Question

FIN401 Insurance and Risk Management: Describe a few examples of your learning of risk management. Discuss how you are helped by this learning and consider the future implications of what you’ve learned for your effectiveness at work, school, with your family or in your community. Be specific and use examples. This is also an opportunity to synthesize elements of the class (e.g., what risk perils or hazards have overlooked or minimized in your daily life or business? Can you develop a contingency and budget to protect against those risks? What new knowledge and information did you learn from video and digital content, and how does that knowledge synthesize into your daily life or professional orientation as a risk manager).

Answer 1

Risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk.When an entity makes an investment decision, it exposes itself to a number of financial risks. The quantum of such risks depends on the type of financial instrument. These financial risks might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc.

So, in order to minimize and control the exposure of investment to such risks, fund managers and investors practice risk management. Not giving due importance to risk management while making investment decisions might wreak havoc on investment in times of financial turmoil in an economy. Different levels of risk come attached with different categories of asset classes.

For example, a fixed deposit is considered a less risky investment. On the other hand, investment in equity is considered a risky venture. While practicing risk management, equity investors and fund managers tend to diversify their portfolio so as to minimize the exposure to risk.

School Risk Management

• Reduce hazards.
• Reduce risks in school activities.
• Improve safety for students, employees, and the public.
• Conserve the schools financial resources (Insurance – risk transfer)
• Protect board, staff from liability.

Risk is a reality for all of us. Each day, in the normal course of our lives, we risk:

• injury to ourselves or others
• loss or damage to our and others property
• having legal action taken against us for things we do or fail to do.

These risks can be managed in many ways. Think about what most of us do when we enter an unfamiliar setting. We tend to look around where we are to see what, if any, risks we are facing. If we identify a risk, we will generally assess its probability and likely impact. Most of us are prepared to accept risks that have a low probability and only minimal consequences. As the likelihood or seriousness of effects increases, we become increasingly concerned. Those risks that concern us most are those that are likely to happen and which would have quite serious effects.

Once we have identified a risk and have an idea of its probability and likely impact, we need to work out our response to the risk. One strategy we use to respond to some risks is to simply avoid them. For example, one good way of reducing or eliminating the risks associated with smoking tobacco is to simply stop smoking.

A second way of dealing with a risk is to transfer it to someone else. For instance, while it might be possible - and cheaper - for most of us to install a television antenna on our own roofs, some of us perceive the risk of falling to be sufficiently great that generally we will get a trades person to do it.

Another approach is to control things like the frequency or extent of loss arising from a risk. Loss control measures include seat belts in cars, fire alarms and sprinklers in buildings, and keeping copies of important documents.

Insurance is another common way in which we respond to risk. Life insurance, property insurance and public liability insurance are all ways that we insure ourselves against the risks that we face.

Finally, people may choose to retain risks, for example there is a risk that you might catch a cold if you get wet from the rain. People whose health is otherwise fine might be prepared to accept that risk, while those whose health is not so fine, or who otherwise wish to avoid catching a cold, will take measures to avoid catching a cold. Risk retention is an acceptable strategy particularly for those risks, which are both unlikely to occur, and of only minimal severity.

• Preconstruction services and planning will help minimize your risks. A complete walk through with designers, engineers, architects, and contractors is a good first step. It’s also a good idea to have complete set of drawings and scope to bid with. Clearly defined scope will help subcontractors know exactly what needs to get done.

Risk Management Is All About Your Perception

to different conclusions about the best way to manage risk.

Within each company, research shows that there are likely to be four different, and often incompatible, risk attitudes.

Perspectives on Risk

The four basic risk perspectives were first identified through research in the 1980s. Clear patterns emerged in the data, and they have proven quite resilient over time. Within businesses, most people tend to identify with one of four perspectives.

1. Maximizers

This perspective does not consider risk to be as important as profits. Businesses managed according to the Maximizer perspective will accept large risks, so long as they are well compensated. Managers who hold this perspective believe that risk reverts to the mean—gains will always follow losses—and the best companies will have larger gains and smaller losses over time.

2. Conservators

According to this perspective, increasing profit is not as important as avoiding loss. Holders of this view often feel that the world is filled with many, many dangerous risks that they must be very careful to avoid.

3. Managers

Carefully balancing risks and rewards is the heart of this perspective. Firms that hold this view employ experts to help them find the risks that offer the best rewards, while at the same time managing these risks to keep the firm safe. They believe that they can balance the concerns of the first two groups, plotting a very careful course between them.

4. Pragmatists

This perspective is not based on a specific theory of risk. Pragmatists do not believe that the future is very predictable, so they avoid commitments and keep their options open to the greatest extent possible. They do not think that strategic planning is especially valuable, but rather seek freedom to react to changing conditions.

Each of these four different perspectives prefers a different strategy for dealing with risk. Firms led by Maximizers for example, seek out risk, believing that no risk is inherently unacceptable. Every risk presents an opportunity; the trick is to negotiate appropriate compensation for the downside potential.

Conservator-led organizations shun risk of all sorts, while Manager-led firms carefully manage and calibrate both the amount and type of risk. For their part, those led by Pragmatists seek diversification but otherwise have no overarching strategy. They operate tactically, reacting to each new development.