RISK MANAGEMENT & INSURANCE

M.RAJARAM J.B.BODA INSURNACE BROKERS PRIVATE LIMITED NEW DELHI

ROUTE MAP FOR THE SESSION

DEFINE RISK AND MANAGEMENT ROLE OF EACH OF THE PARTY RELATED TO INSURANCE; INSURED;INSURER;BROKER NEED FOR IMPLEMENTING RM ADVANTAGES OF HAVING RM CLASSIFICATION OF RISKS PURE RISKS MANAGEMENT CORPORATE RISK MANAGER AND HIS ROLE

CONTD.
PERSONAL ATTITUDES OF INDIVIDUALS CORPORATE RISK MANAGEMENT - RISK MANAGEMENT DEPARTMENT RISK HANDLING METHODS RISK IDENTIFICATION RISK EVALUATION/ QUANTIFICATION RISK AVOIDANCE RISK MINIMISATION RISK TRANSFER RISK FINANCING FOR RISK RETENTION ROLLING REVIEW

1. 2. 3. 4. 5. 6. 7.

CONTD
CONTINGENCY PLANNING DISASTER CONTROL MUTUAL AID INCIDENT / ACCIDENT INVESTIGATION INTERACTION WITH INSURERS/ ENGINEERS/ SURVEYORS CAPTIVE INSURANCE COMPANIES ASSOCIATIONS/ CLUBS/

RISK- DEFINITION
Risk is defined as the chance of having a loss due to occurrence of an event The risk is always associated with the loss aspects since the word itself has the association of DANGER OF LOSS The definition can be PROBABAILITY OF THE OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN

RISK AND MANAGEMENT

RISK- CHANCE OF AN EVENT HAPPENING RESULTING IN LOSS/ GAIN TO APPRECIATE THE NEED FOR LOSS PREVENTION AND IMPLEMENT MEASURES TO ACHIEVE THE SAME THE EFFORTS ARE AIMED TO PREVENT A LOSS HAPPENING BUT ALSO TO MAKE IT MANAGEABLE IF IT HAPPENS THIS ASPECT IS TO BE ACHIEVED IN ALL ACTIVITES OF THE ORGANISATION BE IN PRODUCTION, STORAGE, HANDLING, TRANSPORTATION AND DISTRIBUTION

EFFECTS OF RISK
Risky situations are to be faced by those who are deploying their Capital & RESOURCES in any VENTURE ( is it an ADENTURE?) Adventure means venturing into some area which may have serious effects on the well being of the resources All Industries / Business do face such situations every day in their activities HENCE RISK MAY BRING IN LOSS IN CASE OF AN ACCIDENT / UNTOWRD HAPPENING BUT CAN BRING IN PROFITS IN THINGS GO IN THE WAY THESE ARE EXPECTED TO HAPPEN

Risk Management- Macro

Provision of adequate infrastructure, trained personnel and capability to mitigate huge losses due to disasters natural & man made will be the main area for macro analysis by the Government Natural disasters result in huge devastation and loss of human lives Bhopal tragedy had put India in Guinness book of world records as one of the big tragedies of the world

Risk Management-Macro
Pollution is now causing the maximum concern & affects the health of citizens and young population- Solid, water, air We need to improve the public hygiene awareness and the way in which we are soft targets for epidemics due to pollution Past earthquakes in Maharastra & Gujarat had shown how ill prepared we are Every year the country is ravaged by floods in many parts and drought in some parts- interconnection of rivers remains a distant dream- water may become one of the major sources of trouble in this country Infrastructure is looked into only after development and government is then unable to acquire the land required

Risk Management-Macro
Allowing too many Airlines without runways has only resulted in air congestion and pollution of air at higher level We are contributing to global warming, unpredictable weather conditions, hole in the ozone layer which nature has provided to shield us from ultra-violet radiation Unscrupulous destruction of forests and creation of concrete jungles has resulted in ecological imbalance

RISKS A BUSINESS FACES

ENVIRONMENTAL RISKS-LEGAL, SOCIAL, ECONOMIC, FINANCIAL RISKS CHANGES IN BUSINESS, SPECULATIVE RISKS,TECHNOLOGICAL CHANGES PURE RISKS FUNDAMENTAL RISKS

STEPS IN MANAGEMENT
PLAN ORGANISE DELEGATE MOTIVATE TRAINING CONTROL COURSE CORRECTIONS ACHIEVE THE GOALS

EFFECTS OF PURE RISKS ORGANISATION FACES

D.LOSS OF KEY EMPLOYEES BODILY FATAL/NON-FATAL TO EMPLOYEES

A.LOSS OR DAMAGE TO PROPERTY LOSS EVENT

C.LIABILITY LOSSES

B.PECUNIARY LOSSES (FINANCIAL)

Details A.Loss /dge to property

Fire & explosion Storm, cyclone, hurricane, flood/inundation SRCC Accidental damages Breakdown losses

Financial losses
Business Interruption Loss of profit Continuing fixed costs Cost of alternate accomodation Increased cost of working Increase in cost of replacement of assets following loss/damage/destruction Under insurance/absence of insurance

Liabilities
to general public to users due to defective products to employees as employer as tenants other legal liabilities due to their acts-Directors/ Officers

Human resources
Fatal or non-fatal injuries Loss of key/ trained employees Loss of earnings due to disablement Hospitalization and medical expenses Travel ( inland and overseas)

EFFECTS OF SPECULATIVE RISKS ORGANISATION FACES

LOSS OF KEY EXPERIENCED EMPLOYEES
SPECULATIVE RISKS INCREASED FIXED CHARGES/ LOSSES LOSS OF CUSTOMERS /SUPPLIERS

LOSS OF REVENUE DUE TO LOSS OF MARKET SHARE

Risk Management- Definition

Risk Management is defined as the systematic way of ensuring protection of business resources and income against losses so that the aim , goals and vision of the company can be reached. Thus Risk Management creates stability and contributes to growth and assures profitability of the Organisation.

AIM OF RISK MANAGEMENT

TO SUCCESSFULLY ACHIEVE THE OBJECTIVES OF THE ORGANISATION ACHIEVE THE COMPANYS MISSION ACHIEVE THE SHORT TERM AND LONG TERM GOALS OF THE ORGANISATION SATISFACTION OF CUSTOMERS, MANAGEMENT, EMPLOYEES AND SHARE HOLDERS & GOVERNMENT

RISK MANAGEMENT
This is of very recent origin ( less than three decades old) This is now being considered as a managerial topic and as aspect in which the top management should get involved to reduce any adverse effects on the balance sheets. RM can be described as the scientific way of dealing with or handling the risks. This is done by Risk Analysis, Risk Control, Risk Transfer, Risk financing and rolling review

ICEBERG OF LOSSES
INSURED LOSSES

UNINSURED LOSSES

UNINSURED LOSSES
LOSS OF GOODWILL LOSS OF MARKET LOSS OF CUSTOMERS LOSS OF SHAREHOLDER VALUE LOSS OF KEY EMPLOYEES LOSS OF COSTS INCURRED

THE R M IMPERATIVES
RISK NEEDS PERCEPTION RISK ANALYSIS RISK ASSESSMENT RISK MINIMISATION/CONTROL RISK IMPROVEMENT SHARE INDUSTRY EXPERIENCE SHARE INFO ON CHANGES - BOTH CURRENT & PROSPECTIVE

THE R M BEST PRACTICES ?

INVOLVE ALL PLAYERS EDUCATE, CONTINUOUSLY INVOLVE CORE & NON-CORE INVOLVE FINANCIAL PERSONNEL INVOLVE SAFETY PERSONNEL INVOLVE FIRE SERVICE PERSONNEL INVOLVE BUSINESS PARTNERS INTERACT, CONSTANTLY -

PROACTIVELY

THE RISK MANAGERS DOS

ALWAYS ADDRESS CHANGE & CONTENT MANAGEMENT AT ALL TOUCH POINTS REGULATORY/INSURER/INSURED/ INTERMEDIARY/SURVEYOR ADDRESS DELAY POST-HASTE COMMUNICATE CONTINUOUSLY GET REAL NO EXAGGERATIONS/BLUFFING GET YOURSELF PROFESSSIONALLY RESPECTED CONTINUOUS EDUCTION

THE RISK SPECTRUM

ENIRONMENTAL RISKS STATUTORY RISKS LEGAL RISKS TECHNOLOGICAL RISKS HUMAN ELEMENT PRODUCTION/ FINANCIAL/MARKETING MARKET RISKS TIME FACTOR

THE RISK SPECTRUM

PROJECT RISKS STORAGE RISKS ERECTION & MAINTENANCE RISKS OPERATIONAL RISKS STORAGE RISKS TRANSPORTATION RISKS OUTSOURCING RISKS

ALVIN TOFFLER
ILLITERATES ARE NO LONGER THOSE WHO CANNOT READ AND WRITE, BUT THOSE WHO CANNOT LEARN, UNLEARN & RELEARN
QUICKLY & CONSTANTLY

PURPOSE OF RISK MANAGEMENT

RISK MANAGEMENT AIMS TO PROVIDE AN INCIDENT FREE AND ACCIDENT FREE ENVIRONMENT FOR ACHIEVEING THE OBJECTIVES OF THE ORGANISATION RISK MEANS UNCERTAININTY OF THE OCCURRENECE OF AN EVENT WHICH MAY RESULT IN LOSS/GAIN IMPORTANT CHARACTERISTICS ARE THE UNCERTAINITY/ SEVERITY OF SUCH LOSSES

ADVANTAGES OF RM
To achieve the objectives of the Organisation To ensure that the goals short term and long term are achieved without any disruption or delay To optimise the utilisation of the resources To have knowledgeable insurance arrangements and have considered decisions on insurances not to be availed

ENVIRONMENTAL RISKS
Risks which are to be faced which are external but influence the working and health of the Organisation These are called Environmental Risks Legal Social- Riots/Strikes/Bandh Political-Change in the political systems of Governance and Management-tensions with neighbours Economical- Soaring Oil prices

MANAGEMENT
ALL ABOUT ASPECTS OF SUCCESSFUL MANAGEMENT OF RISKS BOTH PURE AND SPECULATIVE RISKS PROPER PLANNING ORGANISE THE AVAILABLE RESOURCES COORDINATION DELEGATION MOTIVATION DECISION MAKING ROLLING REVIEW

CLASSIFICATION OF RISKS
SPECULATIVE RISKS & PURE RISKS

DYNAMIC RISKS & STATIC RISKS

FUNDAMENTAL RISKS PARTICULAR RISKS

CLASSIFICATION OF RISKS
SPECULATIVE RISKS Operation of this leads to profit /loss Leads to speculation like investment of capital in a new venture Operation is desired
PURE RISKS
These do not change with the risk The operation of these perils does bring in loss/damage to property/assets/ liability Not desired

Dynamic risks Changes with the change in fashion, buying behaviour, trends, technology etc It denotes dynamic nature of the customer behaviour and the products they like to own or use If an organization is not prepared then it may go out of existence

Classification of Risks

Static risks Like pure risks these risks remain static and do not change due to other reasons like that of dynamic risks The operation of these risks always bring about losses Operation is not desired May result in partial or total cessation of activities

CLASSIFICATION OF RISKS
PARTICULAR RISKS Risks which relate to one or few firms, factories or organisations only Losses are suffered by one or few more members of the society
FUNDAMENTAL RISKS Relates to the society at large Losses are suffered by large section of the society/nation(s) Losses may be due to natural catastrophes, riots, epidemics etc

Development of Risk Management

The Industries / Business houses want to have incident free/ accident free working to achieve their objectives For this purpose it is necessary to understand the loss producing events , the nature of losses/ extent of losses to come up with the loss control measures.EXPOSURE ANALYSIS Risk Management aims to help the owners to have control on loss incidents and to reduce the extent of losses by proper study of the exposures and actions to be taken to control the same This as a science had developed in about thirty years period

Risk Management process

The steps in Risk Management process are: 1. Risk analysis- Risk identification & Risk evaluation (Risk measurement) (Risk quantification) 2. Risk control - Risk avoidance (Risk minimization) 3. Risk transfer- Insurance with Professional Insurance companies 4.Risk financing- Risk retention 5. Rolling review

How the loss is caused?

Loss is caused by the operation of perils which refers to the causes for the losses Loss or damage is caused by the operation of perils such as fire, explosion, flood, storm etc The loss potential ( extent of loss) depends on conditions which are favourable for the incident to assume large proportions. This is known as hazard or potential of the loss. More the potential severe will be the extent of loss PERIL ( CAUSE)----------------LOSS(EFFECT) HAZARD

Causes of losses
Perils- such as fire, explosion etc Human factors- such as negligence, carelessness, inadequate training, inadequate supervision, lack of proper systems and controls Inadequate maintenance ( predictive/ routine/ annual maintenance) Failure of Plant/ machinery due to breakdowns (failure of safety devices) Natural perils such as flood, cyclone, earthquake, landslide, rockslide & subsidence Extraneous: Accidents involving Gas or chemical in nearby units

HAZARD
Hazard is defined as conditions existing which are favourable for the loss becoming severe CLASSIFICATIONS OF HAZARD Physical hazard-Originating hazards Contributory hazards Tertiary hazards Moral hazards -relating to the moral behavoiur of the clients Morale hazard -Relating to the morale & working conditions of the employees & employeremployee relationships

RISK ANALYSIS
Needs to be done by a person who is conversant in the identification and measurement The severity of the risk depends on two factors extent and frequency ( probability)ranges from 0-1 There are various methods to analyze the extent of loss The frequency is to be analyzed based on the analysis of data ( loss events and the frequency ) using statistical methods

RISK ANALYSIS- METHOD

LIST ALL POSSIBLE RISKS INVESTIGATE BY STUDY INQUIRY DOCUMENT REVIEW PHYSICAL INSPECTION ANALYSE EACH RISK

RISK PERCEPTION
RISK

RISK APPETITE
Risk Seeker
Neutral toward risk

Risk averter

Loss in Rupees

RISK CONTROL
PRESERVE CONTINUITY OF OPERATION UNDER SAFE OPERATING CONDITIONS PROPER PLANNING LAYOUT OF BUILDINGS/PLANT/MACHINERY BUILD IN SAFETY TO AVOID LOSSES TO PERILS SUCH AS FIRE, EXPLOSION NATURAL OR HUMAN NEGLIGENCE CAUSING SERIOUS LOSSES

RISK ANALYSIS
Property losses- losses which can happen to the Assets Pecuniary losses- Financial Loss which can be caused by business interruption due to the loss to the assets, financial loss due to infidel acts of employees, storekeepers and other employees Liability losses- Loss to the Third Party property or third party personnel ( also known as TPPD and TPBI) due to activities of the Organisation Personal injuries- accidents resulting in fatal or non-fatal injuries to the employees

METHODS OF RISK ANALYSIS

HAZOP STUDY- HAZARD OPERABILITY EVENT ANALYSIS THREAT ANALYSIS INPUT- OUTPUT ANALYSIS FAULT TREE ANALYSIS

RISK EVALUATION
Methods available are Study of Organisational charts/ balance sheets, accounting records Process flow diagrams, P & I diagrams Input- output analysis- contribution from various sections, inter-dependencies Study of completed checklists Threat analysis- Denial of access, Loss of services

EVALUATION METHODS
INPUT OUTPUT ANALYSIS TO TRACE THE FLOW OF GOODS AND SERVICES TO IDENTIFY THE CONTRIBUTION OF PARTS OF ORGANISATION TO THE TOTAL EARNINGS AND TO ANALYSE EXPOSURES

EVALUATION OF RISKS-THREAT
ANALYSE THE THREATS TO BUSINESS DENIAL OF ACCESS- CHEMICAL LEAKAGE, COLLAPSE OF NEARBY BUILDINGS, STRIKE, PICKETING, DAMAGE TO WATER/SEWER MAINS, GOVT RESTRICTIONS LOSS OF SERVICES WATER, POWER,RAINS, FLOODS, CYCLONES

EVALUATION OF RISK-THREAT
EVENT ANALYSIS INVESTIGATE CAUSES AND EFFECTS FAILURE OF BOILER EXPLOSION FAILURE OF A CRITICAL ITEM EXPLOSION IN PRESSURE VESSEL HAZARD LOGIC TREES- VARIOUS HAZARDS WHICH MAY RESULT IN OPERATION OF A PERIL LEADING TO LOSS

HAZOP ANALYSIS
MEANT FOR CHEMICAL PLANTS HAZARD OPERABILITY STUDIES EFFECT OF MORE OF, LESS OF, PART OF , NONE

FAULT TREE ANALYSIS

EXAMINE RELATIONSHIP OF VARIOUS TYPES OF FAILURES THE TREE IS CONSTRUCTED BY ASKING WHAT MUST OCCUR BEFORE A LOSS PRODUCING EVENT HAPPENS EXPLOSION REQUIRES- FORMATION OF EXPLSOIVE MIXTURE- CLOUD FORMATION- SOURCE OF IGNITION PROBABILITY ANALYSIS WILL HELP IN APPRECIATON OF THE RISK INVOLVED

SAFETY AUDITS
THOROUGH KNOWLEDGE TEAM OF EXPERIENCED OFFICIALS WALK IN AUDIT EXAMINATION OF THE STANDARDS HOUSEKEEPING SECURITY, TRAINING AND PREPAREDNESS OF EMPLOYEES,MEANS OF ESCAPE

RISK EVALUATION-CONTD.
Event analysis- Effects of a loss producing event Hazard Logic Tree- Risk and effects Hazard Operability studies- more of , less of, none of, part of, Fault tree analysis- Explosion, Safety audits- Physical inspection

RISK HANDLING METHODS

ADOPTION OF LOSS CONTROL MEASURES Loss control measures involve the nature of the devices utilized and the human factor For any system to be effective the employees concerned need to be properly trained and knowledgeable. The Management need to ensure that the systems employed are in good working order the employees are regularly trained.

RISK AVOIDANCE
This is also known as Risk Elimination Identify the risk and if possible avoid the risk by eliminating the source It is like avoiding a location due to seismic activity in the area Avoiding a low lying location which is susceptible for flooding

RISK MINIMIZATION-RISK CONTROL

If risk can not be eliminated then it is necessary to minimize the extent of loss/damage/liability by employing loss control measures Utilizing fire fighting measures like detectors/ hydrants/sprinklers Using CCTVs/ watch & ward to ensure adequate security Employees need to be well trained for fire fighting operations Employing proper checking /screening systems/ regular and its inventory controls Checking the antecedents of persons employed

RISK RETENTION
To keep the costs under control, after analyzing the risks the Management, may decide to retain some of such losses to its account. Once a decision is taken , then necessary provision needs to be made to avoid such a loss ,if happens, eating into the operating budget Special contingency funds are therefore to be created for this purpose

EFFECT OF LOSSES
Huge losses will upset the functioning of the Power Station Besides the interruption losses, the loss of goodwill, investigation by Government and other agencies will be tedious The direct impact of any incident is in the monetary loss and in restarting of the affected unit. Employees morale gets affected

RISK MANAGEMENT POLICY

The RMP is to be adopted by the Management The Policy details should be communicated to the employees The need to have the RMPolicy should be felt by the employees The Corporate Risk manager is responsible for the implementation of the RM Plan The RM Dept will produce its own report and follow it up with an annual report on its performance

CORPORATE RISK MANAGER

The Corporate risk manager is essentially the coordinator . He has to analyze the various activities and find out the risks involved and analyze which are to be controlled, avoided and which are to be insured. Once the plans are finalized and adopted by the Management , the Insurance dept ensures that the insurance policies are obtained and maintained during the annual period Periodical reviews need to be done to ensure that the risks are analyzed and necessary modifications are done to suit the organization's policies.

CONTINEGENCY PLANNING
IDENTIFICATION OF ALTERNATE SOURCES IDENTIFICATION OF KEY AREAS PLANNING FOR COMEBACK IN SHORTEST POSSIBLE TIME BACKUPS OR DUPLICATE RECORDS OF VITAL INFORMATION TO BE MAINTAINED IN ALTERNATE SAFE LOCATIONS

INCIDENT /ACCIDENT INVESTIGATION

ALL INCIDENTS WHETHER THESE RESULT IN AN ACCIDENT OR NOT NEED TO BE REPORTED AND ANALYSED TO AVOID A FURUTE LOSS OR RECURRENCE. ALL LOSSES NEED TO BE STUDIED WHETHER SMALL OR MEDIUM OR BIG WITH A VIEW TO LEARN THE CAUSES AND TO ENSURE THAT PREVE

CONTRIBUTIONS OF RM TO THE BUSINESS

Achievement of objectives/ goals Reduced anxiety due to losses are of reasonable magnitude and does not cause serious loss situations Goodwill is maintained by meeting the obligations The business is able to survive competition Successful and continued operations Resultant growth and sustained earnings Better care for employees and society at large Reduction of expenses Better relationships between customers, suppliers, employees

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