Page 38 - Risk Management in current scenario

and managed independently. There is also a higher cost of management
of risk if handled independently as the benefit of diversification does not
come into force.

What does risk management do?
In business, risk identification not only helps in proactive action but also
helps in giving risk diversification, better risk transfer to the third party,
better allocation of capital, and enhancing the value of the Company
including stabilization of flow of income.
X Diversification effect - Many risks are correlated, so, managing one
risk also helps in reducing another risk. In the insurance sector, when
the lapse risks (policyholder leaving the portfolio earlier than
expected) are reduced, this helps in reducing the claim risks as well.
X Better risk transfer - Identification of risks helps in identifying those
risks which the Company may not manage and need transfer to the
third party. Example, derivative products.

X Better allocation of capital - Risk management helps in the better
deployment of capital based on the risk-return ratio.
X Impact on the valuation of the Company - For listed Companies, risk
management helps in improving the share price and overall valuation
of the Company.

X Reduce earnings' volatility - Reducing earnings' volatility helps in
stabilizing the steady flow of income.

It is imperative that risk management facilitates benefits to organizations
which practice it; however, it has been seen that there are practical
challenges in the Indian market in its implementation.

Challenges in the Indian Market

The ERM in India is a relatively new concept where its implementation
in some sectors has been made to meet minimum regulatory
requirements. There are challenges in fully implementing ERM across

36 | Risk Management in Current Scenario