SYNOPSIS

Introduction

Insurance reduces the investment risk that businesses and governments experience. Taking
out a loan without the necessary insurance cover is significantly more expensive, if not
impossible, for many businesses. Insured minimizes the expenses of raising the necessary
money. Insurance can encourage organizations to consider the long term and enhance their
risk tolerance by lowering investment risk. A lot of investments in new manufacturing
facilities and newly formed firms would never materialize if every company was expected to
have the financial capacity to make up for any foreseeable loss.

In financial planning, it is assumed that the path leading to an individual’s financial goal is
lined with obstacles, constrains and risks. For the financial practitioner, the key concern
would be the potential risks in the way of his client’s financial goals. These risks are called
financial risks – risks that everyone has to face in the economic world. Financial risks are
risks that involve financial losses if certain events occur. An example would be the medical
bills following a serious illness of an individual. Since financial risks are inevitable, the
financial practitioner’s job would be to identify those potential risks and institute measures
to help the client ride towards his goals successfully in spite of these threats. In financial
planning, the process of dealing with risks is called risk management. The natural world is
full of risk that can affect an individual’s financial wellbeing both currently and in the future.
This is as true in India as it is elsewhere. A classification of risk we are concerned with here is
pure risk as differed from investment risk (which is discussed in another chapter). An
example of pure risk would be whether a car owned by an individual may meet with an
accident. If the accident did occur, there will be a loss to the owner. If no accident occurs,
there will not be any gain on the owner’s part. It is either a loss or breakeven for the person –
with no chance of any gain. Hence, we may say pure risks involve only the possibility of
financial damage to an individual or a business. In the case of the car’s investment risk, its
value could appreciate or depreciate depending on the circumstances. For instance, a major
increase in tariffs for new imported cars could increase the value of the second-hand
imported car. Likewise, a reduction in tariffs or natural depreciation could lower the car’s
value.

CLASSIFICATION OF RISK

Risk can be classified into several distinct classes. They include the following5:
■ Pure and speculative risk
■ Diversifiable risk and non-diversifiable risk
■ Enterprise risk

MEANING OF RISK MANAGEMENT

Risk management is the act of identifying an organization's loss exposures and selecting the
most effective ways for dealing with such exposures. Because the term risk is imprecise and
has several definitions, risk managers commonly use the phrase loss exposure to identify
prospective losses. Loss exposure is any event or condition in which a loss is possible,
regardless of whether a loss occurs. Historically, risk managers focused solely on the firm's
pure loss exposures. However, new risk management approaches are emerging that take into
account both pure and speculative loss risks.

OBJECTIVES OF RISK MANAGEMENT

Risk management has important objectives. These objectives can be classified as follows: 8

■ Pre-loss objectives

■ Post-loss objectives

TECHNIQUES FOR MANAGING RISK

Techniques for managing risk can be classified broadly as either risk control or risk
financing. Risk control refers to techniques that reduce the frequency or severity of losses.
Risk financing refers to techniques that provide for the funding of losses. Risk Retention
denotes risk being born by the risk-taker himself. Risk managers typically use a combination
of techniques for treating each loss exposure.
As noted above, risk control is a generic term to describe techniques for reducing the
frequency or severity of losses. Major risk-control techniques include the following:

• Avoidance
• Loss prevention
• Loss reduction

BENEFITS OF RISK MANAGEMENT AND INSURANCE PLANNING

• A formal risk management program enables a firm to attain its pre-loss and post-loss
objectivesmore easily.
• The cost of risk is reduced, which may increase the company’s profits. The cost of risk
is a risk management tool that measures certain costs. These costs include premiums paid,
retained losses, loss control expenditures, outside risk management services, financial
guarantees, internal administrative costs, and taxes, fees, and other relevant expenses.
• Because the adverse financial impact of pure loss exposures is reduced, a firm may be
able to implement an enterprise risk management program that treats both pure and
speculativeloss exposures.
• Society also benefits since both direct and indirect (consequential) losses are
reduced. As a result, pain and suffering are reduced.

CONCLUSION

In conclusion, it is clear that risk managers are extremely important to the financial success
of business firms in today’s economy. Furthermore, it is a very important task as a business
entity or as an individual to decide his financial goals to assess the risk threats and
opportunities in his way of achieving such goals. It is very pertinent to understand that risk
management is a never-ending process and some policies of risk management may remain
relevant for a long duration and some may become obsolete in a short period of time, does
thus monitoring of search risk assessment becomes particularly important. The insurance
companies tend to help the insured to select the appropriate policy according to the risk
posed by him in his business or his life which reduces the burden for the insured. Typically
risk assessment is not confined in terms of the monetary risk it also extends to other forms of
risk such as the risk of life, risk of reputation, risk of malpractices, etc which are complicated
to assess and foresee for anyone in the ordinary course and thus for such circumstance’s
insurance planning can be leveraged as a tool for mitigating these mishaps.
Insurance planning has many facets doe mitigating the loss due to mishap is one of the
advantages there are other considerations which can be found in modern-day insurance
planning such as consideration towards tax benefits consideration towards social good.