Posts

Risk Financing

By -
Image
Risk Financing The objective of risk financing, the third element in the risk management process, is to have the necessary financial resources available following the occurrence of a loss so that the continuity of the operations of the firm or organization can be preserved. Basically, the finance alternatives include internal funds available to the firm and external fimding or compensation that can be obtained from other economic agents. Michael Smith in Williams and Heins (1989, Chap. 14 ) argued that restoring a damaged asset is rational when its restoration increases the market value of the firm. He explained that both the restoration and the commitment to restoration contribute to the value of the firm. The emphasis on restoration or 61 on replacement may explain the importance of insurance to finance contingent losses. According to Doherty (1985, p.30) when the loss financing arrangement is set in place in anticipation of a possible loss, the proc
Read more

Safety Management

By -
Safety Management Given society's increasing demands for personnel safety and health programs and product safety programs, it is apparent that risk control will certainly be the major function of risk management and the area where the greatest growth is likely to take place. Some of these approaches are principally geared to educating the public, the customers or the employees regarding their exposure to risks. It is interesting to note that, in many countries, the decision to implement a loss-control program is frequently imposed to the firm because the benefits that are realized extend beyond the enterprise itself and tend to benefit the whole society. Legal requirements do not themselves optimize safety, but they create a climate for the development of reliable means. Organized safety developed at the end of last century under the pressures created by the new worker's compensation laws in Germany (1885) and in Great Britain (1897). In the United S
Read more

Risk Measurement

By -
Image
Risk Measurement Once the risks have been identified, the risk manager must evaluate them. The process of creating data is known as measurement. This means measuring the potential size of the loss and the probability that it is likely to occur. Information is needed concerning two dimensions of each risk exposure:   (1) the frequency of occurrence and (2) the severity of the losses that will occur. Information is collected for the purpose of description of a phenomena, evaluation and prediction. It is usually desirable to !o1lJl1Dla1"ize the data by preparing frequency distributions. The presentation of data can bring a very useful information on the causes or consequences of a phenomena. Table 4.1 gives an example of the causes of accidental deaths in India. One difficulty that is encountered in the measurement process is that an event may give rise to both direct and indirect costs. Direct losses involve the direct costs associated with (1) pro
Read more

The Risk Management Process

By -
Image
The Risk Management Process Hamrd (or Risk) Identification One of the most critical functions of risk man agement  is probably the identification process. A failure to recognize the existence of one or more potential events can result in financial disaster. The importance of being able to anticipate the existence of the problem before it materializes is recognized by everyone but unfortunately there is no scientific method or systemic approach to the identification process. In the extreme case, the very existence of the risk may be unknown. In the past, exposure identification has largely been exercised in terms of those exposures that are insurable and in terms of the company past experience. The most difficult part of the identification process is that it requires that the manager be clairvoyant and continually asks "what if" questions. Williams and Heins (1989) define risk identification as "the process by which a business systematica
Read more

The Objective of Risk Management

By -
Image
The Objective of Risk Management According to asset pricing models in Finance, the risks specific to a firm are diversifiable and therefore irrelevant except as it affects  the firm's systematic risk. However, corporations are majors purchasers of insurance and financial futures and forward contracts, sign long-term purchase and sales contracts, and engage in a variety of activities to avoid or reduce risks. One explanation of this behavior is that asset pricing models are concerned only with the effect of risk on market discount rates and for the most part ignore its effect on expected cashflows. Property losses are often not the only losses that occur when property is damaged or destroyed. Until that property is replaced or restored to its initial condition, the business may suffer a reduction in its net income either because revenues are decreased or because expenses are increased or both. Any action taken by a firm that decreases risks, improves
Read more

The Evolution of Risk Management

By -
Image
The Evolution of Risk Management In an originally french published book in 1916, Henry Fayol identified risk management as a security function among the six basic functions of a business firm.! In 1931, the American Management Association established its Insurance Division for exchanging infOrmation among members. In 1950 the National Insurance Buyers Association was created which became in 1955 the American Society of Insurance Management (ASIM). In 1969 the name of the society'S magazine was changed from the National Insurance Buyers to Risk Management and in 1975 the name of the Society was changed to the Risk and Insurance Management Society (RIMS).2 Risk management has been re..<fiscovered by multinational firms in the United States after World War II. The general trend in the current usage of risk management probably began in the early 1950s. One of the earliest reference to the concept of risk management in the literature appeared in an
Read more

Insurance and Trade in Services

By -
Image
Insurance and Trade in Services The international character of insurance services relating to goods in international trade is not a recent phenomena. Transit-transport insurance as well as export credit insurance is often historically connected  with the pattern of international trade. The protectionism which has developed in almost all countries should be viewed as a decision to produce internal insurance services as opposed to importing these services. In developing countries, insurance was considered a macroeconomic tool and as such used by many governments to produce not only insurance services but also social and macreconomic objectives. The development of multinational operations has resulted in increasing demand for international insurance coverage. The ever increasing number, size and complexity of risks insured has enhanced the trend for international expertise and diversification. Political, legal and cultural environment as well as economic
Read more