Understanding Risk Management: Identifying, Analyzing, and Mitigating Business Risks, Study notes of Engineering

Download Understanding Risk Management: Identifying, Analyzing, and Mitigating Business Risks and more Study notes Engineering in PDF only on Docsity! THE RISK MANAGEMENT PROCESS Risk Management-What Does It Mean? FYI • 96% of firms in international commerce have less than 500 employees - USCB • By 2005,k average mid-size company will generate 1/4 to 1/2 of it revenue from outside U.S. Management  Process of Planning, Organizing, Leading, and Controlling an organization’s or other entity’s resources to fulfill its objectives cost- effectively. 5 Step Sequence in RM Process • Identify & analyzing exposures to accidental and business losses that might interfere with organization’s basic objectives. • Examine feasible alternative risk management techniques to deal with exposures. • Selecting the apparently best risk management techniques. • Implement the chosen risk management techniques. • Monitor results of chosen techniques to ensure the risk management program remains effective. Risk Management • Process of making & implementing decisions that will minimize adverse effects of accidental & business losses. Broad View of Risk Management • Casualty Risks - hazard risks or accidents • Liquidity Risks - Insufficient cash or other liquid assets • Market Risks - not being able to buy or sell goods or services the organization needs or provides in normal markets and usual terms and prices. • Political Risks - Adverse actions of governments that might expropriate or excessively restrict or tax an organization’s assets and activities. • Technological Risks - Failure to keep pace with changes in production or in operating techniques. Risk Manager’s Fundamental Concern (say some) • Is the organization’s overall capacity to cope with losses, regardless of whether those losses stem from fires, lawsuits, or poor business decisions in managing speculative risks. Comprehensive risk management should manage both types of loss exposures. Pre-Loss Objectives  Economy  Reduction in Anxiety  Meeting Internal Obligations  Meeting External Obligations  Social Responsibility Post-Loss Control Objectives  Survival  Continuity of Operations  Stable Earnings  Continued Growth  Social Responsibility RISK  The threat an event or action will adversely affect an organization’s ability to achieve its business objectives. Categories of Risk  Technology  Operational  Financial  Political  Legal  Human Capital  Natural The Risk Management Process 1. Identify Loss Exposures a. Tangibles b. Intangibles 2. Analyze the Exposures a. Prioritize b. Checklists 3. Select the Optimal Technique, or a Combination a. Avoidance b. Control i. Loss Control ii. Separation iii. Combination c. Non-Insurance Transfer i. Certificate of Insurance Applying Risk Finance Techniques Technique Exposure Avoidance Loss Prevention Loss Reduction Segregation by Separation Segregation by Duplication Transfer Risk Control Wheeler Never own or lease this lot Control Sources, Isolate Flammables, Extinguish Reduce, Separate Operate more, smaller lots Emergency use of others property Lease lot another Aunt Melinda’s Truck Make at airport Drive Safe, Selection, Training, Safe Route Drive Slow (less damage), Less expensive vehicle Split delivery with other trucks Contract for other trucks in an emergency Subcontract delivery, Rent Trucks, Destiny, Pickups Alternative Risk Management Techniques • Purchasing a new vehicle? – Apply Six Risk Control Techniques-making losses less frequent, less severe, or more predictable - The following: General Techniques Actions  Exposure Avoidance (make loss impossible)  Do not buy or lease  Loss Prevention (reduce frequency)  Drive Carefully, Select drivers cautiously, Do Maintenance  Loss Reduction (makes loss smaller)  Drive slow, cheaper smaller vehicle  Segregation by Separation (use several units regularly)  Own and operate two vehicles routinely  Segregate by Separation (use several regularly)  Use a spare, temporary, substitute  Contractual transfer of risk control (Shift exposure by contract)  Use a leased vehicle Apply 8 Risk Financing Techniques  Make payment to finance recovery from losses that occur despite risk control efforts General Technique Specific Action  Retention Through Current Expensing  Pay directly from current income  Retention Through Unfunded Reserving  Recognize the need to be ready to pay for damage  Pay Through Funded Reserving  Set aside money to be ready to pay  Retention Through Borrowing  Use a Loan or Credit Card  Retention- Affiliated (Captive) Insurer  Form to join a “Captive” for vehicle damage  Contractual Transfer for Risk Financing  Locate noninsurance indemnitor to pay damage  Commercial Insurance  Buy damage insurance  Hedging-take offsetting market positions to neutralize business risks  No application to exposure to accid/loss The Fire at Wheeler’s Tire Disposal, Inc. • What happened? • Who is affected? • Fall out? • Figure out the exposure/loss trail!