Page 10 - RMAI BULLETIN Oct - Dec 2019

RMAI BULLETIN OCTOBER TO DECEMBER 2019

the maintenance of financial stability through cost The subject of risk management does not have a long
effective methods of protecting assets and history. It is reported by Ben Hunt that “one of the
earnings earliest references to the term “risk management” was
in 1956 in the US when it was used in a Harvard
3. The Systematic appraisal of a Company, plant or
Business Review article. The term started gaining
operation using in many cases a number of
currency in 1970s. According to him “even the
specialist skills and technique, so that risk can be
establishment [by corporations] of risk management
quantified and specific proposals can be made for
reducingthem. departments toward the end of 1980s and early in the
1990s did not herald a more strategic approach to risk
Risk Management is a managerial function or a and its management….”Non-financial risk
technique concerned with the protection of a firms/ management remained framed within the discipline of
organization’sassets,earningsorprofits,legalliabilities insurance purchasing. The spectrum of risks that
and personnel (employees) against unforeseen corporations wanted to manage still tended to be
accidental / possible losses (that results / may result ‘insurable’–physicalhazards,liabilityrisksandsoon”.
from fortuitous events i.e. accidental happenings). Risk
management is a systematic process involving various The focus on risk management, particularly by
steps like – ‘Risk Identification’, ‘Risk, ‘Risk Prevention / corporate, has undergone remarkable change over
Avoidance/ Minimization, ‘Risk Control’, Risk time. There has been a change in regard to concern
Retention’ and ‘Risk Financing’. Purpose of Risk withgravityofrisk. Thecorporatehavebecomefarless
Managementistofindout:- concerned with traditional “high frequency, low
1. High frequency & low severity of losses (that are severity” risks but have started devoting greater
noteconomictoinsure);& attention to risks that could lead to corporate collapse

2. Low frequency & high severity losses (where andcorporatebankruptcy.
insuranceisnecessary).
Risk management is about insurance and hedging and
Risk Management process is planning, arranging and biases the use of both insurance and financial
controlling of activities and resources in order to instruments to control the costs of corporate risk. For a
minimize the impact of uncertain events. Risk long time, corporate have used insurance to manage
Management also can be defined as a decision process property, liability and other insurable risks. Insurable
for selecting and putting into practice those risk risks expose the firm to volatility that is only on the
management techniques which are most cost-effective downside – chance of loss, not of gain. However, it was
for a particular organization. Now Traditional Risk slowly recognized that insurance is not the only
Management concept & process uses a lot of risk possible strategy. To pay for losses, insurance provides
protection measures & techniques in sequence the needed funds. With no insurance, the firm could
typicallyinvolvingthefollowing(orequivalent)steps: pay for losses by contractinga debt or raisefresh equity
1. Identifyingandanalyzinglossexposures; capital.Itisincreasinglyacceptedthatthesourceofrisk
2. Examining the feasibility of alternative risk is of no great importance. Furthermore, the
managementtechniques; contribution of each source of risk cannot easily be
isolated.AsDohertyobserves“riskdoesnot simplyadd
3. Selectingtheapparentlybesttechniques;
up”. There is therefore a need to adopt a
4. Implementingthechosentechnique(s); comprehensive approach for managing risk. This
comprehensive strategy for treating risk is referred to
5. Overall monitoring, review and improving the risk as “integrated risk management” (IRM) or “enterprise
managementprogramme.
riskmanagement”(ERM).

According to Kenneth Arrow “the essence of risk
The basic objective is the measurement of futuristic
management lies in maximizing the areas where we possibility of loss or damage (i.e. finding the risk
have some control over the outcome while minimizing
exposure through Risk Identification & Analysis) to
theareaswherewehaveabsolutelyno controloverthe
various risks (i.e. the subject matter of insurance - like a
outcome”.

8