RISK MANAGEMENT & INSURANCE

ROUTE MAP FOR THE SESSION

DEFINE RISK AND MANAGEMENTROLE OF EACH OF THE PARTY RELATED TO INSURANCE; INSURED;INSURER;BROKERNEED FOR IMPLEMENTING RMADVANTAGES OF HAVING RMCLASSIFICATION OF RISKSPURE RISKS MANAGEMENTCORPORATE RISK MANAGER AND HIS ROLE

CONTD. PERSONAL ATTITUDES OF INDIVIDUALS CORPORATE RISK MANAGEMENT - RISK MANAGEMENT DEPARTMENT RISK HANDLING METHODS

1. RISK IDENTIFICATION2. RISK EVALUATION/ QUANTIFICATION3. RISK AVOIDANCE4. RISK MINIMISATION5. RISK TRANSFER 6. RISK FINANCING FOR RISK RETENTION7. ROLLING REVIEW

CONTD CONTINGENCY PLANNING DISASTER CONTROL MUTUAL AID INCIDENT / ACCIDENT INVESTIGATION INTERACTION WITH INSURERS/ ENGINEERS/ SURVEYORS CAPTIVE INSURANCE COMPANIES ASSOCIATIONS/ CLUBS/

RISK- DEFINITION

Risk is defined as the chance of having a loss due to occurrence of an eventThe risk is always associated with the loss aspects since the word itself has the association of DANGER OF LOSSThe definition can be “ PROBABAILITY OF THE OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN

RISK AND MANAGEMENT

RISK- CHANCE OF AN EVENT HAPPENING RESULTING IN LOSS/ GAINTO APPRECIATE THE NEED FOR LOSS PREVENTION AND IMPLEMENT MEASURES TO ACHIEVE THE SAMETHE EFFORTS ARE AIMED TO PREVENT A LOSS HAPPENING BUT ALSO TO MAKE IT MANAGEABLE IF IT HAPPENSTHIS ASPECT IS TO BE ACHIEVED IN ALL ACTIVITES OF THE ORGANISATION BE IN PRODUCTION, STORAGE, HANDLING, TRANSPORTATION AND DISTRIBUTION

EFFECTS OF RISK

Risky situations are to be faced by those who are deploying their Capital & RESOURCES in any VENTURE ( is it an ADENTURE?) Adventure means venturing into some area which may have serious effects on the well being of the resourcesAll Industries / Business do face such situations every day in their activitiesHENCE RISK MAY BRING IN LOSS IN CASE OF AN ACCIDENT / UNTOWRD HAPPENING BUT CAN BRING IN PROFITS IN THINGS GO IN THE WAY THESE ARE EXPECTED TO HAPPEN

Risk Management- MacroProvision of adequate infrastructure, trained personnel and capability to mitigate huge losses due to disasters natural & man made will be the main area for macro analysis by the GovernmentNatural disasters result in huge devastation and loss of human livesBhopal tragedy had put India in Guinness book of world records as one of the big tragedies of the world

Risk Management-MacroPollution is now causing the maximum concern & affects the health of citizens and young population- Solid, water, airWe need to improve the public hygiene awareness and the way in which we are soft targets for epidemics due to pollutionPast earthquakes in Maharastra & Gujarat had shown how ill prepared we areEvery year the country is ravaged by floods in many parts and drought in some parts- interconnection of rivers remains a distant dream- water may become one of the major sources of trouble in this countryInfrastructure is looked into only after development and government is then unable to acquire the land required

Risk Management-Macro Allowing too many Airlines without runways has only resulted in air congestion and pollution of air at higher levelWe are contributing to global warming, unpredictable weather conditions, hole in the ozone layer which nature has provided to shield us from ultra-violet radiationUnscrupulous destruction of forests and creation of concrete jungles has resulted in ecological imbalance

RISKS A BUSINESS FACES

ENVIRONMENTAL RISKS-LEGAL, SOCIAL, ECONOMIC, FINANCIAL RISKSCHANGES IN BUSINESS, SPECULATIVE RISKS,TECHNOLOGICAL CHANGESPURE RISKSFUNDAMENTAL RISKS

STEPS IN MANAGEMENT

PLANORGANISEDELEGATEMOTIVATETRAININGCONTROLCOURSE CORRECTIONSACHIEVE THE GOALS

EFFECTS OF PURE RISKS –ORGANISATION FACES

LOSSEVENT

A.LOSS OR DAMAGE TOPROPERTY

B.PECUNIARY LOSSES(FINANCIAL)

C.LIABILITY LOSSES

D.LOSS OF KEY EMPLOYEES

BODILY FATAL/NON-FATALTO EMPLOYEES

Details A.Loss /dge to property

Fire & explosion Storm, cyclone, hurricane, flood/inundation SRCC Accidental damages Breakdown losses

Financial losses Business Interruption Loss of profit Continuing fixed costs Cost of alternate accomodation Increased cost of working Increase in cost of replacement of assets following loss/damage/destruction Under insurance/absence of insurance

Liabilities to general public to users due to defective products to employees as employer as tenants other legal liabilities due to their acts-Directors/ Officers

Human resources Fatal or non-fatal injuries Loss of key/ trained employees Loss of earnings due to disablement Hospitalization and medical expenses Travel ( inland and overseas)

EFFECTS OF SPECULATIVE RISKS –ORGANISATION FACES

SPECULATIVERISKS

LOSS OF REVENUEDUE TO LOSS

OF MARKET SHARE

LOSS OF CUSTOMERS/SUPPLIERS

INCREASED FIXED CHARGES/ LOSSES

LOSS OF KEYEXPERIENCEDEMPLOYEES

Risk Management- Definition

Risk Management is defined as the

systematic way of ensuring protection of business resources and income against losses so that the aim , goals and vision of the company can be reached.

Thus Risk Management creates stability and contributes to growth and assures profitability of the Organisation.

AIM OF RISK MANAGEMENT

TO SUCCESSFULLY ACHIEVE THE OBJECTIVES OF THE ORGANISATIONACHIEVE THE COMPANY’S MISSIONACHIEVE THE SHORT TERM AND LONG TERM GOALS OF THE ORGANISATIONSATISFACTION OF CUSTOMERS,

MANAGEMENT, EMPLOYEES AND SHARE HOLDERS & GOVERNMENT

RISK MANAGEMENTThis is of very recent origin ( less than three decades old)This is now being considered as a managerial topic and as aspect in which the top management should get involved to reduce any adverse effects on the balance sheets.RM can be described as the scientific way of dealing with or handling the risks.This is done by Risk Analysis, Risk Control, Risk Transfer, Risk financing and rolling review

ICEBERG OF LOSSES

INSURED LOSSES

UNINSURED LOSSESUNINSURED LOSSES

LOSS OF GOODWILLLOSS OF MARKETLOSS OF CUSTOMERSLOSS OF SHAREHOLDER VALUELOSS OF KEY EMPLOYEESLOSS OF COSTS INCURRED

THE R M IMPERATIVES

“RISK NEEDS” PERCEPTIONRISK ANALYSISRISK ASSESSMENTRISK MINIMISATION/CONTROLRISK IMPROVEMENTSHARE INDUSTRY EXPERIENCESHARE INFO ON CHANGES - BOTH CURRENT & PROSPECTIVE

THE R M “BEST PRACTICES” ?

INVOLVE ALL PLAYERSEDUCATE, CONTINUOUSLYINVOLVE “CORE” & “NON-CORE” INVOLVE FINANCIAL PERSONNELINVOLVE SAFETY PERSONNELINVOLVE FIRE SERVICE PERSONNELINVOLVE BUSINESS PARTNERSINTERACT, CONSTANTLY - PROACTIVELY

THE RISK MANAGER’S DO’S

ALWAYS ADDRESS CHANGE & CONTENT MANAGEMENT – AT ALL TOUCH POINTS – REGULATORY/INSURER/INSURED/ INTERMEDIARY/SURVEYORADDRESS DELAY POST-HASTECOMMUNICATE CONTINUOUSLYGET REAL – NO EXAGGERATIONS/BLUFFINGGET YOURSELF PROFESSSIONALLY RESPECTED – CONTINUOUS EDUCTION

THE RISK SPECTRUM

ENIRONMENTAL RISKSSTATUTORY RISKSLEGAL RISKSTECHNOLOGICAL RISKSHUMAN ELEMENTPRODUCTION/ FINANCIAL/MARKETINGMARKET RISKSTIME FACTOR

THE RISK SPECTRUM

PROJECT RISKSSTORAGE RISKSERECTION & MAINTENANCE RISKSOPERATIONAL RISKSSTORAGE RISKSTRANSPORTATION RISKSOUTSOURCING RISKS

ALVIN TOFFLER

“ ILLITERATES ARE NO LONGER THOSE WHO CANNOT READ AND WRITE, BUT THOSE WHO CANNOT LEARN, UNLEARN & RELEARN ”

QUICKLY & CONSTANTLY

PURPOSE OF RISK MANAGEMENT

RISK MANAGEMENT AIMS TO PROVIDE AN INCIDENT FREE AND ACCIDENT FREE ENVIRONMENT FOR ACHIEVEING THE OBJECTIVES OF THE ORGANISATIONRISK MEANS UNCERTAININTY OF THE OCCURRENECE OF AN EVENT WHICH MAY RESULT IN LOSS/GAINIMPORTANT CHARACTERISTICS ARE THE UNCERTAINITY/ SEVERITY OF SUCH LOSSES

ADVANTAGES OF RM

To achieve the objectives of the OrganisationTo ensure that the goals short term and long term are achieved without any disruption or delayTo optimise the utilisation of the resourcesTo have knowledgeable insurance arrangements and have considered decisions on insurances not to be availed

ENVIRONMENTAL RISKS

Risks which are to be faced which are external but influence the working and health of the OrganisationThese are called Environmental RisksLegalSocial- Riots/Strikes/BandhPolitical-Change in the political systems of Governance and Management-tensions with neighboursEconomical- Soaring Oil prices

MANAGEMENTALL ABOUT ASPECTS OF SUCCESSFUL MANAGEMENT OF RISKS BOTH PURE AND SPECULATIVE RISKSPROPER PLANNINGORGANISE THE AVAILABLE RESOURCESCOORDINATIONDELEGATIONMOTIVATION DECISION MAKINGROLLING REVIEW

CLASSIFICATION OF RISKS

SPECULATIVE RISKS & PURE RISKS

DYNAMIC RISKS & STATIC RISKS

FUNDAMENTAL RISKS

PARTICULAR RISKS

CLASSIFICATION OF RISKS

SPECULATIVE RISKSOperation of this leads to profit /lossLeads to speculation like investment of capital in a new ventureOperation is desired

PURE RISKS

These do not change with the riskThe operation of these perils does bring in loss/damage to property/assets/ liabilityNot desired

Classification of RisksDynamic risks

Changes with the change in fashion, buying behaviour, trends, technology etcIt denotes dynamic nature of the customer behaviour and the products they like to own or useIf an organization is not prepared then it may go out of existence

Static risksLike pure risks these risks remain static and do not change due to other reasons like that of dynamic risksThe operation of these risks always bring about losses Operation is not desiredMay result in partial or total cessation of activities

CLASSIFICATION OF RISKS

PARTICULAR RISKSRisks which relate to one or few firms, factories or organisations onlyLosses are suffered by one or few more members of the society

FUNDAMENTALRISKS

Relates to the society at largeLosses are suffered by large section of the society/nation(s)Losses may be due to natural catastrophes, riots, epidemics etc

Development of Risk Management

The Industries / Business houses want to have incident free/ accident free working to achieve their objectivesFor this purpose it is necessary to understand the loss producing events , the nature of losses/ extent of losses to come up with the loss control measures.EXPOSURE ANALYSISRisk Management aims to help the owners to have control on loss incidents and to reduce the extent of losses by proper study of the exposures and actions to be taken to control the sameThis as a science had developed in about thirty years period

Risk Management processThe steps in Risk Management process are:

1. Risk analysis- Risk identification & Risk evaluation

(Risk measurement) (Risk quantification)2. Risk control - Risk avoidance

(Risk minimization)3. Risk transfer- Insurance with Professional Insurance companies4.Risk financing- Risk retention5. Rolling review

How the loss is caused?

Loss is caused by the operation of perils which refers to the causes for the lossesLoss or damage is caused by the operation of perils such as fire, explosion, flood, storm etcThe loss potential ( extent of loss) depends on conditions which are favourable for the incident to assume large proportions. This is known as hazard or potential of the loss. More the potential severe will be the extent of lossPERIL ( CAUSE)----------------LOSS(EFFECT) HAZARD

Causes of lossesPerils- such as fire, explosion etcHuman factors- such as negligence, carelessness, inadequate training, inadequate supervision, lack of proper systems and controlsInadequate maintenance ( predictive/ routine/ annual maintenance)Failure of Plant/ machinery due to breakdowns (failure of safety devices)Natural perils such as flood, cyclone, earthquake, landslide, rockslide & subsidence Extraneous: Accidents involving Gas or chemical in nearby units

HAZARDHazard is defined as conditions existing which are favourable for the loss becoming severeCLASSIFICATIONS OF HAZARDPhysical hazard-Originating hazards

Contributory hazards Tertiary hazards

Moral hazards -relating to the moral behavoiur of the clientsMorale hazard -Relating to the morale & working conditions of the employees & employer-employee relationships

RISK ANALYSIS

Needs to be done by a person who is conversant in the identification and measurement The severity of the risk depends on two factors –extent and frequency ( probability)- ranges from 0-1There are various methods to analyze the extent of lossThe frequency is to be analyzed based on the analysis of data ( loss events and the frequency ) using statistical methods

RISK ANALYSIS- METHOD

LIST ALL POSSIBLE RISKS INVESTIGATE BY STUDYINQUIRYDOCUMENT REVIEWPHYSICAL INSPECTIONANALYSE EACH RISK

RISK

RISK PERCEPTION

Loss in Rupees

Los

s in

uti

lity Risk

Seeker

Neutral toward

risk

Risk averter

RISK APPETITE

RISK CONTROL

PRESERVE CONTINUITY OF OPERATION UNDER SAFE OPERATING CONDITIONSPROPER PLANNING –LAYOUT OF BUILDINGS/PLANT/MACHINERYBUILD IN SAFETY TO AVOID LOSSES TO PERILS SUCH AS FIRE, EXPLOSION NATURAL OR HUMAN NEGLIGENCE CAUSING SERIOUS LOSSES

RISK ANALYSIS

Property losses- losses which can happen to the Assets Pecuniary losses- Financial Loss which can be caused by business interruption due to the loss to the assets, financial loss due to infidel acts of employees, storekeepers and other employeesLiability losses- Loss to the Third Party property or third party personnel ( also known as TPPD and TPBI) due to activities of the OrganisationPersonal injuries- accidents resulting in fatal or non-fatal injuries to the employees

METHODS OF RISK ANALYSIS

HAZOP STUDY- HAZARD OPERABILITY EVENT ANALYSIS THREAT ANALYSIS INPUT- OUTPUT ANALYSIS FAULT TREE ANALYSIS

RISK EVALUATION

Methods available areStudy of Organisational charts/ balance sheets, accounting recordsProcess flow diagrams, P & I diagramsInput- output analysis- contribution from various sections, inter-dependenciesStudy of completed checklistsThreat analysis- Denial of access, Loss of services

EVALUATION METHODS

INPUT – OUTPUT ANALYSIS TO TRACE THE FLOW OF GOODS AND SERVICES TO IDENTIFY THE CONTRIBUTION OF PARTS OF ORGANISATION TO THE TOTAL EARNINGS AND TO ANALYSE EXPOSURES

EVALUATION OF RISKS-THREAT ANALYSE THE THREATS TO BUSINESS DENIAL OF ACCESS- CHEMICAL LEAKAGE, COLLAPSE OF NEARBY BUILDINGS, STRIKE, PICKETING, DAMAGE TO WATER/SEWER MAINS, GOVT RESTRICTIONS LOSS OF SERVICES –WATER, POWER,RAINS, FLOODS, CYCLONES

EVALUATION OF RISK-THREATEVENT ANALYSIS INVESTIGATE CAUSES AND EFFECTS FAILURE OF BOILER EXPLOSION FAILURE OF A CRITICAL ITEM EXPLOSION IN PRESSURE VESSEL HAZARD LOGIC TREES- VARIOUS HAZARDS WHICH MAY RESULT IN OPERATION OF A PERIL LEADING TO LOSS

HAZOP ANALYSIS

MEANT FOR CHEMICAL PLANTS HAZARD OPERABILITY STUDIES EFFECT OF MORE OF, LESS OF, PART OF , NONE

FAULT TREE ANALYSIS EXAMINE RELATIONSHIP OF VARIOUS TYPES OF FAILURES THE TREE IS CONSTRUCTED BY ASKING WHAT MUST OCCUR BEFORE A LOSS PRODUCING EVENT HAPPENS EXPLOSION REQUIRES- FORMATION OF EXPLSOIVE MIXTURE- CLOUD FORMATION- SOURCE OF IGNITION PROBABILITY ANALYSIS WILL HELP IN APPRECIATON OF THE RISK INVOLVED

SAFETY AUDITS

THOROUGH KNOWLEDGE TEAM OF EXPERIENCED OFFICIALS WALK IN AUDIT EXAMINATION OF THE STANDARDS HOUSEKEEPING SECURITY, TRAINING AND PREPAREDNESS OF EMPLOYEES,MEANS OF ESCAPE

RISK EVALUATION-CONTD.

Event analysis- Effects of a loss producing eventHazard Logic Tree- Risk and effectsHazard Operability studies- more of , less of, none of, part of, Fault tree analysis- Explosion, Safety audits- Physical inspection

RISK HANDLING METHODS

ADOPTION OF LOSS CONTROL MEASURESLoss control measures involve the nature of the devices utilized and the human factorFor any system to be effective the employees concerned need to be properly trained and knowledgeable.The Management need to ensure that the systems employed are in good working order the employees are regularly trained.

RISK AVOIDANCE

This is also known as Risk EliminationIdentify the risk and if possible avoid the risk by eliminating the sourceIt is like avoiding a location due to seismic activity in the areaAvoiding a low lying location which is susceptible for flooding

RISK MINIMIZATION-RISK CONTROL

If risk can not be eliminated then it is necessary to minimize the extent of loss/damage/liability by employing loss control measuresUtilizing fire fighting measures like detectors/ hydrants/sprinklersUsing CCTVs/ watch & ward to ensure adequate securityEmployees need to be well trained for fire fighting operationsEmploying proper checking /screening systems/ regular and its inventory controlsChecking the antecedents of persons employed

RISK RETENTION

To keep the costs under control, after analyzing the risks the Management, may decide to retain some of such losses to its account.Once a decision is taken , then necessary provision needs to be made to avoid such a loss ,if happens, eating into the operating budgetSpecial contingency funds are therefore to be created for this purpose

EFFECT OF LOSSES

Huge losses will upset the functioning of the Power StationBesides the interruption losses, the loss of goodwill, investigation by Government and other agencies will be tediousThe direct impact of any incident is in the monetary loss and in restarting of the affected unit.Employees morale gets affected

RISK MANAGEMENT POLICY

The RMP is to be adopted by the ManagementThe Policy details should be communicated to the employeesThe need to have the RMPolicy should be felt by the employeesThe Corporate Risk manager is responsible for the implementation of the RM PlanThe RM Dept will produce its own report and follow it up with an annual report on its performance

CORPORATE RISK MANAGER

The Corporate risk manager is essentially the coordinator . He has to analyze the various activities and find out the risks involved and analyze which are to be controlled, avoided and which are to be insured.Once the plans are finalized and adopted by the Management , the Insurance dept ensures that the insurance policies are obtained and maintained during the annual periodPeriodical reviews need to be done to ensure that the risks are analyzed and necessary modifications are done to suit the organization's policies.

CONTINEGENCY PLANNING

IDENTIFICATION OF ALTERNATE SOURCESIDENTIFICATION OF KEY AREASPLANNING FOR COMEBACK IN SHORTEST POSSIBLE TIMEBACKUPS OR DUPLICATE RECORDS OF VITAL INFORMATION TO BE MAINTAINED IN ALTERNATE SAFE LOCATIONS

INCIDENT /ACCIDENT INVESTIGATION

ALL INCIDENTS WHETHER THESE RESULT IN AN ACCIDENT OR NOT NEED TO BE REPORTED AND ANALYSED TO AVOID A FURUTE LOSS OR RECURRENCE.ALL LOSSES NEED TO BE STUDIED WHETHER SMALL OR MEDIUM OR BIG WITH A VIEW TO LEARN THE CAUSES AND TO ENSURE THAT PREVE

CONTRIBUTIONS OF RM TO THE BUSINESS

Achievement of objectives/ goalsReduced anxiety due to losses are of reasonable magnitude and does not cause serious loss situationsGoodwill is maintained by meeting the obligationsThe business is able to survive competitionSuccessful and continued operationsResultant growth and sustained earningsBetter care for employees and society at largeReduction of expensesBetter relationships between customers, suppliers, employees

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