Page 15 - Risk Management in current scenario

risks and prepares the mitigation plan in advance. The risk management
is defined as

"Risk management is to help organizations to identify, understand and
manage their risks and opportunities, and thereby increase the likelihood
(Probability) of achieving their objective (Mean) by reducing uncertainty
(standard deviation) "

If a question is asked how a player manages the risk that is in the thick
of the roulette game, a simple answer is, once risk is taken, he should
know how much maximum money that he can lose prior to playing the
game- a kind of his own stop loss limit. If this limit is Rs.100, 000, he may
stop playing the game.

In the modern risk management terminology or in a statistical sense, such
limit set by the business houses based on Value at Risk (VaR) used in the
calculation of economic capital.

Insurance Business
Now, if we look at the business of insurance, this is also a game of chance,
where the key event for which insurance is taken is "death". The objective
of insurance is protection against death. Insurance helps in replacing the
income of the breadwinner. Here roulette owner is insurance company
and players are customers and God runs the wheel.

Insurance is based on the principle of "Pooling of Risks". All the lives
taking insurance policies are bucketed, they should be homogenous.
Based on the probability theory, God spins the wheel like roulette and
here winner is the one who God chooses to call him in heaven. This in
the game of roulette is the winner of the game.

Now when the risk is transferred to Insurance Company, they have to
manage the risk that the actual numbers of claims that were expected
should not be more than actual claims. For example, if in the bucketing

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