Risk Management: A Conceptual Framework

B.V.Raghunandan,

SVS College,

Bantwal-Karnataka-India

Meaning of Risk

• Risk is defined as possibility of loss• Lico Reis, ”Degree of uncertainty of

return on an asset”• Investopedia (www.invetopedia.com),

” The chance that an investment's actual return will be different than expected”.

Classification of Risks

Risk

Pure Risk

Life Insurance General Insurance

Speculative Risk

Financial, Business,

Market and Interest Risk

A] Pure Risk

• It is a risk where there is no possibility of profit

• There is the expense in the form of insurance premium

• There is a loss when the compensation paid by insurance company is less than the actual loss

• It is a method of dividing the risk among those exposed to a particular type of risk

B] Speculative Risk

• Speculative risk not only attempts to compensate for the loss, but may also bring in a profit

• Financial risk management tools may bring in profit apart from covering the risk

A] Pure Risk Management

• Life Insurance and General Insurance• Life Insurance Principles: Utmost Good

faith, and Insurable Interest• General Insurance Principles:

- Utmost Goodfaith

-Insurable Interest

-Indemnity

-Subrogation

-Contribution

Types of Pure Risks

• Risks relating to physical assets• Risks relating to human assets• Risks relating to liability

B] Speculative Risks

• Business Risk• Default Risk• Market Risk• Liquidity Risk• Credit Risk• Exchange Risk

• Financial Risk• External Environment

Risk• Environment Risk• Attrition Risk• Manufacturing Risk• Risk of Natural

Calamity

Handling the Risk

• Risk Management

• Risk Retention

Risk Management: Action

• Risk Avoidance• Diversification• Spin-off• Risk Transfer• Risk Sharing• Fighting Fire with

Fire

Risk Retention: Acceptance

• Rationale:

1. When it can not be avoided

2. High cost of management of risk

3. Risk management may increase loss

4. Where control is difficult

5. Where risk management is too complex

Risk Management Process: Steps Involved

1) Identification of Objectives: competition, stability in earnings, meeting customer expectation, treasury management, cost control, protecting foreign markets

2) Identification of Risks

3) Evaluation of Risk

4) Selection of Policy

5) Developing Strategy

6) Organisational Authority

7) Organisational Control & Corrective Action

THANK YOU