DEFINITION: Climate changes, political The purpose of risk management is to

CHAPTER 2 : uncertainties, economic forces are among enable an organization to progress toward

RISK external factors of emerging needs of risk

management in an organization.
its goal and objectives (mission) in the most
direct, efficient, and effective path

MANAGEMENT

01. PREE LOSS 02. POSS LOSS

OBJECTIVES OBJECTIVES

Survival of organization – organization still able to

Reduce impact of loss
Reduce fear and worry
OBJECTIVES continue operations

Stability of earnings – business operations do not

Required by law have to stop and the organizations can
concentrate on their business activities as usual.

Reduce impact of losses to organization and

society – when a loss occurs not only will the
organization suffer but the loss has to be
burdened by society as well. Employees may have
to be retrenched and some departments may
have to be closed down.
 2) Evaluating
potential risks

1) Identifying existing 3) Examining alternative

and potential risks risk management

techniques

Business Idea

5) Evaluating, reviewing 4) Selecting and Implementing

and controlling the risk management program
program

1) IDENTIFYING EXISTING AND

POTENTIAL LOSSES

IDENTIFICATION
Quick Wins

Risk identification is the

process by which an Direct damage ( damage to building) Indirect damage
(loss of profits due to business interruption )
organization is able to learn of

the areas in which it is exposed

to risk.

Identification techniques are Liability

(court award to 3rd party since fire was caused by
Loss of Key Employees
(key employees such as general manager/
designed to develop negligence of the owner of building) CEO/Researcher)

information on sources of risk,

hazards, risk factors, perils

and exposures to loss.

 2. EVALUATING
POTENTIAL frequency Severity
LOSSES Referring to the
number of times the
Referring to the
maximum size of
loss occurs loss exposures
This step involves important
aspects of lose exposure:
Frequency
Severity

1. 2. 3
Identifying and Estimating the frequency Estimating relative
determining the and severity for each type
frequency and
of loss exposure and ranked
loss exposures
it according to their
severity of each loss
alone is not relative importance. High exposure as the
sufficient loss exposure will be given selection of
priority. appropriate technique

will depend on this.
 Risk control efforts help organization avoid a
risk, prevent loss, lessen the amount of
risk control
damage if a loss occurs or reduce undesirable
effects of risk on an organization.

If someone is afraid of risks, the best way

risk avoidance to deal with it is to avoid it completely.

Eg; a manufacturer may stop production of
a defective product to avoid alawsuit.

Usability

3. EXAMINING Loss control is designed to reduce both the

ALTERNATIVES RISK loss control frequency and severity of losses by changing the
characteristics of the exposure so that it is more

ELEMENT TECHNIQUE acceptable to the firm. Divided into:

Loss prevention Loss reduction Link Building

Loss Reduction
Loss Prevention
Designed to reduce or lower the
Seek to reduce the number of severity of losses, should it occur.
losses (frequency) of losses
Since some risks are unavoidable, the other alternative is to reduce
Is used when the benefits outweigh the costs involved.
its impact.
Either imposed by law or imposed by companies and
Can be used in two circumstances: before a loss, e.g. installation of
factories to fence dangerous machinery to reduce the
fire alarm or after a loss e.g. salvage efforts in the restoration of a
chances of employees being injured.
building burnt down by fire.
 1 Separation 2 Contractual 3 Risk
Transfer Financing

Involves the dispersal of Refers to the Retention ( the com. In return, the
the firm’s assets in various methods will bear the insurance
several locations other than consequences of the
company
instead of confining it to loss)
insurance by which a agrees to pay
one major area.
continue

pure risk and its a stated sum

Self insurance and
potential financial captive insurer ( the on the
Reduce the impact of consequences can be
losses should a major
organizations sets up happening of
transferred to a pool of fund to certain risks
disaster occurs.
other party. retain its loss
specified in the
exposures)
Eg: separation of head contract
Advantages: Often
quarters and assembly
cost less than Insurance
plant in automobile (transferring the risks
industry.
insurance
to another party
involves a contractual
Disadvantages: Not
agreement whereby
necessarily cheaper the other party
than insurans if assumes the risks and
discounts are taken its liable for the loss in
into consioderation. the event of loss.

4. SELECTION AND IMPLEMENTATION

OF THE RISK MANAGEMENT
PROCESS.

low frequency high

Whether it will affect the
organization's profitability or Risk Loss Prevention
rate of return. assumption/Retention also;

low
also; Loss reduction if cost
Loss prevention can be justified
Loss reduction if cost Assume risk if cost
justifies the benefits cant 'be justified

severity
01. Financial criteria RISK
MANAGEMENT Insurance Risk Avoidance
02. Non financial PROCESS also; also;
Risk transfer,loss
high
Loss prevention
criteria reduction and loss and loss reduction
prevention if possible

Whether it affects the growth of the

organization, humanitarian aspects
and legal requirements.
 The risk
management
program must be
monitored and
controlled
systematically.
It must be
periodically
reviewed

d
Evaluation an
review of the t
n
risk manageme ts The tec
hn
program permi o that weiques
the manager t ns appropr re
o last ye iate
review decisi r EVALUATION, not be ar many
and discove
is REVIEW, advisabthe most
mistakes, it e le
hoped, befor year, a this
they become
CONTROL constannd
costly attenti t
o

requiren is
d