Risk Management Concept PDF

RISK INS510 MANAGEMENT 10.0  DEFINITION OF RISK MANAGEMENT " A systematic approach to identify, measure and control risks that can threaten assets and earnings of oneself, a business or the organization” IMPORTANCE OF RISK MANAGEMENT...

RISK INS510 MANAGEMENT 10.0  DEFINITION OF RISK MANAGEMENT " A systematic approach to identify, measure and control risks that can threaten assets and earnings of oneself, a business or the organization” IMPORTANCE OF RISK MANAGEMENT Successful in producing a To enable an organization to progress toward its goal Achieving maximum desired or intended result and objectives in the most direct, efficient, and productivity with Without minimum wasted effective path. intervening effort or expense factors or barriers Direct Efficient Effective  RISK MANAGEMENT FORM ISLAMIC PERSPECTIVE Every human being who is the caliph (vicegerent) of Allah SWT must accept all His divine stipulations and give way to His Qada’ and Qadar (actions and reactions). Muslims are asked to work hard in order to be able to change their conditions as God says : "… Verily never will God change the condition of a people until they change it themselves (with their own souls)…" (Al-Qur'an Surah Al Rad 13:11). Aimed to reduce the utilization of resources (financial and non-financial) and to minimize the negative effects of risks or maximize the opportunities and goals. The goals must be aligned with the Shariah.  AL QURAN AND SUNNAH Bedouin and Camel The story of Hijrah Prophets Muhammad S.A.W once asked a Moving in a small group helps to mitigate and Bedouin who had left his camel untied, reduce the risk of being caught “Why do you not tie your camel?” The Battles of Khandaq Bedouin answered – “ I put my trust in Building the trenches around the city - another God”. loss prevention measure taken to stop the advancing forces of the enemies Prophet than said “Tied up your camel first, then put trust in God” PRIMARY OBJECTIVES OF RISK MANAGEMENT To preserve the operating effectiveness of the organization Primary Humanitarian goals Objectives To utilize cost, resources and social responsibility  PRE LOSS OBJECTIVES Required by law and regulators To reduce and minimize the impact of loss To reduce fear and worry  POST LOSS OBJECTIVES Reduce impact of loss to organization and society Survival of the organization – able to continue the operation Stability of earnings – business operation do not have to stop  RISK ASSESSMENT AND RISK MANAGEMENT TECHNIQUES RISK MANAGEMENT PROCESS Identifying existing and potential risks Evaluating potential risks Examining alternatives Risk Management techniques Selecting and implementing Risk Management program Evaluating, reviewing, controlling the Risk Management program 1. IDENTIFYING EXISTING AND POTENTIAL RISKS Process by which an organization / individual is able to learn of the areas in which it is exposed to risk. To develop information on sources of risks, hazards, risk factors, perils and exposures to loss. Since it is not easy to identify risks, everyone in the organization is responsible to identify loss exposures. There are nine (9) Risk Identification Tools available.  RISK IDENTIFICATION TOOLS The process to gain general knowledge about the goals and functions of Orientation organization, the practices and its operations. Designed to lead the risk manager to the discovery of risks through a series Risk Analysis detailed and related questions about the organization. Questionnaire A listing of common exposures that can be used effectively with other tools to Exposure reduce the chance of overlooking a serious exposure Checklist  RISK IDENTIFICATION TOOLS Insurance Policy Checklist A catalogue of the various policies or types of insurance that a given business might need Analysis of flow chart of the firm’s operation may alert the risk manager to Flow Chart singular aspects of the firm’s operations that give rise to special risks The assets listing in the balance sheet and income statement may alert the risk Financial manager to the existence of assets and expenses of company Statements  RISK IDENTIFICATION TOOLS An examination of the firm’s various operations sites and discussions with Inspections managers and workers Some information is not recorded in documents and exists only in the minds of Interviews employees. It can be conducted with internal and external parties Combination Approach All the tools listed are brought together to solve the problem 2. EVALUATING POTENTIAL RISKS Important to evaluate potential risks so that they can be categorized based on the degree of risks (frequency and severity) Risks can be classified into such high/low frequency and high/low severity Different level of risks required different risk management techniques to be applied (refer to Risk Matrix)  RISKS MATRIX Types of risks Low frequency HIgh frequency Low Severity Risk Retention A Loss Prevention B Loss prevention and loss Loss reduction if cost can reduction if the cost be justified justifies the benefits High Severity Risk Retention C Risk Avoidance D Loss prevention and loss Loss prevention and loss reduction if the cost reduction if possible justifies the benefits 3. EXAMINING ALTERNATIVES RISK MANAGEMENT TECHNIQUES RISKS AVOIDANCE Risk is proactively avoided after rational consideration. Possibility of loss = 0. If someone is afraid of risks, the best way to deal with it is to avoid it completely. Example: a manufacturer may stop production of a defective products to avoid a lawsuit.  LOSS CONTROL Loss Prevention Loss Reduction Reduce the number of l oss (Frequency) Reduce or lower the impact of losses (Severity) Can be used in two (2) circumstances : before and after loss. Either imposed by law or imposed by Example : Before a loss – installation of fire alarm, water sprinklers, fire extinguishers and etc. government and companies. Example : After a loss – salvage efforts in the restoration of a building burnt down by fire. Example : Fencing dangerous machinery to reduce the chances of employees being injured. Example : Used proper attires at workplace. SEPARATION Involves the dispersal of the firm’s assets in several locations instead of confining it to one major area. This measure will reduce the impact of losses should a major disaster occurs. Example : separation of head quarters and assembly plant in automobile industry.  CONTRACTUAL TRANSFER Incorporation Leasing Contract Hedging Hold-harmless Agreement The owner of the company An agreement where the An agreement to buy or An agreement between a transfers the risks to owner or landlord transfers sell a commodity at a retailer and a manufacturer corporation by registering the risks to the tenants. certain price to avoid whereby the later agrees to the company as losses due to price increase bear losses due to the partnership. or decrease. manufacturer of defective products thus relieving the retailer of any liability. RETENTION Retention – the company will bear the consequences of the loss. Risk or loss exposed are normally assumed or retained when their impact and consequences are not too great. In an organization, the ability to assume a risk depends on one’s financial ability. SELF INSURANCE Self insurance - the organization sets up a pool of fund to retain its loss exposures. Adequate financial agreement has to be made in advance of the occurrence of losses. The number of loss exposures must be large enough to ensure the mechanism of insurance to be operative. CAPTIVE INSURANCE A captive insurance company is an entity to write insurance arrangement for its parent company. The captive’s parent may be one company, several companies or an entire industry. Example: Sime Darby Group is the parent company of Sime AXA Assurance Sdn Bhd. INSURANCE Risk transfer mechanism. Transferring the financial consequences of potential accidental losses from an insured business or family to an insurer. In an insurance contract, the party exposed to the risks (the proposer/insured) pays the premium to the insurance company. In return, the insurance company agrees to pay a stated sum on the happening of certain risks specified in the contract. 4. SELECTING AND IMPLEMENTING RISK MANAGEMENT PROGRAM The selection may based on two (2) factors: Financial criteria – whether it will affects the organization’s profitability or rate of return. Non financial criteria – whether it affects the growth of the organization, humanitarian aspects and legal requirements. 5. EVALUATING, REVIEWING, CONTROLLING RISK MANAGEMENT PROGRAM Evaluate, review and control are important to the Risk Management process for two (2) reasons: Solutions that were appropriate in the past may no longer be Things Change appropriate. New risks emerge and old risks disappear. Risk exposures may be overlooked. Mistakes are Made Measures selected to address risks may not have been the most appropriate.