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RISK ANALYSIS AND MANAGEMENT
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RISK ANALYSIS AND MANAGEMENT
Guiding questions
Introduction
People undertake business activities with
the main objective of making profit.
As there is a chance to get profit, there is
also a possibility of loss due to one of the
essential characteristics of a business in that
it involves an element of
risk.
Risk exist because there is no perfect foresight about
the future.
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RISK ANALYSIS AND MANAGEMENT
INTRODUCTION
Risk is undesirable and its consequences are at times damaging
to
individuals,
businesses and
the society as a whole,
mankind is constantly developing its predictive ability through
the constant upgrading and refinement of its knowledge.
The more mankind is knowledgeable about the future,
the more certain it will be concerning future events.
But the disappointing phenomenon is that perfect foresight
about the future is something impossible.
Thus, risk becomes a fact of life that will remain side by side with
the activities of mankind.
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RISK ANALYSIS AND MANAGEMENT
INTRODUCTION
These and related facts, thus, call for the need for sound
risk management in firms.
There is a need to identity possible risks.
There is a necessity to device and employ preventive
measures.
To manage risk, it is imperative to anticipate the possible
consequences of our actions.
As such, this training manual discusses
the nature of risk,
its identification,
measurement and
management processes in general and in cement factories in
particular.
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RISK ANALYSIS AND MANAGEMENT
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RISK ANALYSIS AND MANAGEMENT
Activity
In group of five
Take 10 minutes to discuss
What types of risk are there associated with cement
manufacturing?
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RISK ANALYSIS AND MANAGEMENT
Political Environment
Legal Environment
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RISK ANALYSIS AND MANAGEMENT
RISK ANDEnvironment
Social RELATED CONCEPTS
This relates to changing morals and values, human
behavior, social structures and institutions, etc.
A social environment is a reflection of cultural,
religious, and moral values of people. As these values
differ significantly, the social environment in
different areas differs.
For example comparison of a social environment in
Addis and Nairobi may reveal that Addis is less risk
y than Nairobi.
Note that social environment also includes the
working habit of people.
A social environment, which is reflected by cultural,13
RISK ANALYSIS AND MANAGEMENT
Activity
In group of five
Take 10 minutes to discuss
What do you think is the effect of land lease policy
that was recently formulated on cement market?
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RISK ANALYSIS AND MANAGEMENT
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RISK ANALYSIS AND MANAGEMENT
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RISK ANALYSIS AND MANAGEMENT
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Risk Example:
versus Probability
Consider the occurrence of a particular
event.
One extreme is that the event is certain to take
place.100% but there is no risk (risk=0) because
there is a perfect foresight as to the occurrence of the
event in this regard.
The other extreme is the event will not take place at
all (0) . Here, too, there is certainty and, therefore,
no risk.
In between these two extremes there could be several
occurrences of the events with the corresponding
probabilities of occurrence.
This puts us in a situation of uncertainty because it is
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RISK ANALYSIS AND MANAGEMENT
Quarrying Crushing
Storage and
transportation
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Quarrying
The quarrying activity includes
the drilling of bore holes,
the filling up of explosives and
the triggering of the explosives.
Once this happens then the material is loaded and
transported either to open storage piles or to the
crushing area.
During the process of charging and ignition, the
explosives are transported to the explosion area from
the explosive storage facilities.
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RISK ANALYSIS AND MANAGEMENT
Storage
Hazards of other
as a result of the goods
storage,and equipment
transport and use of explosives
Bad housekeeping in and out of the warehouse.
Inadequate distance (<10cm) between the containers
and the warehouse wall
Insufficient building maintenance (lighting,
ventilation) with the possibility of concentration of
humidity in the warehouse
Execution of non-approved maintenance work on the
warehouse electrical wiring.
Insufficient warehouse security
Not following the FIFO (First In First Out) in the
management of explosive stocks 36
RISK ANALYSIS AND MANAGEMENT
Hazards
Theduring
failure the use of explosives
to implement are: rules and
the company
regulations
The use of unauthorized explosives
The failure to use the approved explosion plan
The failure to prevent unauthorized person to
approach the explosives area
The transport of more than required explosives
quantity
The temporary storage of explosives at excessive
temperatures (greater than 65 degrees Celsius) or
near naked flame 38
RISK ANALYSIS AND MANAGEMENT
Hazards during
During the the
boreBore holing
holing process
process the basic
hazards are:
The moving parts of the bore holing
machinery Falls from height
Material falling from height
Crushing of quarry table
Hurling of material
Presence of dust and noise
Movement of earth moving equipment
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RISK ANALYSIS AND MANAGEMENT
Crushing Hazards
The rotational movement and the movement of the
parts of the crusher
The exposure to noise and dust of the personnel
responsible for the continuous control of the
crusher
The maintenance activities inside the crushing
chamber
The electrical problems
The activities inside the hopper due to:
The operation of the feeder
The possible crushing of material 41
RISK ANALYSIS AND MANAGEMENT
Crushing Hazards
Objective VsRisk
Objective Subjective Risk
The relative variation of actual from probable or
expected loss.
Refers to the variation that exists in nature
is the same for all persons facing the same situation.
Is concerned with the range of variability of economic
losses about some long-run average (most probable) loss
in a group large enough to analyze significantly in a
statistical sense.
Objective Risk = Probable variation of actual
loss
Probable losses
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Example
Consider the probability of fire losses to buildings
in two towns A and B.
There are 100,000 buildings in each town and, on
average each town has 100 fire losses per year.
By looking at historical data from the towns,
statisticians are able to estimate that in town A, the
actual number of fire losses during the next year
will very likely, range from 95 to 105. In town B,
however, the range probably will be greater, with at
least 80 fire losses expected and possible as many
as 120.
Objective risk A = 105-95 = 10%
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Subjective Risk of
The estimate the objective risk which depends
on the person’s psychological belief is the
subjective risk.
Psychological uncertainty that stems from the
individual’s mental attitude or state of mind.
May be measured by means of different
psychological tests but no widely accepted or
uniform tests of proven reliability have been
developed.
The impact of subjective risk varies depending on
the individual.
Subjective risk may affect a decision when the
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Cont’d
Liability risk
Is the possibility of loss arising from intentional or
unintentional damage made to other persons or to
their property.
Speculative Risk
can result in three possible outcomes, loss,
breakeven, or gain situations.
People may deliberately create speculative risks when
they realize that the favorable (gain) outcome is,
indeed, so promising. Examples may include;
Investing in a venture
Gambling transaction
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Static Vs Dynamic
Dynamic Risks Risks
Originate from changes in the overall economy such
as price level change, changes in consumer tastes,
income distribution, technological changes, political
changes.
Are less predictable and hence beyond the control of
the risk manager.
Static Risks
Are losses arising from causes other than changes in
the economy.
Are predictable and could be controlled to some
extent by taking loss prevention measures.
Many of the perils fall under this category. 50
RISK ANALYSIS AND MANAGEMENT
Fundamental Vs Risk
Fundamental Particular Risks
It is impersonal in origin and widespread in effect.
affect the entire society or a larger segment of the
population, which are usually, beyond the control of
individuals.
The responsibility for tackling these risks is,
therefore, left to the society itself.
They are generally uninsurable. Example include:
Earthquakes,
Floods,
Famine,
Volcanoes,
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Inflation
RISK ANALYSIS AND MANAGEMENT
Particular Risks
affect each individual separately.
arise from individual causes and affect
individuals in their consequences.
are dealt with by purchasing insurance
policies and other techniques. Examples
include:
Fire,
Theft,
Work related injury,
Motor accidents,
Property losses,
Death, 52
RISK ANALYSIS AND MANAGEMENT
Risks Related
Most risks intobusiness
Business Activities
environment are speculative
in nature. The finance literature considers four
such types of risks
Business Risk
is associated with the physical operation of the
firm.
Variations in the level of
sales,
costs,
profits are likely to occur due to a number of factors
inherent in the economic environment.
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RISK ANALYSIS AND MANAGEMENT
Risks RelatedRisk
Financial to Business Activities
This is associated with debt financing.
Borrowing results in the payment of periodic interest
charge and the payment of the principal upon maturity.
There is a risk of default by the company if operations are
not profitable.
Other financial risks include: bankruptcy, stock price
decline, and insolvency.
Interest Rate Risk
This is a risk resulting from changes in interest rates.
Changes in interest rates affect the prices of financial
securities such as the prices of bonds etc. for interest rate
rise depresses bond prices and vice versa. 54
RISK ANALYSIS AND MANAGEMENT
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RISK MANAGEMENT
Risk management PROCESS
is the systematic process for the identification
and evaluation of pure loss exposures faced by
an organization or individual and for the
selection and implementation of the most
appropriate techniques for treating such
exposures.
is a discipline that systematically identifies and
analyses the various loss exposures faced by a
firm or organization and the best methods of
treating the loss exposures consistent with the
organization’s goals and objectives. 61
RISK ANALYSIS AND MANAGEMENT
The Risk Management process steps are a generic guide for any organization,
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Risk matrix
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Functions of Risk
To decide theManagement
best and most economical
method of handling the risk of loss
Whether it be by assumption (retention),
avoidance, self-insurance, reduction of
hazards, transfer, commercial insurance, or
some combination of these methods.
To administer the programs of risk
management
Important, but often overlooked function of
risk management is the duty of constantly
tracking and revaluating of the programs,
record keeping & the like. 66
RISK ANALYSIS AND MANAGEMENT
Activity
In a group of five trainees
Take 10 minutes
Discuss to what extent the above
mentioned risk management process
A) Exist
B) Implemented
C) Contribute
Towards the success of your enterprise
goals 67
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Objectives
Theseofobjectives
Risk Management
of risk management can
be classified as pre-loss and post-loss.
Pre-loss objectives: - are objectives to
be achieved prior to the occurrence of
any loss. They include:
Handle potential losses in the most
economical way possible
Reduction of anxiety and fear associated
with all loss exposures.
Meeting externally imposed obligations
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Objectives of objectives:
Post-loss Risk Management
- objectives to be achieved after a
loss has occurred, they include:
The survival of the firm
Survival means after a loss occurs, the firm can at
least resume partial operation within some
reasonable time period if it chooses to do so.
To continue operating
For some firms the ability to operate after a severe
loss is an extremely important objective.
Stability of earnings
The firm wants to maintain its earnings per share
after a loss occurs.
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Cont’d
To maintain continued growth of the
firm
A firm may grow by developing new
products and markets or by acquisitions
and mergers. The risk manager must
consider the impact that a loss will have
on the firm’s ability to grow.
To meet the goal of social responsibility
It aims to minimize the impact that a loss
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Activity
In groups of five
Take 15 minutes
Discuss
The possible contribution of risk
management
To whom does risk management
contributes something?
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Cont’d
Contribution to Family
The possible contributions may include:
Protecting the family against catastrophic losses
Contribution to a society
To the extent that individual businesses and
families benefit from risk management, so does
the society of which they are members.
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Categories of Loss
Although in Exposures
the broadest sense the entire
organization is at exposure to risk, it is useful to
develop categories of exposures for analytical
purposes.
Physical asset exposures
Ownership of property gives rise to possible losses or
gains to physical assets.
Property could be
damaged,
destroyed,
lost or
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Categories
LiabilityofExposures
Loss Exposures
Obligation imposed by the legal system creates this
type of exposures.
Liability losses arise out of damage to or destruction of
other’s property or personal injuries to others.
Human Asset Exposures :
This involves such loses as;
Losses to the firm itself as a result of the death,
disability or old age of employees, customers, or owners.
Losses to the families of the personnel or the personnel
themselves as a result of their death, disability, old age,
or unemployment.
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Illustration
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Methods
Seven of risk identification
methods that have been
suggested are:
The risk analysis questionnaire
Financial statement method
Flow-chart method
On-site inspections
Interactions with other
departments
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determination of:
The probability or chance that the
loss will occur /frequency of
occurrences of losses/
The impact the losses would have up
on the financial affairs of the firm or
the family, should they occur /size
or severity of loss/ 86
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