Risk Management Chapter 2

Enterprise risk management
attempts to integrate the management of all of the firm’s pure and speculative risks
Risk management
represents the merging of three specialties: decision theory, risk financing, and risk control
Risk control
consists of those techniques that are designed to minimize, at the least possible costs, those risks to which the organization is exposed
Risk avoidance
takes place when decisions are made that prevent a risk
Risk reduction
consists of all techniques that are designed to reduce the likelihood of loss or the potential severity of those losses that do occur
Loss prevention
preventing the occurrence of loss; that is, on controlling the frequency
Loss control
lessening the severity of those losses that occur
Risk financing
consists of those techniques that focus on arrangements designed to guarantee the availability of funds to meet those losses that do occur
Risk retention
the “residual” or “default” risk manage- ment technique
Risk transfer
any method in which the risk is moved to a secondary party, such as the purchase of contract, hedging, as well as subcontracting
Risk sharing
risk is shared when there is some arrangement to share losses, sometimes viewed as a special form of risk transfer
Insurance management
a primitive form of risk management focused only on pure risks that are insurable
Financial risk management
management of all market, liquidity, and credit risks
Risk management process
can be divided into a series of individual steps that must be accomplished in managing risks using the following steps: determination of objectives, identification of risks, evaluation of risks, consideration of alternatives, implementation of the decision, evaluate
Determination of objectives
deciding what the organization would like its risk management program to do
Identification of risks
looking into the operations of the firm and determine the risks
Evaluation of risks
implies some ranking of the risks in terms of importance
Consideration of alternatives
consideration of the approaches that may be used to deal with risks and the selection of the technique that should be used for each one
Implementation of the decision
Putting the plan into action
permits the risk manager to review decisions and discover mistakes, ideally before they become costly
Insurance policy checklist
lists include a catalog of the various policies or types of insurance that a given business might need
Risk analysis questionnaires
sometimes called fact finders, are designed to assist in identifying risks facing an organization
Critical risks
include all exposures to loss in which the possible losses are of a magnitude that would result in bankruptcy
Important risks
include those exposures in which the possible losses would not result in bankruptcy but would require the firm to borrow in order to continue operations
Unimportant risks
include those exposures in which the possible losses could be met out of the existing assets or current income of the firm without imposing undue financial strain
Risk management policy
provides a basis for achieving a logical and consistent program by offering guidance for those responsible for programming and buying the firm’s insurance
Post-loss objectives
objectives that are designed to be implemented after the loss
Pre-loss objectives
objectives that are designed to be implemented prior to the loss
guarantee the continuing existence of the organization as an operating entity in the economy
Cost of risk
which is the total expenditure for risk management, including insurance premiums paid and retained losses, expressed as a percentage of revenues