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8/4/2019 B&I kARTHICK
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Methods ofhandling Risk
A Presentation By
KARTHICK S
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Methods of handlingbusiness risks
• Risks in any business are unavoidable and theycannot be eliminated completely. The variousmethods that may be used for handling businessrisks are as follows
o Loss Control
o Loss Financing
o
Internal Risk Reduction
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Handling Risk
Loss Control
Reducing level ofRisky Activities
Increasing
Precautions
Loss Financing
Retention
Insurance
Hedging
Internal RiskReduction
Diversification
Investment in
Information
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Loss Control• Actions that reduce the expected cost of losses by
reducing the frequency of losses and/ or theseverity of losses that occur are known as Loss
Control .
• This is also known as Risk Control.
• Two general approaches to loss controlo Reducing Level of Risky Activity
o Increasing Precautions against loss
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Reducing level of Risk
• Exposure to loss can be reduced by reducing thelevel of risky activities.
• It primarily affect the frequency of losses.
• The main cost of this strategy is that it forgoes anybenefits of risky activity that would have been
achieved apart from the risk involved.
• Risk Avoidance
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Increasing Precautions
• To increase the level of care for a given level of riskyactivity.
• To make the activity safer – goal
• Thorough testing for safety and installation of safety
equipment are examples of increased precautions.
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Loss Financing• Methods used to obtain funds to pay for or offset
losses that occur are known as Loss Financing.
• This is called as Risk Financing.
• Methods in Loss Financing
o Retention
o Insurance
o Hedging
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Retention• A business or individual retains the obligation to pay
for part or all of the losses.
• This is also known as Self-Insurance
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Insurance• The typical insurance contract requires the insurer to
provide funds to pay for specified losses.
• Insurance contract reduce risk for the buyer bytransferring some of loss to the insurer.
• Insurers in turn reduce the risk through
diversification.
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Hedging
• Financial derivatives, such as forwards, futures,options and swaps, are used extensively to managethe risks. Most notably Price Risk.
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Internal Risk Reduction
• In addition to loss financing that allow businessesand individuals to reduce risk by transferring it toanother entity, business can reduce risk internally.
• Two main forms of Internal Risk reduction
o Diversification
o Investment in Information
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Diversification
• Firms can reduce the risk internally by diversifyingtheir activities.
• Individuals also routinely diversify risk by investingtheir savings in many different stocks.
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Investment in Information
• To invest in information to obtain superior forecastsof expected losses.
• It can produce more accurate estimates or forecasts of future cash flows, thus reducingvariability of cash flows around the predicted value.
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Reference• Risk Management and Insurance by Harrington
Niehaus
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