Risk Management Concept and Importance

Risk Management Overview

• Risk management is a systematic approach to identifying, measuring, and controlling risks that threaten assets and earnings.
• It aims to enable organizations to progress towards their goals and objectives effectively.
• The Islamic perspective emphasizes accepting divine stipulations, working hard, and aligning goals with Shariah principles.

Importance of Risk Management

• Enables organizations to progress towards goals efficiently and effectively.
• Prevents intervening factors or barriers from hindering progress.
• Maximizes productivity with minimal wasted effort and expense.
• Achieves desired or intended results, leading to success.

Risk Management Objectives

• Primary Objectives: Preserve operating effectiveness and humanitarian goals. Utilizing cost, resources, and social responsibility.
• Pre-loss Objectives: Reduce and minimize the impact of loss, and reduce fear and worry concerning loss. (Required by laws and regulators)
• Post-loss Objectives: Reduce impact of loss to the organization and society. Maintain organizational survival and stability of earnings.

Risk Assessment and Management Techniques

• The risk management process involves identifying, analyzing, controlling, and monitoring risks.
• The process involves identifying existing and potential risks, evaluating potential risks, examining risk management techniques, and selecting and implementing/evaluating, reviewing, controlling the Risk management program.

Risk Identification Tools

• Orientation: Gaining general knowledge of organizational goals, operations, and practices to identify risks.
• Risk Analysis Questionnaire: A series of detailed questions to help identify risks.
• Exposure Checklist: A list of common exposures to reduce the chance of overlooking serious exposures.
• Insurance Policy Checklist: A catalogue of policies a business might need.
• Flow Chart: Analyze operations to identify singular aspects that give rise to special risks.
• Financial Statements: Identify assets and expenses to understand risk factors.
• Inspections: Examining operation sites and discussing with managers and workers.
• Interviews: Gathering information from employees, both internally and externally.
• Combination Approach: Combining multiple tools to solve problems.

Evaluating Potential Risks

• Evaluating risks based on frequency and severity helps categorize them.
• Risks are classified into high/low frequency and severity categories.
• Different risk levels require different risk management techniques. (refer to Risk Matrix)

Risk Matrix (Example)

• Low frequency, Low severity - Risk Retention, Loss Prevention (loss reduction if cost justifies it).
• Low frequency, High severity - Risk Retention, Loss Prevention (loss reduction if cost justifies it).
• High frequency, Low severity - Loss Prevention (loss reduction if justified).
• High frequency, High severity - Risk Avoidance, Loss Prevention (loss reduction if possible).

Examining Alternatives Risk Management Techniques

• Risk avoidance, loss prevention, loss control, separation, contractual transfer, retention, risk financing (financial risk management), captive insurance, insurance.

Risk Avoidance

• Proactively avoid risk after rational consideration.
• Possibility of loss is zero.
• Avoiding risk completely is a good approach for those afraid of risks.
• Example: manufacturer stopping production of a defective product to avoid a lawsuit.

Loss Control

• Reducing the likelihood of losses occurring.
• Can be mandated by laws or company policy.
• Example: fencing dangerous machinery, required use of protective equipment.

Loss Reduction

• Minimizing the impact of losses.
• Can be applied before and after a loss.
• Example: installing fire alarms, water sprinklers, conducting salvage efforts after a fire.

Separation

• Dispersing assets to reduce impact of a major disaster.
• Example: separating headquarters and assembly plant in an automobile industry.

Contractual Transfer

• Transferring risks through agreements (incorporation, leasing contracts, hedging, hold-harmless agreements).

Retention

• Company takes responsibility for consequences of losses; it is employed when impact/consequences are not severe.
• Ability to assume risk is based on the organization's financial capacity.
• Types of Retention: self-insurance, captive insurance.

Self Insurance

• Maintaining a pool of funds to cover insured losses.
• Financial agreement is required in advance.
• Enough loss exposures are required to make the fund operational.

Captive Insurance

• Captive insurance company writes insurance arrangements for its parent company.
• Parent may be one company, several companies, or an entire industry.
• Example: Sime Darby Group and Sime AXA Assurance Sdn Bhd.

Insurance

• Transfers risk from the insured to an insurance company.
• The insurance company pays a sum if specified risks occur, in return for a premium.

Selecting and Implementing Risk Management Program

• Selection is based on financial criteria (profitability, return) and non-financial criteria (growth, humanitarian aspects, legal requirements).

Evaluating, Reviewing, and Controlling Risk Management Program

• Important to evaluate, review, and control because solutions may become outdated, new risks emerge, existing may be overlooked, or measures may be inappropriate.

This quiz covers the fundamentals of risk management, emphasizing its systematic approach to identifying and controlling risks that organizations face. It discusses the Islamic perspective on risk management and outlines its primary and pre-loss objectives in contributing to effective goal achievement.