RISK MANAGEMENT & INSURANCE

RISK MANAGEMENT & INSURANCE M.RAJARAM J.B.BODA INSURNACE BROKERS PRIVATE LIMITED NEW DELHI

ROUTE MAP FOR THE SESSION • DEFINE RISK AND MANAGEMENT • ROLE OF EACH OF THE PARTY RELATED TO INSURANCE; INSURED;INSURER;BROKER • NEED FOR IMPLEMENTING RM • ADVANTAGES OF HAVING RM • CLASSIFICATION OF RISKS • PURE RISKS MANAGEMENT • CORPORATE RISK MANAGER AND HIS ROLE

CONTD. • PERSONAL ATTITUDES OF INDIVIDUALS • CORPORATE RISK MANAGEMENT - RISK MANAGEMENT DEPARTMENT • RISK HANDLING METHODS • RISK IDENTIFICATION • RISK EVALUATION/ QUANTIFICATION • RISK AVOIDANCE • RISK MINIMISATION • RISK TRANSFER • RISK FINANCING FOR RISK RETENTION • ROLLING REVIEW

CONTD • CONTINGENCY PLANNING • DISASTER CONTROL • MUTUAL AID • INCIDENT / ACCIDENT INVESTIGATION • INTERACTION WITH INSURERS/ ENGINEERS/ SURVEYORS • CAPTIVE INSURANCE COMPANIES • ASSOCIATIONS/ CLUBS/

RISK- DEFINITION • Risk is defined as the chance of having a loss due to occurrence of an event • The risk is always associated with the loss aspects since the word itself has the association of DANGER OF LOSS • The definition can be “ PROBABAILITY OF THE OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN

RISK AND MANAGEMENT • RISK- CHANCE OF AN EVENT HAPPENING RESULTING IN LOSS/ GAIN • TO APPRECIATE THE NEED FOR LOSS PREVENTION AND IMPLEMENT MEASURES TO ACHIEVE THE SAME • THE EFFORTS ARE AIMED TO PREVENT A LOSS HAPPENING BUT ALSO TO MAKE IT MANAGEABLE IF IT HAPPENS • THIS ASPECT IS TO BE ACHIEVED IN ALL ACTIVITES OF THE ORGANISATION BE IN PRODUCTION, STORAGE, HANDLING, TRANSPORTATION AND DISTRIBUTION

EFFECTS OF RISK • Risky situations are to be faced by those who are deploying their Capital & RESOURCES in any VENTURE ( is it an ADENTURE?) • Adventure means venturing into some area which may have serious effects on the well being of the resources • All Industries / Business do face such situations every day in their activities • HENCE RISK MAY BRING IN LOSS IN CASE OF AN ACCIDENT / UNTOWRD HAPPENING BUT CAN BRING IN PROFITS IN THINGS GO IN THE WAY THESE ARE EXPECTED TO HAPPEN

Risk Management- Macro • Provision of adequate infrastructure, trained personnel and capability to mitigate huge losses due to disasters natural & man made will be the main area for macro analysis by the Government • Natural disasters result in huge devastation and loss of human lives • Bhopal tragedy had put India in Guinness book of world records as one of the big tragedies of the world

Risk Management-Macro • Pollution is now causing the maximum concern & affects the health of citizens and young population- Solid, water, air • We need to improve the public hygiene awareness and the way in which we are soft targets for epidemics due to pollution • Past earthquakes in Maharastra & Gujarat had shown how ill prepared we are • Every year the country is ravaged by floods in many parts and drought in some parts- interconnection of rivers remains a distant dream- water may become one of the major sources of trouble in this country • Infrastructure is looked into only after development and government is then unable to acquire the land required

Risk Management-Macro • Allowing too many Airlines without runways has only resulted in air congestion and pollution of air at higher level • We are contributing to global warming, unpredictable weather conditions, hole in the ozone layer which nature has provided to shield us from ultra-violet radiation • Unscrupulous destruction of forests and creation of concrete jungles has resulted in ecological imbalance

RISKS A BUSINESS FACES • ENVIRONMENTAL RISKS-LEGAL, SOCIAL, ECONOMIC, FINANCIAL RISKS • CHANGES IN BUSINESS, SPECULATIVE RISKS,TECHNOLOGICAL CHANGES • PURE RISKS • FUNDAMENTAL RISKS

STEPS IN MANAGEMENT • PLAN • ORGANISE • DELEGATE • MOTIVATE • TRAINING • CONTROL • COURSE CORRECTIONS • ACHIEVE THE GOALS

EFFECTS OF PURE RISKS –ORGANISATION FACES A.LOSS OR DAMAGE TO PROPERTY D.LOSS OF KEY EMPLOYEES BODILY FATAL/NON-FATAL TO EMPLOYEES LOSS EVENT C.LIABILITY LOSSES B.PECUNIARY LOSSES (FINANCIAL)

Details A.Loss /dge to property • Fire & explosion • Storm, cyclone, hurricane, flood/inundation • SRCC • Accidental damages • Breakdown losses

Financial losses • Business Interruption • Loss of profit • Continuing fixed costs • Cost of alternate accomodation • Increased cost of working • Increase in cost of replacement of assets following loss/damage/destruction • Under insurance/absence of insurance

Liabilities • to general public • to users due to defective products • to employees as employer • as tenants • other legal liabilities • due to their acts-Directors/ Officers

Human resources • Fatal or non-fatal injuries • Loss of key/ trained employees • Loss of earnings due to disablement • Hospitalization and medical expenses • Travel ( inland and overseas)

EFFECTS OF SPECULATIVE RISKS –ORGANISATION FACES LOSS OF REVENUE DUE TO LOSS OF MARKET SHARE LOSS OF KEY EXPERIENCED EMPLOYEES SPECULATIVE RISKS INCREASED FIXED CHARGES/ LOSSES LOSS OF CUSTOMERS /SUPPLIERS

Risk Management- Definition Risk Management is defined as the systematic way of ensuring protection of business resources and income against losses so that the aim , goals and vision of the company can be reached. Thus Risk Management creates stability and contributes to growth and assures profitability of the Organisation.

AIM OF RISK MANAGEMENT • TO SUCCESSFULLY ACHIEVE THE OBJECTIVES OF THE ORGANISATION • ACHIEVE THE COMPANY’S MISSION • ACHIEVE THE SHORT TERM AND LONG TERM GOALS OF THE ORGANISATION • SATISFACTION OF CUSTOMERS, MANAGEMENT, EMPLOYEES AND SHARE HOLDERS & GOVERNMENT

RISK MANAGEMENT • This is of very recent origin ( less than three decades old) • This is now being considered as a managerial topic and as aspect in which the top management should get involved to reduce any adverse effects on the balance sheets. • RM can be described as the scientific way of dealing with or handling the risks. • This is done by Risk Analysis, Risk Control, Risk Transfer, Risk financing and rolling review

ICEBERG OF LOSSES INSURED LOSSES UNINSURED LOSSES LOSS OF GOODWILL LOSS OF MARKET LOSS OF CUSTOMERS LOSS OF SHAREHOLDER VALUE LOSS OF KEY EMPLOYEES LOSS OF COSTS INCURRED UNINSURED LOSSES

THE R M IMPERATIVES • “RISK NEEDS” PERCEPTION • RISK ANALYSIS • RISK ASSESSMENT • RISK MINIMISATION/CONTROL • RISK IMPROVEMENT • SHARE INDUSTRY EXPERIENCE • SHARE INFO ON CHANGES - BOTH CURRENT & PROSPECTIVE

THE R M “BEST PRACTICES” ? • INVOLVE ALL PLAYERS • EDUCATE, CONTINUOUSLY • INVOLVE “CORE” & “NON-CORE” • INVOLVE FINANCIAL PERSONNEL • INVOLVE SAFETY PERSONNEL • INVOLVE FIRE SERVICE PERSONNEL • INVOLVE BUSINESS PARTNERS • INTERACT, CONSTANTLY - PROACTIVELY

THE RISK MANAGER’S DO’S • ALWAYS ADDRESS CHANGE & CONTENT MANAGEMENT – AT ALL TOUCH POINTS – REGULATORY/INSURER/INSURED/ INTERMEDIARY/SURVEYOR • ADDRESS DELAY POST-HASTE • COMMUNICATE CONTINUOUSLY • GET REAL – NO EXAGGERATIONS/BLUFFING • GET YOURSELF PROFESSSIONALLY RESPECTED – CONTINUOUS EDUCTION

THE RISK SPECTRUM • ENIRONMENTAL RISKS • STATUTORY RISKS • LEGAL RISKS • TECHNOLOGICAL RISKS • HUMAN ELEMENT • PRODUCTION/ FINANCIAL/MARKETING • MARKET RISKS • TIME FACTOR

THE RISK SPECTRUM • PROJECT RISKS • STORAGE RISKS • ERECTION & MAINTENANCE RISKS • OPERATIONAL RISKS • STORAGE RISKS • TRANSPORTATION RISKS • OUTSOURCING RISKS

ALVIN TOFFLER • “ ILLITERATES ARE NO LONGER THOSE WHO CANNOT READ AND WRITE, BUT THOSE WHO CANNOT LEARN, UNLEARN & RELEARN ” QUICKLY & CONSTANTLY

PURPOSE OF RISK MANAGEMENT • RISK MANAGEMENT AIMS TO PROVIDE AN INCIDENT FREE AND ACCIDENT FREE ENVIRONMENT FOR ACHIEVEING THE OBJECTIVES OF THE ORGANISATION • RISK MEANS UNCERTAININTY OF THE OCCURRENECE OF AN EVENT WHICH MAY RESULT IN LOSS/GAIN • IMPORTANT CHARACTERISTICS ARE THE UNCERTAINITY/ SEVERITY OF SUCH LOSSES

ADVANTAGES OF RM • To achieve the objectives of the Organisation • To ensure that the goals short term and long term are achieved without any disruption or delay • To optimise the utilisation of the resources • To have knowledgeable insurance arrangements and have considered decisions on insurances not to be availed

ENVIRONMENTAL RISKS • Risks which are to be faced which are external but influence the working and health of the Organisation • These are called Environmental Risks • Legal • Social- Riots/Strikes/Bandh • Political-Change in the political systems of Governance and Management-tensions with neighbours • Economical- Soaring Oil prices

MANAGEMENT • ALL ABOUT ASPECTS OF SUCCESSFUL MANAGEMENT OF RISKS BOTH PURE AND SPECULATIVE RISKS • PROPER PLANNING • ORGANISE THE AVAILABLE RESOURCES • COORDINATION • DELEGATION • MOTIVATION • DECISION MAKING • ROLLING REVIEW

CLASSIFICATION OF RISKS • SPECULATIVE RISKS & PURE RISKS • DYNAMIC RISKS & STATIC RISKS • FUNDAMENTAL RISKS • PARTICULAR RISKS

SPECULATIVE RISKS Operation of this leads to profit /loss Leads to speculation like investment of capital in a new venture Operation is desired PURE RISKS These do not change with the risk The operation of these perils does bring in loss/damage to property/assets/ liability Not desired CLASSIFICATION OF RISKS

Dynamic risks Changes with the change in fashion, buying behaviour, trends, technology etc It denotes dynamic nature of the customer behaviour and the products they like to own or use If an organization is not prepared then it may go out of existence Static risks Like pure risks these risks remain static and do not change due to other reasons like that of dynamic risks The operation of these risks always bring about losses Operation is not desired May result in partial or total cessation of activities Classification of Risks

PARTICULAR RISKS Risks which relate to one or few firms, factories or organisations only Losses are suffered by one or few more members of the society FUNDAMENTAL RISKS Relates to the society at large Losses are suffered by large section of the society/nation(s) Losses may be due to natural catastrophes, riots, epidemics etc CLASSIFICATION OF RISKS

Development of Risk Management • The Industries / Business houses want to have incident free/ accident free working to achieve their objectives • For this purpose it is necessary to understand the loss producing events , the nature of losses/ extent of losses to come up with the loss control measures.EXPOSURE ANALYSIS • Risk Management aims to help the owners to have control on loss incidents and to reduce the extent of losses by proper study of the exposures and actions to be taken to control the same • This as a science had developed in about thirty years period

Risk Management process The steps in Risk Management process are: • 1. Risk analysis- Risk identification & Risk evaluation (Risk measurement) (Risk quantification) • 2. Risk control - Risk avoidance (Risk minimization) • 3. Risk transfer- Insurance with Professional Insurance companies • 4.Risk financing- Risk retention • 5. Rolling review

How the loss is caused? • Loss is caused by the operation of perils which refers to the causes for the losses • Loss or damage is caused by the operation of perils such as fire, explosion, flood, storm etc • The loss potential ( extent of loss) depends on conditions which are favourable for the incident to assume large proportions. This is known as hazard or potential of the loss. More the potential severe will be the extent of loss • PERIL ( CAUSE)----------------LOSS(EFFECT) • HAZARD

Causes of losses • Perils- such as fire, explosion etc • Human factors- such as negligence, carelessness, inadequate training, inadequate supervision, lack of proper systems and controls • Inadequate maintenance ( predictive/ routine/ annual maintenance) • Failure of Plant/ machinery due to breakdowns (failure of safety devices) • Natural perils such as flood, cyclone, earthquake, landslide, rockslide & subsidence • Extraneous: Accidents involving Gas or chemical in nearby units

HAZARD • Hazard is defined as conditions existing which are favourable for the loss becoming severe • CLASSIFICATIONS OF HAZARD • Physical hazard-Originating hazards Contributory hazards Tertiary hazards • Moral hazards -relating to the moral behavoiur of the clients • Morale hazard -Relating to the morale & working conditions of the employees & employer-employee relationships

RISK ANALYSIS • Needs to be done by a person who is conversant in the identification and measurement • The severity of the risk depends on two factors –extent and frequency ( probability)- ranges from 0-1 • There are various methods to analyze the extent of loss • The frequency is to be analyzed based on the analysis of data ( loss events and the frequency ) using statistical methods

RISK ANALYSIS- METHOD • LIST ALL POSSIBLE RISKS • INVESTIGATE BY • STUDY • INQUIRY • DOCUMENT REVIEW • PHYSICAL INSPECTION • ANALYSE EACH RISK

RISK PERCEPTION • RISK

RISK APPETITE Risk Seeker Loss in utility Neutral toward risk Risk averter Loss in Rupees

RISK CONTROL • PRESERVE CONTINUITY OF OPERATION UNDER SAFE OPERATING CONDITIONS • PROPER PLANNING –LAYOUT OF BUILDINGS/PLANT/MACHINERY • BUILD IN SAFETY TO AVOID LOSSES TO PERILS SUCH AS FIRE, EXPLOSION NATURAL OR HUMAN NEGLIGENCE CAUSING SERIOUS LOSSES

RISK ANALYSIS • Property losses- losses which can happen to the Assets • Pecuniary losses- Financial Loss which can be caused by business interruption due to the loss to the assets, financial loss due to infidel acts of employees, storekeepers and other employees • Liability losses- Loss to the Third Party property or third party personnel ( also known as TPPD and TPBI) due to activities of the Organisation • Personal injuries- accidents resulting in fatal or non-fatal injuries to the employees

METHODS OF RISK ANALYSIS • HAZOP STUDY- HAZARD OPERABILITY • EVENT ANALYSIS • THREAT ANALYSIS • INPUT- OUTPUT ANALYSIS • FAULT TREE ANALYSIS

RISK EVALUATION • Methods available are • Study of Organisational charts/ balance sheets, accounting records • Process flow diagrams, P & I diagrams • Input- output analysis- contribution from various sections, inter-dependencies • Study of completed checklists • Threat analysis- Denial of access, Loss of services

EVALUATION METHODS • INPUT – OUTPUT ANALYSIS TO TRACE THE FLOW OF GOODS AND SERVICES TO IDENTIFY THE CONTRIBUTION OF PARTS OF ORGANISATION TO THE TOTAL EARNINGS AND TO ANALYSE EXPOSURES

RISK MANAGEMENT & INSURANCE