Module-1

Concept of Risk

The term risk has a variety of meanings in business and everyday life. At its
most general level, risk is used to describe any situation where there is
uncertainty about what outcome will occur. Different authors on the subject
have defined risk differently. However, in most of the terminology, the term
risk includes exposure to adverse situations. There are some popular definitions
of risk as follows.

According to the dictionary, risk refers to the possibility that something

unpleasant or dangerous might happen.

Risk is a condition in which there is a possibility of an adverse deviation from a

desired outcome that is expected or hoped for.

Types of Risk

There are different types of risks, which may be classified as follows:

 Pure and Speculative risk

 Financial and Non-financial risk
 Individual and Group Risk
 Static and Dynamic Risk
 Quantifiable and Non-Quantifiable Risk

Pure and Speculative Risks

Pure risk situations are those where there is a possibility of loss or no loss.
There is no gain to the individual or the organization. For example, a car can
meet with an accident or it may not meet with an accident. If an insurance
policy is bought for the purpose, then if accident does not occur, there is no gain
to the insured.

Speculative risks are those where there is possibility of gain as well as loss. The
element of gain is inherent or structured in such a situation. For example — if
you invest in a stock market, you may either gain or lose on stocks.

For Internal Circulations only

Financial and Non-financial Risks

Financial risk involves the simultaneous existence of three important elements

in a risky situation – (a) that someone is adversely affected by the happening of
an event, (b) the assets or income is likely to be exposed to a financial loss from
the occurrence. of the event and (c) the peril can cause the loss. For example,
loss occurred in case of damage of property or theft of property or loss of
business. This is financial risk since risk resultant can be measured in financial
terms.

When the possibility of a financial loss does not exist, the situation can be
referred to as non-financial in nature. For example, risk in the selection of
career, risk in the choice of course of study, etc. They may or may not have any
financial implications.

Individual and Group Risks

A risk is said to be a group risk or fundamental risk if it affects the economy or

its participants on a macro basis. These are impersonal in origin and
consequence. They affect most of the social segments or the entire population.
These risk factors may be socio-economic or political or natural calamities, e.g.,
earthquakes, floods, wars, unemployment etc.

Individual or particular risks are confined to individual identities or small

groups. Thefts, robbery, fire, etc. are risks that are particular in nature. Some of
these are insurable.

Static and Dynamic Risks

Dynamic risks are those resulting from the changes in the economy or the
environment. For example economic variables like inflation, income level, price
level, technology changes etc. are dynamic risks Dynamic risk involves losses
mainly concerned with financial losses. These risks affect the public and
society.

Static risks are more or less predictable and are not affected by the economic
conditions. Static risk involves losses resulting from the destruction of an asset
or changes in its possession as a result of dishonesty or human failure. Such
financial losses arise, even if there are no changes in the economic environment.

For Internal Circulations only

Quantifiable and Non-Quantifiable Risk

The risk which can be measured like financial risks are known to be
quantifiable while the situations which may result in repercussions like tension
or loss of peace are called as non-quantifiable.

Sources of Pure Risks

Since pure risks are generally insurable, the discussion on pure risk more. These
are the sources of pure risks
Pure Risks

Personal Property Liability

Personal Risks
Personal risks are risks that directly affect an individual. They involve the
possibility of the complete loss or reduction of earned income. There are four
major personal risks.
 Risk of Premature Death
 Risk of Insufficient Income during Retirement
 Risk of Unemployment
 Risk of Poor Health
Property Risks

It refers to the risk of having property damaged or lost because of fire,

windstorm, earthquake and numerous other causes. There are two major types
of loss associated with the destruction or theft of property.
Direct Loss: A direct loss is defined as a financial loss that results from the
physical damage destruction, or theft of the property. For example, physical
damage to a factory due to fire is known as direct loss.
Indirect or Consequential Loss: An indirect loss is a financial loss that results
indirectly from the occurrence of a direct physical damage or theft loss. For
example, in factory, there may be apparent financial losses resulting from not
working for several months while the factory was rebuilt and also extra
expenses termed as indirect loss

For Internal Circulations only

Liability Risks
These are the risks arising out of the intentional or unintentional injury to the
persons or damages to their properties through negligence or carelessness.
Liability risks generally arise from the law. For example, the liability of an
employer under the workmen’s compensation law or other labour laws in India.
Methods of avoiding the risks
There are five major methods of handling the risks:
 Avoidance of risks
 Loss control
 Risk Retention
 Insurance
Avoidance of risks:
An individual can avoid the risk of an automobile accident by not riding in a
car. A manufacturer can avoid the risk of product failure by refusing to
introduce new products.
Loss Control
Loss control consist of certain activities that reduce the frequencies and severity
of losses. Thus loss control has two objectives: loss prevention and loss
reduction.
Loss prevention aims at reducing the probability of losses so that the frequency
minimised /prevented by using safely lockers, number of heart attacks can be
reduced, if individuals reduce their weight
Loss reduction means try to control the severity of losses. For example keeping
firefighting equipment will reduce the severity of losses from fire.
Risk Retention
An individual or a business firm retains all or part of a given risks, is retains the
obligations to pay for part or all of the losses. For example, a transport company
may decide to retain the risks that cash flow will drop due to increase in the
price of oil. Retention is done with a formal plan to fund losses can be paid by
the firm.
Insurance
Though we try to avoid, control and prevent, still the risk will exist. Therefore
insurance is the most practical method for handling major risks. The risk is

For Internal Circulations only

transferred to the insurer. The basic objective of insurance is to transfer the risks
of a person to the insurance company which has easily similar risks.
Management of Risks
Risk management is the process of identifying, analysing, evaluating the risk
and selecting the best possible methods for handing them. Generally every
company follows certain steps in analysing and evaluating the risk. These steps
are part of risk management process. These are:
 Setting of Objectives
 Risk Identification
 Evaluation of Risks
 Selection of Appropriate risk management technique
 Implementation of risk management technique
 Review the risk management decision

Setting of objectives: First the organisation has to determine the objectives of

its risk management plan. The objective is to maintain the operational efficiency
of the organisation.

Risk identification: Company should be fully aware of the potential risks. In

order to identify the risk systematic approach such as use of checklists,
inspection operations etc. should be done.
Evaluation of risks: Once the risks are identified, they should be analysed and
evaluated. Evaluation process includes finding out the frequency of occurrence
and severity of loss.
Choosing Appropriate risk management technique: After the risk are
analysed and evaluated, the management has to take the decision regarding the
appropriate technique to deal with the risks.
Implementation of risk management techniques: The management will
implement the risk management decision for handling the risks.

Review the Risk Management Decision

Risk Management is a continuous process. The risk management activities of

the organisation have to be reviewed from time to time on the basis of actual
results achieved and new developments in order to make the required changes.

For Internal Circulations only

Disaster Risk Management

Disaster risk is defined as “the potential loss of life, injury, or destroyed or

damaged assets which could occur to a system, society or a community in a
specific period of time, determined probabilistically as a function of hazard,
exposure, and capacity”. In the technical sense, it is defined through the
combination of three terms: hazard, exposure and vulnerability.

Disaster Risk Management is the application of disaster risk reduction policies

and strategies, to prevent new disaster risks, reduce existing disaster risks, and
manage residual risks, contributing to the strengthening of resilience and
reduction of losses. Disaster risk management actions can be categorized into;
prospective disaster risk management, corrective disaster risk management and
compensatory disaster risk management.

For Internal Circulations only