Methods of handling Risk

A Presentation By KARTHICK S

Methods of handling business risks

Risks in any business are unavoidable and they cannot be eliminated completely. The various methods that may be used for handling business risks are as follows o Loss Control o Loss Financing o Internal Risk Reduction

Handling Risk

Loss Control

Loss Financing

Internal Risk Reduction

Reducing level of Risky Activities

Retention

Diversification

Increasing Precautions

Insurance

Investment in Information

Hedging

Loss Control
Actions that reduce the expected cost of losses by reducing the frequency of losses and/ or the severity of losses that occur are known as Loss Control .

This is also known as Risk Control. Two general approaches to loss control
o Reducing Level of Risky Activity o Increasing Precautions against loss

Reducing level of Risk

Exposure to loss can be reduced by reducing the level of risky activities.
It primarily affect the frequency of losses. The main cost of this strategy is that it forgoes any benefits 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 risky activity.
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 by transferring 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 manage the risks. Most notably Price Risk.

Internal Risk Reduction

In addition to loss financing that allow businesses and individuals to reduce risk by transferring it to another 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 diversifying their activities.
Individuals also routinely diversify risk by investing their savings in many different stocks.

Investment in Information
To invest in information to obtain superior forecasts of expected losses.
It can produce more accurate estimates or forecasts of future cash flows, thus reducing variability of cash flows around the predicted value.

Reference
Risk Management and Insurance by Harrington Niehaus

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