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 and 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, and residual risk.

What is residual risk?

Risk that remains after using prevention and financing methods.

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.

Why is reducing anxiety a goal?

Because big risks can cause stress and worry.

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?

Limiting the harm to others and society after a loss.

What is the goal of corporate risk management?

To increase the firm's value.

How is a firm’s value defined?

The discounted value of expected future cash flows.

How does risk management increase expected cash flows?

By avoiding big losses and reducing financial trouble.

How does it lower the discount rate?

By making cash flows more stable, so investors accept lower returns.

What was risk management mainly before the 1950s?

Just buying insurance.

What happened in the 1950s?

Firms started using more control strategies.

What happened in the 1970s?

Focus on the total cost of risk.

What happened in the 1990s?

International regulations were added.

What happened in the 2000s?

Risk governance and integration became common.

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, and avoidance.

What is risk financing?

Ways to pay for losses when they happen.

What are the two types of risk financing?

Risk retention and risk transfer.

What is a risk management policy?

A written plan that explains goals and trains staff.

Why should departments work together on risk management?

Because each has unique knowledge and responsibilities.

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.