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Risk

The document discusses the concept of risk, defining it as measurable uncertainty that can lead to potential losses, and outlines the process of risk management, which involves identifying, analyzing, and controlling risks. It differentiates between direct and indirect losses, and categorizes types of risks faced by businesses and individuals, including business risk, pure risk, and credit risk. Additionally, it details the risk management process and various methods for managing risks, such as loss control, loss financing, and internal risk reduction.

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3 views

Risk

The document discusses the concept of risk, defining it as measurable uncertainty that can lead to potential losses, and outlines the process of risk management, which involves identifying, analyzing, and controlling risks. It differentiates between direct and indirect losses, and categorizes types of risks faced by businesses and individuals, including business risk, pure risk, and credit risk. Additionally, it details the risk management process and various methods for managing risks, such as loss control, loss financing, and internal risk reduction.

Uploaded by

shipabarua.cox
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Risk and Its Management

Risk: The part of uncertainty that can be measured is called risk. Risk is describe
any situation where there is uncertainty about what outcome will occur.
Possibility of occurring any loss
Risk Management: It is the process of measuring or assessing risk and developing
strategies to manage it. It is also a systematic approach of identifying, analyzing,
and controlling areas and events.
Direct vs. Indirect Losses

Aspect Direct Loss Indirect Loss

Losses that result directly Losses that arise as a consequence of


Definition from the occurrence of an the direct loss, often secondary
event. effects.

Cause Immediate Delayed

Timing Easier to quantify Harder to quantify

Measurement Directly tied to the event Resulting from the direct loss

Lost revenue, reputational damage,


Examples Physical damage, harm, etc.
etc.

Types of Risk Facing Businesses and Individuals


• Business Risk:
Business risk is the possibility of a company facing financial loss due to
internal or external factors. The major business risks that give rise to
variations in cash flows and business value are:
1. Price Risk: Refers to uncertainty over the magnitude of changes in
output and input prices.
▪ Output Price Risk: Refers to the risk of changes in the prices a
firm can demand for its goods and services.
▪ Input Price Risk: Refers to the risk of changes in the price that a
firm must pay for labor, materials, and other inputs.
2. Pure Risk:
Pure risk is the chance of financial loss with no possibility of gain. It involves
situations where the outcomes are negative or neutral. Examples:
o Physical damage
o Theft
o Loss of assets
3. Credit Risk:
Credit risk is the chance that a borrower may fail to repay a loan or meet debt
obligations, causing financial loss to the lender.

Personal Risk
1. Earnings:
o Unemployment
o Disability
o Death
o Aging
2. Medical Expenses
3. Liability
4. Physical Assets:
o Home
o Auto
o Watercraft
o Electronics
o Others
5. Financial Assets:
o Stocks
o Bonds
o

Comparison of Pure Risk and Its Management with Other Types of Risk

Pure Risk vs. Other Types of Risk


1. Definition:
o Pure Risk: Only loss or no loss can occur (e.g., accidents, natural
disasters).
o Other Risk (Speculative, Financial, Operational, Strategic): Loss, no
loss, or gain can occur (e.g., investments, business decisions).
2. Outcome:
o Pure Risk: Loss or no loss.
o Other Risk: Loss, no loss, or gain.
3. Insurance:
o Pure Risk: Often insurable (e.g., health, property insurance).
o Other Risk: Usually not insurable (e.g., stock, investments).
4. Management:
o Pure Risk: Managed by avoiding, reducing, retaining, or transferring
risk (insurance).
Other Risk:
Managed through strategies like diversification, planning, and financial tools.

The Risk Management Process


1. Identify all significant risks.
2. Evaluate the potential frequency and severity of losses.
3. Develop and select methods for managing risks.
4. Implement the risk management methods chosen.
5. Monitor the risk performance and the suitability of the risk management
methods and strategies on an ongoing basis.
6.
Major Risk Management Methods
1. Loss Control
o Reduced level of risky activity: Minimizing exposure to risky
situations or operations.
o Increased precautions: Implementing safety measures to lower the
likelihood of risk.
2. Loss Financing
o Retention and self-insurance: Bearing the risk internally without
external coverage.
o Insurance: Transferring risk to an insurer in exchange for premium
payments.
o Hedging: Using financial instruments to offset potential losses.
o Other contractual risk transfers: Transferring risks to other parties
through contracts.
3. Internal Risk Reduction
o Diversification: Spreading out investments or activities to reduce
exposure to a single risk.
o Investments in Information: Improving data collection and analysis to
predict and mitigate risks effectively.
o

Continuation of Risk Management Methods


• Hedging: Using financial instruments to offset potential losses.
• Other Contractual Risk Transfers: Shifting risk through contracts like
warranties or indemnity agreements.
3. Internal Risk Reduction
o Diversification: Spreading resources or investments to minimize overall
risk.
o Investments in Information: Using data and analysis to improve risk
assessment and decision-making.

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