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Introduction To Risk Management

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Shikha sharma
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6 views

Introduction To Risk Management

Uploaded by

Shikha sharma
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCTION TO RISK

MANAGEMENT & INSURANCE


RISK MANAGEMENT

Risk management is the continuing process to identify, analyze,


evaluate, and treat loss exposures and monitor risk control and
financial resources to mitigate the adverse effects of loss.
Loss may result from the following
• Financial risks such as cost of claims and liability judgments
• Operational risks such as labor strikes
• Perimeter risks including weather or political change
• Strategic risks including management changes or loss of
reputation
STEPS OF A RISK MANAGEMENT PROCESS

• Identify the Risk


• Analyze the Risk
• Evaluate or Rank the Risk
• Treat the Risk
• Monitor and Review the Risk
IDENTIFY THE RISK

The initial step in the risk management process is to identify the risks that the
business is exposed to in its operating environment.
There are many different types of risks:
• Legal risks
• Environmental risks
• Market risks
• Regulatory risks etc.
ANALYZE THE RISK

• Risk has been identified it needs to be analyzed.


• The scope of the risk must be determined. It is also important to understand the
link between the risk and different factors within the organization.
• To determine the severity and seriousness of the risk it is necessary to see how
many business functions the risk affects.
• There are risks that can bring the whole business to a standstill if actualized,
while there are risks that will only be minor inconveniences in the analysis.
EVALUATE THE RISK OR RISK ASSESSMENT

• Risks need to be ranked and prioritized.


• Most risk management solutions have different categories of risks, depending
on the severity of the risk.
• A risk that may cause some inconvenience is rated lowly, risks that can result
in catastrophic loss are rated the highest.
• It is important to rank risks because it allows the organization to gain a holistic
view of the risk exposure of the whole organization.
EVALUATE THE RISK OR RISK ASSESSMENT

• The business may be vulnerable to several low-level risks, but it may not
require upper management intervention.
• On the other hand, just one of the highest-rated risks is enough to require
immediate intervention.
• There are two types of risk assessments:
• Qualitative Risk Assessment and
• Quantitative Risk Assessment.
QUALITATIVE RISK ASSESSMENT

• Risk assessments are inherently qualitative – while we can derive metrics from
the risks, most risks are not quantifiable.
• For instance, the risk of climate change that many businesses are now focusing
on cannot be quantified as a whole, only different aspects of it can be
quantified.
• There needs to be a way to perform qualitative risk assessments while still
ensuring objectivity and standardization in the assessments throughout the
enterprise.
QUANTITATIVE RISK ASSESSMENT

• Finance related risks are best assessed through quantitative risk assessments.
• Such risk assessments are so common in the financial sector because the sector
primarily deals in numbers – whether that number is the money, the metrics,
the interest rates, or any other data point that is critical for risk assessments in
the financial sector.
• Quantitative risk assessments are easier to automate than qualitative risk
assessments and are generally considered more objective.
TREAT THE RISK

• Every risk needs to be eliminated or contained as much as possible.


• This is done by connecting with the experts of the field to which the risk
belongs
• In a risk management solution, all the relevant stakeholders can be sent
notifications from within the system.
• The discussion regarding the risk and its possible solution can take place from
within the system.
• Upper management can also keep a close eye on the solutions being suggested
and the progress being made within the system.
• Instead of everyone contacting each other to get updates, everyone can get
updates directly from within the risk management solution.
MONITOR AND REVIEW THE RISK

• Not all risks can be eliminated – some risks are always present. Market risks
and environmental risks are just two examples of risks that always need to be
monitored.
• If any factor or risk changes, it is immediately visible to everyone.
• Computers are also much better at continuously monitoring risks than people.
• Monitoring risks also allows your business to ensure continuity.
Everyone inherently faces two major risks: the risk of life
and the risk of health.
If left uncovered, these risks could financially ruin people’s
lives.

HOW INSURANCE IS USED AS RISK


MANAGEMENT TOOL?????
A LEADING FINANCIAL EXPERT SAYS,
‘LIFE INSURANCE IS NOT AN INVESTMENT.
IT IS A RISK MANAGEMENT TOOL TO
PROTECT FUTURE INCOME’.
RISK OF LIFE

This is mainly beneficial to the nominee when the policyholder passes away. It can
also provide monetary support to the insured if they outlive the policy duration. An
insurance policy can provide support in the following manner:

• Securing your family’s future


• Encouraging savings and investments
• Fulfilling financial goals
RISK OF HEALTH

It is mandatory for individuals to purchase a health insurance policy so that they


will not have to worry about money when their condition is critical.
Many insurers also offer cashless claim settlements so that policyholders can get
treated at the right time.

• Providing monetary support


• Offering additional protection
PRINCIPAL RISKS

• Principal Risks means the key risks of the Company which include a broad
range of risks such as market, credit, insurance and operational risks, excluding
risks related to regulatory compliance, anti-money laundering and anti-terrorist
financing risks, which are the responsibility of the Audit Committee.
• Principal risk also known as capital risk in finance investment is the risk that an
investor takes when they invest money into a specific security or asset.
• It is the risk that the investor will lose the money they put into the investment,
either partially or completely.
PRINCIPAL RISKS

• Principal risk can be divided into four categories:


• Market risk
• Credit risk
• Systematic risk
• Unsystematic risk
PRINCIPAL RISKS

• Market risk is the risk that the value of the security or asset will decline due to
changes in the market. This can include changes in interest rates, currency
values, and other economic factors.
• Credit risk is the risk that the issuer of the security or asset will not be able to
make the payments they owe to the investor. This could be due to bankruptcy,
default, or other financial difficulties. The borrower may default on their loan
and not be able to repay the loan.
PRINCIPAL RISKS

• Systematic risk and unsystematic risk. Systematic risk is the risk that is
associated with the entire market, and is not specific to any one particular
investment. It is also known as market risk, and is caused by factors such as
economic recessions, changes in interest rates, and political instability.

• Unsystematic risk is the risk that is specific to one particular investment, and
is caused by factors such as company-specific events, or changes in the
industry in which the investment is made.
THE PRINCIPLE OF MUTUALITY

• The mutuality principle is a legal principle established by case law. It is based


on the proposition that an organization cannot derive income from itself.
• The principle provides that where a number of persons contribute to a common
fund created and controlled by them for a common purpose, any surplus arising
from the use of that fund for the common purpose is not income.
• The principle does not extend to include income that is derived from sources
outside that group.
ORGANIZATIONS THAT CAN ACCESS MUTUALITY

Some of the characteristics of organizations that can access mutuality may


include:
• The organization is carried on for the benefit of its members collectively, not
individually
• The main purpose for which the organization was established, and is operated,
is the common purpose of the members
• Different classes of memberships may exist with varying subscription rates,
rights and entitlements to facilities.
MUTUAL DEALINGS

As a result of the mutuality principle:


• receipts derived from mutual dealings with members are not assessable income
(these are called mutual receipts)
• expenses incurred to get mutual receipts are not deductible.
INSURANCE PREMIUM

• An insurance premium is the amount of money an individual or business pays


for an insurance policy.
• Insurance premiums are paid for policies that cover healthcare, auto, home, and
life insurance.
• Once earned, the premium is income for the insurance company. It also
represents a liability, as the insurer must provide coverage for claims being
made against the policy.
• Failure to pay the premium on the individual or the business may result in the
cancellation of the policy.
INSURANCE PREMIUM

• An insurance premium is the amount of money an individual or business must


pay for an insurance policy.
• Insurance premiums are paid for policies that cover healthcare, auto, home, and
life insurance.
• Failure to pay the premium on the part of the individual or the business may
result in the cancellation of the policy and a loss of coverage.
• Some premiums are paid quarterly, monthly, or semi-annually depending on
the policy.
• Shopping around for insurance may help you find affordable premiums.
INTEREST

Interest is the price you pay to borrow money or the return earned on an
investment.
For borrowers, interest is most often reflected as an annual percentage of the
amount of a loan. This percentage is known as the interest rate on the loan.
The types of interest are
• Fixed interest rate,
• Variable interest rate,
• Annual percentage rate (APR),
• Prime interest rate,
• Discounted interest rate,
• Simple interest rate, and
• Compound interest rate.
NET PREMIUM

• Net premium is the amount received or written on insurance policies when


premiums are incurred or paid, and return premiums are deducted from gross
premiums.
• Net premium can be referred to as the present value of policy benefits less the
present value of premiums payable in the future.
• Net premium does not consider any expenses expected in the future for policy
maintenance.
• Net premiums are also called benefit premiums.
GROSS PREMIUM

• A gross premium is the total premium of an insurance contract before


brokerage or discounts have been deducted.
• In reinsurance, the primary insurance company usually pays the reinsurer its
proportion of the gross premium it receives on a risk.
• The gross premium is the total premium paid by the policy owner, and
generally consists of the net premium plus the expense of operation minus
interest.
• A gross premium is the total premium of an insurance contract before
brokerage or discounts have been deducted.

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