.Continual Improvement includes the capacity for re-evaluation and improvement. 11.MoR Approach processes, policies, strategies and plans within the MoR framework provide generic guidelines and templates within a particular organization. 12.Overcoming Barriers to MoR requires thoughtful consideration of possible barriers to implementation. F. Risk Management Process 1. Identify all significant risks 2. Evaluate the potential frequency and severity of losses 3. Develop and select methods for managing risk 4. Implement the risk management methods chosen 5. Monitor the performance and suitability of the risk management methods and strategies on an ongoing basis.

Risk Management Methods 1. Loss Control reduces expected losses by lowering the level of risky activity and/or increasing precautions against loss for any given level of risky activity. 2. Loss Financing includes retention (selfinsurance), insurance, hedging, and other contractual risk transfers. 3. Internal Risk Reduction includes diversification and investment in information. G. Organization of the Risk Management Function within the Business Most large companies have a specific department responsible for managing pure risk that is headed by the risk manager. However, given that losses can arise from numerous sources, the overall risk management process ideally reflects a coordinated effort between all of the corporations major departments and business units, including production, marketing, finance and human resources. References: Book Harrington, Scott E. & Niehaus, Gregory R. (2003). Risk management & insurance. New York: McGraw-Hill. Electronic Sources Business Dictionary. (n.d). Retrieved on 15 June 2011 from http://www.businessdictionary .com/definition/business-risk.html. Investorwords. (n.d.). Retrieved on 15 June 2011 from http://www.investorwords.com/ 4304/risk_management.html. Yahoo. (n.d.). Retrieved on 15 June 2011 from http://education.yahoo.com/reference/ dictionary/entry/management.

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