Risk Assessment

Nature of risk management activitiesNature of risk management activities

Currency hedgingCurrency hedging Capital budgetingCapital budgeting Public relationPublic relation Employee assistance & trainingEmployee assistance & training Government lobbyingGovernment lobbying Service marketingService marketing Mergers & acquisitionsMergers & acquisitions

Nature of risk management function.Nature of risk management function.Traditional or conventional view of risk mgtTraditional or conventional view of risk mgtTotal risk managementTotal risk management

Four sources of failures areFour sources of failures are Hardware failureHardware failure software failuresoftware failure organization failureorganization failure human failurehuman failure

Corporate risk managementCorporate risk management Theory view of risk mgt functionTheory view of risk mgt function Risk management decisionRisk management decision Financial decisionFinancial decision

Elements of organization risk managementElements of organization risk management::

Risk management vary among organization, Risk management vary among organization, certain element would be common.certain element would be common.

Mission IdentificationMission Identification Risk assessment Risk assessment Risk controlRisk control Risk financingRisk financing Program administrationProgram administration

Risk assessmentRisk assessment Risk identification: It is a process by which an Risk identification: It is a process by which an

organization is able to learn the area inorganization is able to learn the area in which it is exposed to risk.which it is exposed to risk.Identification techniques areIdentification techniques are::

Sources of riskSources of riskHazardsHazardsRisk factorsRisk factorsPerilsPerilsExposure to loss.Exposure to loss.

Sources of riskSources of riskPhysical EnvironmentPhysical EnvironmentSocial EnvironmentSocial EnvironmentPolitical EnvironmentPolitical EnvironmentLegal EnvironmentLegal EnvironmentOrganizational EnvironmentOrganizational EnvironmentEconomic EnvironmentEconomic EnvironmentCognitive EnvironmentCognitive Environment

Identification of exposuresIdentification of exposures

Risk identification is exposures identificationRisk identification is exposures identificationFour categories of risk exposuresFour categories of risk exposures Physical asset exposuresPhysical asset exposures Financial asset exposuresFinancial asset exposures Liability assets exposuresLiability assets exposures Human asset exposuresHuman asset exposures

Check list used in risk identificationCheck list used in risk identificationRecognizing source of risk.Recognizing source of risk.Careful analysis of internal and external environment.Careful analysis of internal and external environment.Identification of hazards, risk factor, peril and exposures to risk.Identification of hazards, risk factor, peril and exposures to risk.Supplemental techniquesSupplemental techniques

Financial techniquesFinancial techniques The flow chart methodThe flow chart method On site inspectionsOn site inspections Planned interaction with other departmentPlanned interaction with other department Interaction with outsider-supplier and professional organisizationInteraction with outsider-supplier and professional organisization Contract analysisContract analysis Stastical analysis of loss recordsStastical analysis of loss records Incident reportsIncident reports Hazard analysisHazard analysis

Risk measurementRisk measurementEvaluate a risk importance to organization and to individual.Evaluate a risk importance to organization and to individual.Risk measurement requires risk managersRisk measurement requires risk managers

1.1. Develop yardstick for measuring importance of risk to Develop yardstick for measuring importance of risk to organizationorganization

2.2. Apply these yardstick to risk which have been identified.Apply these yardstick to risk which have been identified.No single measurement techniques or method have been developed No single measurement techniques or method have been developed

that applies to all area of exposure to riskthat applies to all area of exposure to risk Statistical techniques can be appliedStatistical techniques can be applied Direct and indirect effectDirect and indirect effect Dimension of exposure to risk-Dimension of exposure to risk-loss frequencyloss frequencyLoss severityLoss severity Probable maximum loss(PML)-the worst loss that is likely to occur Probable maximum loss(PML)-the worst loss that is likely to occur

in a time period or because of a single event.in a time period or because of a single event.

Risk analysis exposures of physical Risk analysis exposures of physical assetasset

Physical asset-3different typesPhysical asset-3different typesValuation Valuation Direct and indirectDirect and indirectTime elementTime elementTypes of physical asset exposure-risk can be classified Types of physical asset exposure-risk can be classified into four waysinto four ways

1.1. Class of property affectedClass of property affected2.2. Cause of the gain or lossCause of the gain or loss3.3. Outcome direct or indirect or time elementOutcome direct or indirect or time element4.4. The nature of organization interest in the propertyThe nature of organization interest in the property

Risk analysis exposures of physical Risk analysis exposures of physical assetasset

Property classProperty class may be divided into two may be divided into two1.1. Real estate-vacant land ,office building, Real estate-vacant land ,office building,

manufacture plant, ware housemanufacture plant, ware house2.2. Personal property-machine , furniture Personal property-machine , furniture

and fixtures, raw material finished goods.and fixtures, raw material finished goods. movablemovable Not attached to landNot attached to land

Risk analysis exposures of physical Risk analysis exposures of physical assetasset

Cause of the exposure outcome –in term of Cause of the exposure outcome –in term of physical asset –physical asset –loss or gainloss or gain may be divide may be divide into threeinto threePhysical Physical Social Social economiceconomic

Risk analysis exposures of physical Risk analysis exposures of physical assetasset

Direct, indirect and time element outcomeDirect, indirect and time element outcomeDirect –fire occurred to houseDirect –fire occurred to houseIndirect-staying in hotelIndirect-staying in hotelTime element-loss occur when property Time element-loss occur when property cannot be used following direct losscannot be used following direct lossExample-land lord cannot get loss rentalof Example-land lord cannot get loss rentalof apartment building cannot be occupied apartment building cannot be occupied following fire damage.following fire damage.

Risk analysis exposures of physical Risk analysis exposures of physical assetasset

Interest in propertyInterest in propertyOwnersOwnersSecured creditorsSecured creditorsVendors Vendors TenantsTenantsBaileesBaileesRepresentative property of ownersRepresentative property of ownersOther intrestsOther intrests

Risk analysis exposures of physical Risk analysis exposures of physical assetasset

Valuation of potential physical asset lossesValuation of potential physical asset lossesObject is to estimate the economic burden of Object is to estimate the economic burden of

damage on organization ownerdamage on organization ownerDiff between firm value to market valueDiff between firm value to market valueValuation method-Valuation method-market valuemarket valueReplacement cost newReplacement cost newReplacementcost-depressiationReplacementcost-depressiation

Risk analysis exposure of financial assetsRisk analysis exposure of financial assetsTypes of financial assets: Types of financial assets: By individual, business, government.By individual, business, government. Common stockCommon stock DebentureDebenture Zero coupon bondZero coupon bond Reverse bondsReverse bonds FutureFuture OptionsOptions SwapsSwaps Preferred stock.Preferred stock.

Risk analysis exposures of financial Risk analysis exposures of financial assetasset

Assessment of riskAssessment of riskLayer of riskLayer of riskInterest rate riskInterest rate riskValue at riskValue at riskSingle asset and portfolio applicationSingle asset and portfolio application

Risk analysis exposures of human Risk analysis exposures of human assetasset

Loss of human asset –direct economic effect on Loss of human asset –direct economic effect on organization organization Risk manager should give interest to Risk manager should give interest to

The issues of cost efficiencyThe issues of cost efficiency Sense of employer responsibilitySense of employer responsibility Public relationPublic relation Compliance with government regardsCompliance with government regards Employer sponsored programEmployer sponsored program Possible gain from exposure of human assetPossible gain from exposure of human asset

Risk analysis exposures of human Risk analysis exposures of human assetasset

Assessing of human assetAssessing of human assetLoss frequency-houseLoss frequency-house hold-risk exposure-death hold-risk exposure-deathPoor healthPoor healthOld ageOld ageOther type of unemploymentOther type of unemploymentLoss severity-potential loss of earningsLoss severity-potential loss of earningsThe need approachThe need approachCost of medical careCost of medical careAssessing direct exposure of organizationAssessing direct exposure of organization

Risk analysis exposures of legal liabilityRisk analysis exposures of legal liabilityTypes of lawTypes of lawA.A. Criminal LawCriminal LawB.B. Civil LawCivil Law1.1. Liability arising from ownership, possession of land.Liability arising from ownership, possession of land.2.2. Liability arising from public & private nuisance.Liability arising from public & private nuisance.3.3. Liability arising from sale, manufacture, distribution or Liability arising from sale, manufacture, distribution or

service. service. 4.4. Liability arises from negligence.Liability arises from negligence.5.5. Liability arising from professional liabilityLiability arising from professional liability6.6. Liability arising from agencyLiability arising from agency7.7. Liability arising from bailee liability exposureLiability arising from bailee liability exposure8.8. Liability arising from contract liabilityLiability arising from contract liability9.9. Liability arising from employmentLiability arising from employment10.10. Liability arising from work related injuryLiability arising from work related injury11.11. Liability arising from motor vehicleLiability arising from motor vehicle

Risk measurementRisk measurementQualitative assessment of exposureQualitative assessment of exposure

Loss frequencyLoss frequencyLoss severityLoss severity

Numerical estimatesNumerical estimatesBudgetBudgetForecast future effectsForecast future effects

Claim estimationClaim estimationClosed, open, reverse, loss development Closed, open, reverse, loss development method, structured, present valuemethod, structured, present value

Maximum probable cost: The highest cost Maximum probable cost: The highest cost level the risk manager believes is likely to level the risk manager believes is likely to prevail during the yearprevail during the year

MPC depends on two factorMPC depends on two factor

Dispersion of actual to expected valueDispersion of actual to expected valueRisk toleranceRisk tolerance