INSTITUTE OF MANAGEMENT STUDIES DAVV INDORE

MBA (FINANCIAL ADMINISTRATION) IVth SEMESTER

RISK AND INSURANCE MANAGEMENT

 METHODS OF HANDLING RISK

 Risk is burden not only on individual but also on society. Some techniques for
meeting problem of risk or methods of handling risk are:

 Risk avoidance
 Risk avoidance is one of the methods to handle risk.
 Examples – you can avoid risk of divorce by not marrying. Risk of pick pocketing
by avoiding travelling. Not taking education for risk of failing.
 Not all risks can be avoided like – risk of death by not travelling by air, but it may
happen while travel in bus or train. Safest place for ship is harbor, but it is not the
place meant for it.
 Solution can be by increasing safety measures, developing skills etc.

 Risk retention
 An individual or business firm may retain all or part of a risk either in active or
passive form.
 Active risk means an individual is consciously aware of risk and deliberately plan
to retain some risk, example – a businessman may retain risk of petty theft by
employees or spoilage of perishable goods or a person having very old
motorcycle takes only third party insurance. This is done as commercial
insurance is either unavailable or is available by paying high premium.
 Passive risk is when risk is retained unknowingly because of ignorance etc.
which may become dangerous when it occurs.

 Risk transfer
 Risk is transferred by several ways like:
- Transfer of risk by contract – example – risk of defective TV can be
transferred to retailer by purchasing a service contract.
- Hedging price risk – risk of unfavorable price fluctuation to a speculator by
purchasing and selling future contracts on an organized exchange such as
NSE.
 - Conversion to a Public ltd company. – a sole proprietor is responsible for
everything to the creditors including his personal property. In case of
company, he is responsible to the extent of his share holding.

 Loss control
- Loss prevention – aims at reducing probability of loss so that frequency of
loss is reduced. Example: to reduce number of heart attacks - reduce weight,
give up smoking, follow good food habits, automobile accidents – pass a safe
driving course.
- Loss reduction – though by taking preventions loss frequency will be reduced
but in order to reduce severity of loss control after it happens once is
necessary. Example – highly flammable material to be stored separately to
avoid fire happenings, plant to have fire resistant material, fire proof almirah
for safe keeping of important papers, installation of fire extinguishers at
prominent places etc.

 Insurance
 Final technique of handling risk is taking insurance. Most individuals prefer taking
insurance as practical method for handling major risks. Commercial insurance is
also equally important.

Prepared by:
Arvind Paranjape, CAIIB
paranjape.arvind@yahoo.com
9425067026