09-14 - risk control - part 02.pptx

8/10/2019 09-14 - Risk Control - Part 02.pptx

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MFS 4023 RISK MANAGEMENT

By : Salman Bin Lambak


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Risk Reduction

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Types of Risk Reductions:-

1. Loss Prevention

2. Loss Control


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Loss Prevention

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Loss prevention efforts are aimed at preventing theoccurrence or loss.

Example: Vehicles anti-theft device is installed toprevent the vehicle being stolen


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Loss Control

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Loss control efforts can be directed toward reducingthe severity of those losses that do occur.

Example: Water sprinkler is aimed to reduce the firedamage to the building or content


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Risk Reduction

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Basic Principles of Risk Reductions:-

1. Timing

2. Measure


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Risk Reduction : Timing

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Risk control can be applied to act:-1. Before the occurrence, to reduce the likelihood of

happening2. During the occurrence, to reduce the severity3. After the occurrence, to reduce severity and further

consequential impact i.e. contingency plan, first aidprovision


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Risk Reduction : Measures / Mechanics

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Measure can be hard or soft:-1. Hard (physical) measures that alter the risk by physical

means, e.g. water sprinkler, theft alarm, locks and bolts.2. Soft (organizational and procedural) measures that are

aimed to ensure the people act in the appropriate way toreduce the risk, e.g. risk committee, security patrol andnon-smoking room.


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Risk Finance

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Risk finance is a form of risk treatment involvingcontingent arrangements for the provision of funds tomeet or modify the financial consequences should

they occur. Risk financing is not generally considered to be the provision of

funds to meet the cost of implementing risk treatment.

as defined by ISO/IEC Guide 73; see page 11 @ 17


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Risk Finance : Transfer / Sharing

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Risk transfer / sharing is form of risk treatmentinvolving the agreed distribution of risk with otherparties.

It can be carried out through insurance or otherforms of contract.

The extent to which risk is distributed can depend onthe reliability and clarity of the sharing arrangements.


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Types of Transfer

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Non Insurance Transfer

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It may be possible to transfer a risk to another partyin a contract.

For example, a landlord might make a condition of alease that the tenant be responsible for any damage tothe premises.


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Insurance Transfer

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Insurance is the most widely used of all risk transfermethod.

It is a mechanism by which an organization canexchange its uncertainty for greater certainty.

The details of insurance will be elaborated in next

chapter.


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Insurance Transfer

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Like any other risk treatment method, insurance isnot perfect.

A residual risk will usually remain for the customer,whereby:-1. Some events may be excluded by policy conditions2. A proportion of loss will be carried by the insured in the form

of deductible3. The insurance company itself may become insolvent and fail

to pay the claim


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ART (Alternatives Risk Transfers)

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ART is a name given to a range of instruments thatenable an organization to transfer financial risk to aprofessional risk carrier other than by way of a

conventional insurance contract.


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Instruments of ART:-1. Derivatives:

It is a forward contract that will enable someone to buy or sell aspecified asset at a specified date in the future and at a specified

price. Example is an earthquake. One such contract could be triggered

by an earthquake of a magnitude in excess of, say 7.1 on theRichter scale occurring within the defined latitude and longitude,and within a defined period.


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Instruments of ART:-2. Catastrophe bonds: It is an investment bonds that provide a return to investors that is

based on insurance type events rather than financial market

development.

3. Catastrophe Risk Exchange (CATEX): It is an electronic system for trading insurance risk. Licensed risk

bearers exchange or swap catastrophe exposures offered by other

subscribers. For example, insurers and reinsurers may exchange a Japanese

earthquake risk for a Florida hurricane risk.


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Instruments of ART:-4. Loans: Borrow funds after a catastrophe has occurred to help it meet the

extra costs that emerged.

5. Put Options: It is sold by a financial institution to the organization. The effect is

that the option, or a contracted right to act, will become effectivefollowing certain specified events. The damaged organization then

could use the contracted right to sell a pre-agreed level and type ofequity to the financial organization that provided the option.


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Instruments of ART:-6. Mutual: Some industries find value in avoiding the insurance market by

creating a mutual company that can be used to share risks across

the sector. Examples include pools for the oil industry, marinerisks and others.

7. Combination of ART 1 - 6


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Risk Finance : Risk Retention

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It means an acceptance of the potential benefit ofgain, or burden of loss, from a particular risk

Risk retention includes the acceptance of residualrisks1

The level of risk retained can depend on risk criteria2

1 Residual risk is the remaining after risk treatment. It can contain unidentified risk. Theresidual risk can also be known as retained risk.

2 Risk criteria are based on organizational objectives, and externaland internal context


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Risk Retention : Types

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1. Self Insure2. Captive


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Self Insure

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Self Insure was previously related to risks which arenot covered by insurance.

But now, the scope becomes wider which that theindividual or organization retains the risk on theirowns for many reasons.


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Self Insure

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Reasons for self-insurance:-1. Cost of insurance, be it short term or long run, exceed average

losses.2. The organizational may also believe that the loss experience is

better than the average loss experience of other same nature.3. The amount spent for insurance may more worth to be

invested.


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Self Insure :- Types

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1. Handles as an expense In this approach, the organization decides that no separate

funding is necessary. The losses, such as collision damage totheir motor vehicle, are handled as part of the running

expenses.

2. Loans The organization may choose to rely on a loan if a loss occurs.

This saves of insurance premiums, but it has its drawbacks i.e.the organization may be weakened by the loss.


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Self Insure :- Types

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3. Contingency Fund A special fund may be set up to pay for the loss, using all or part

of the money that would have been paid out as an insurancepremium. This has the attraction that the organization will

benefit from any investment income if the contingency neveroccurs.


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Captive

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A captive is an insurance company that has been setup by the organization to insure its own risk, althoughsome may actually accept risk for profit from other

organizations.


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Captive

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Captive perform a number of roles:-1. They are a formalized method of self-insurance for high

frequency risk that can be carried by the company itself in atax efficient way.

2. They are also used as a financing instrument for very specificlow frequency / high severity risk.

09-14 - risk control - part 02.pptx

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