Introduction to risk management

What is risk management?

A process to identify risks and choose the best way to handle them.

What kind of risks does traditional risk management focus on?

Pure risks (only involve loss).

What does Enterprise Risk Management (ERM) include?

Both pure and speculative risks.

What are the two main types of risk management objectives?

• Pre-loss

• Post-loss objectives.

What are the three pre-loss objectives?

1. Minimize cost of risk,
2. Reduce anxiety,
3. Meet legal requirements.

What is included in the cost of risk?

Expected loss

Cost of control

Cost of financing

Residual risk.

What is residual risk?

Risk that remains after using prevention and financing methods.

Example:

A company installs a firewall to protect its computer system from hackers.
This reduces the risk, but it doesn’t remove it completely — hackers might still find a way in.

That leftover risk is the residual risk.

Why can't risk be totally eliminated?

Because it's too expensive to remove all risk.

What is the best level of risk control?

When the benefit of control equals its cost.

Example:

If spending CHF 1,000 on safety saves you CHF 1,000 in losses, that’s a good level.
Spending CHF 5,000 to avoid CHF 1,000 in losses is too much.

Give examples of legal obligations for risk management.

• Safety devices

• Proper waste disposal

• Compensation for injured workers.

What are the five post-loss objectives?

1. Survival,
2. Keep operating,
3. Stable earnings,
4. Growth,
5. Social responsibility.

Why is earnings stability important?

To avoid big profit losses and keep investors confident.

What does social responsibility mean in risk management?

Company takes actions to protect people, the environment, and society, not just profits.

What is the goal of corporate risk management?

• Protect the firm’s value

• Reduce unexpected losses

• Support better decision-making

• Improve stability and performance

How is a firm’s value defined?

The discounted value of expected future cash flows.

How does risk management increase expected cash flows and How does it lower the discount rate?

Increases expected cash flows by reducing losses and disruptions, and lowers the discount rate by making the company less risky and more attractive to investors.

How has risk management changed from before the 1950s to the 2000s?

It changed from focusing only on insurance (before the 1950s) to including prevention (1950s), structured control (1970s), enterprise-wide risk (1990s), and strategic decision-making (2000s).

Why is risk management more important today?

Because of bigger risks, tighter rules, and public pressure.

What are the 3 steps in the risk management process?

1. Risk analysis,
2. Choosing strategies,
3. Implementation and monitoring.

What is the first step in risk analysis?

Identify all possible risks.

How can risks be identified?

With checklists, inspections, financial data, and past loss records.

How are risks assessed?

Using qualitative (descriptions) and quantitative (data) methods.

What are the two main types of risk management strategies?

Risk control and risk financing.

What is risk control?

Actions to reduce the chance or impact of a loss.

What are examples of risk control?

• Loss prevention

• Loss reduction

• Avoidance.

What is risk financing?

Ways to pay for losses when they happen.

What are the two types of risk financing?

• Risk retention

• Risk transfer

What is a risk management policy?

A risk management policy is a written plan that explains how a company will identify, assess, and deal with risks.
It sets the rules, goals, and responsibilities for managing risk across the organization.

It helps everyone know what to do and who is responsible when risks appear.

Why should departments work together on risk management?

Because risks can affect multiple parts of a company, and working together helps spot problems early, share information, and create better solutions.

Why do we monitor risk strategies?

To see if they work and fix them if needed.

What should be compared during evaluation?

Costs vs. benefits of risk strategies.

What is personal risk management?

Managing risks for individuals and families using the same steps as companies.