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Methods ofhandling Risk

A Presentation By

KARTHICK S



Methods of handlingbusiness risks

• Risks in any business are unavoidable and theycannot be eliminated completely. The variousmethods that may be used for handling businessrisks are as follows

o Loss Control

o Loss Financing

o

Internal Risk Reduction



Handling Risk

Loss Control

Reducing level ofRisky Activities

Increasing

Precautions

Loss Financing

Retention

Insurance

Hedging

Internal RiskReduction

Diversification

Investment in

Information



Loss Control• Actions that reduce the expected cost of losses by

reducing the frequency of losses and/ or theseverity of losses that occur are known as Loss

Control .

• This is also known as Risk Control.

• Two general approaches to loss controlo Reducing Level of Risky Activity

o Increasing Precautions against loss



Reducing level of Risk

• Exposure to loss can be reduced by reducing thelevel of risky activities.

• It primarily affect the frequency of losses.

• The main cost of this strategy is that it forgoes anybenefits of risky activity that would have been

achieved apart from the risk involved.

• Risk Avoidance



Increasing Precautions

• To increase the level of care for a given level of riskyactivity.

• To make the activity safer – goal

• Thorough testing for safety and installation of safety

equipment are examples of increased precautions.



Loss Financing• Methods used to obtain funds to pay for or offset

losses that occur are known as Loss Financing.

• This is called as Risk Financing.

• Methods in Loss Financing

o Retention

o Insurance

o Hedging



Retention• A business or individual retains the obligation to pay

for part or all of the losses.

• This is also known as Self-Insurance



Insurance• The typical insurance contract requires the insurer to

provide funds to pay for specified losses.

• Insurance contract reduce risk for the buyer bytransferring some of loss to the insurer.

• Insurers in turn reduce the risk through

diversification.



Hedging

• Financial derivatives, such as forwards, futures,options and swaps, are used extensively to managethe risks. Most notably Price Risk.



Internal Risk Reduction

• In addition to loss financing that allow businessesand individuals to reduce risk by transferring it toanother entity, business can reduce risk internally.

• Two main forms of Internal Risk reduction

o Diversification

o Investment in Information



Diversification

• Firms can reduce the risk internally by diversifyingtheir activities.

• Individuals also routinely diversify risk by investingtheir savings in many different stocks.



Investment in Information

• To invest in information to obtain superior forecastsof expected losses.

• It can produce more accurate estimates or forecasts of future cash flows, thus reducingvariability of cash flows around the predicted value.



Reference• Risk Management and Insurance by Harrington

Niehaus



Thank you

b&i karthick

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