introduction

1. RISK MANAGMENT

2. UNDERSTANDING RISK
The objectives of this unit are:
1. Introduce the concept of risk and uncertainty
2. Risk management
3. Understand Subjective risk attitude.
4. Differentiate between Acceptable risk vs. unacceptable risk
5. Classify the different types of risks
6. What are the cost of risks
7. What is handling risks.
8. Determine the need and aims of risk management
9. State the principles of risk management

3. WHAT IS RISK:
In broad terms, risk involves exposure to some type of danger and the
possibility of loss or injury. In general, risks can apply to your physical health or
job security. In finance and investing, risk often refers to the chance an outcome
or investment's actual gains will differ from an expected outcome or return.
DEFINITION :
According to the dictionary – risk refers to the possibility that something
unpleasant or dangerous might happen.
“risk is a condition in which there is a possibility of an adverse deviation from a
desired outcome that is expected or hoped for.”
“our life is obviously risky”

4. Uncertainty:
a situation in which something is not known, or something that is not known or certain.
the feeling of not being sure what will happen in the future.
Uncertainty simply means the lack of certainty or sureness of an event.
Difference between risk and uncertainty:
risk uncertainty
Risk is a measurable uncertainty Uncertainty is an unknown risk
Can be quantitatively measured by any form. Cannot be measured in any form.
certain risks can be fully covered by taking
insurance policies such as fire, flood, draught,
theft, robbery etc.
uncertainty the insurance is not possible.
Risk can be transferred into another risk. But uncertainty cannot be transferred.

5. Risk Management
• The forecasting and evaluation of financial risks together with the
identification of procedures to avoid or minimize their impact
• Risk management is the process of identification, analysis and acceptance or
mitigation of uncertainty in investment decisions.
• Definition: In the world of finance, risk management refers to the practice of
identifying potential risks in advance, analyzing them and taking
precautionary steps to reduce/curb the risk.

6. SUBJECTIVE RISK ATTITUDE
• Subjective risk is what an individual perceives to be a possible unwanted
event. Most people realize, for instance, that it's possible for them to have an
accident, or a heart attack or some other health problem.
• Subjective probability is a person's perception or opinion of the likelihood
of an event. Subjective probability differs from objective probability, either
because the person cannot calculate the actual probability.
• If you are asking for or giving a personal opinion it is subjective.
• There is nothing wrong with a subjective opinion as is based on the personal beliefs of the
individual responding.

7. CLASSIFICATION OF RISK
• Financial and non-financial risks
• Individual and group risks
• Pure and speculative risks
• Static and dynamic risks
• Quantifiable and non-quantifiable risks

8. FINANCIAL RISKS
Financial risk is a broad category of risk directly related to money. It includes risks in areas such as investments, assets,
securities, markets, credit, business operations and the economy.
Kinds of financial risk:
• Systematic risk: Systemic risk is the probability of losses due to collapse of a financial system such as the global
economy or the economy of a single nation. There are several major types of systemic risk; political (conflicts or
trade war b/w nations), security (cyber attacks), accounting (due to accounting frauds).
• Inflation risk: Inflation Risk is the probability that the value of assets and investments will be negatively affected by
change in inflation.
• Liquidity risk: Liquidity risk is the potential that an entity will be unable to acquire the cash required to meet short
or intermediate term obligations. In many cases, capital is locked up in assets that are difficult to convert to cash
when it is required to pay current bills. The following are illustrative examples of liquidity risk.
• Interest rate risk: Interest rate risk is the probability that business costs or the value of assets will be negatively
affected by changes in interest rates.
• Economic risk: economic risk arise due to change in economic conditions like boom and recession, change in
economic policies.
• Political risk: Political risk is the probability that political decisions, events or conditions will result in losses.
Politics affect everything from taxes to interest rates and political events can dramatically impact the price of assets
or cost of doing business.

9. NON-FINANCIAL RISK
Non-financial risks are risks that arise from sources outside the financial
markets such as actions within an entity, environment, community, suppliers and
customers. These risks also have a monetary impact on the organization.
Operational risk, Legal risk, Regulatory risk and model risk are the kind of nan-
financial risk.

10. INDIVIDUAL AND GROUP RISKS
• Individual risk: individual risks are confirmed to individual identities or
small groups. Theft, robbery, fire, accident etc. these are insurable.
• Group risk: group risk affects the economy or its participants on a macro
basis. These risk factors may be socio-economic or political or natural
calamities e.g., earthquakes, floods, wars, unemployment , terror attacks etc.

11. PURE AND SPECULATIVE RISKS
A pure risk is a chance of loss or no loss, but no chance of gain.
For example, the owner of a commercial building faces the risk associated with a possible fire
loss. The building will either burn or not burn. If the building burns, the owner suffers a financial
loss. If the building does not burn, the owner’s financial condition is unchanged. Neither of the
possible outcomes would produce a gain. Because there is no opportunity for financial gain, pure
risks are always undesirable.
Other example: weather, disaster, crime, accident, war etc.
Pure risk can be avoided by insurance, reduce risk ( precautions)

12. TYPES OF PURE RISK ARE:
Purerisk
Personal risk: it includes early death, sudden accident and disability, unemployment etc.
Property risk: reduction in value of assets due to physical damage, fire theft etc.
Liability risk: the risk of legal liability for damage accruing to supplier, customer, vendors etc.

13. Speculative risk
Speculative risks are those there where possibility of loss, no loss, or gain.
They carry some advantages to economy.
Generally not insurable.
Example : if you invest in stock market, you may either gain or loss on stocks.

14. STATIC AND DYNAMIC RISKS
dynamic risks may arise due to change in the economy like fluctuations in price
levels, consumer references, distribution of income, product development, shifts
in technology etc. These are called dynamic risks. As they are less predictable,
difficult to anticipate and quantify, generally they are not insurable.
Static risk are more or less predictable and are not affected by economic
conditions. These can be more predictable and accordingly suitable for
insurance.

15. QUANTIFIABLE AND NON-QUANTIFIABLE RISKS
the risk which can be measured like financial risks are known to be
quantifiable while the situations which may result in repercussions
like tension or loss pf peace are called as non-quantifiable.

16. Acceptable risk
Acceptable risk is a risk exposure that is deemed acceptable to an individual,
organization, community or nation. Acceptable risk are defined in terms of the
probability and impact of a particular risk.They serve to set practical targets
for risk management and are often more helpful than the ideal that no risk is
acceptable. In practice, risk often can’t be reduced to zero due to factors such
as cost and secondary risk.
Risk exposure is an estimate of the probable costs of a risk or set of risks.This can be
calculated for a strategy, program, project or initiative.

17. Unacceptable risk
• Unacceptable Level of risk determined as unsafe level or unsatisfactory level.
• unacceptable risk will always depend on the level of risk that we take.
Example: A racing driver can gain time and possibly win a race by going quicker
through the corners, drive faster and brake later. These are the risks the driver takes in
order to maximize his objective of winning a race. However, by doing so the driver also
increases the likelihood of a crash and also the level of the consequences when this
happens. So, every driver will try to determine its personal risk criteria depending on
the car and circumstances at a given moment. As such, their try to maximize the result,
aiming to stay just below the unacceptable level of risk of having a crash, destroying
the car and getting injured.

18. COSTS OF RISK
Costs that are occur on risk management , risk control, risk
mitigation, risk transfer and losses due to risk.
Cost of risk is the managing risk and incurring losses due to risk. It
is a metric that can be calculate for a financial period or forecast for
a future period. The common elements of cost of risk are following:
Administration costs: the cost of managing risk such as budget of a
risk management team.

19. Mitigation costs: the costs of reducing risk. For example, a firm that buys
specialized hardware and software to reduce information security risk.
risk control costs: the cost of operational processes designed to reduce risk
such as credit checks that are run to customers.
Transfer costs: the cost of transferring risk using techniques such as insurance
or financial instruments.
Losses: losses that occur because of a risk. For example, losses that occur when
a customer fail to pay delivered services is considered a loss due to credit risk.

20. Total cost of risk is the sum of all aspects of an organization's
operations that relate to risk, losses and related loss adjustment
expenses, risk control costs, transfer costs, administrative costs and
mitigation cost.

21. Handling of risk
Risk Handling (now called risk Mitigation) is the process that identifies,
evaluates, selects, and implements options in order to set risk at acceptable
levels given program constraints and objectives. This includes the specifics on
what should be done, when it should be accomplished, who is responsible, and
associated with cost of risk.
It is based on the loss exposure analysis, decision is made about the way to
handle the risk.
Risk mitigation revolves around reducing the impact of potential risk. A
jewelry store might mitigate the risk of theft, by having a security system or
even a security guard at the entrance.

22. TECHNIQUES FOR RISK HANDLING
• It the part of risk management process.
• the most common types of risk management techniques include:
avoidance
mitigation
transfer
acceptance.

23. AVOIDANCE
• Avoidance is a method for mitigating risk by not participating in activities that may
incur injury, sickness or death.
• Smoking cigarettes is an example of one such activity because avoiding it may lessen
both health and financial risks. smoking is the No. 1 risk factor for getting lung
cancer, and the risk only increases the longer that people smoke.
• Life insurance companies mitigate this risk on their end by raising premiums for
smokers than nonsmokers. Under the Affordable Health Care Act, also known as
Obamacare, health insurers are able to increase premiums based on age, geography,
family size and smoking status. The law allows for up to a 50% surcharge on
premiums for smokers.

24. MITIGATION
Mitigation means reducing risk of loss from the occurrence of any undesirable
event.
In general, mitigation means to minimize degree of any loss or harm.
Businesses can also choose to manage risk through mitigation or reduction.
The process by which an organization introduces specific measures to minimize
or eliminate unacceptable risk associated with its operations.

25. RETENTION
Retention is the acknowledgment and acceptance of a risk as a given.
Usually, this accepted risk is a cost to help offset larger risks down the road,
such as opting to select a lower premium health insurance plan that carries a
higher deductible rate. The initial risk is the cost of having to pay more out-of-
pocket medical expenses if health issues arise. If the issue becomes more serious
or life-threatening, then the health insurance benefits are available to cover most
of the costs beyond the deductible. If the individual has no serious health issues
warranting any additional medical expenses for the year, then they avoid the
out-of-pocket payments, mitigating the larger risk altogether.

26. TRANSFER
• The use of health insurance is an example of transferring risk because the financial risks
associated with health care are transferred from the individual to the insurer.
• businesses choose to transfer risk away from the organization. Risk transfer typically takes
place by paying a premium to an insurance company in exchange for protection against
substantial financial loss.
• For example, property insurance can be used to protect a company from the costs incurred
when a building or other facility is damaged. Similarly, professionals in the financial
services industry can purchase errors and omissions insurance to protect them from lawsuits
brought by customers or clients claiming they received poor or erroneous advice.

27. RISK ACCEPTANCE
Risk management can also be implemented through the acceptance of risk. Companies retain a
certain level of risk brought on by specific projects or expansion if the
anticipated profit generated from the activity is far greater than its potential risk.
For example, pharmaceutical companies often utilize risk retention or acceptance when
developing a new drug. The cost of research and development does not outweigh the potential
for revenue generated from the sale of the new drug, so the risk is deemed acceptable.