Risk Management

Risk Management

1. Overview

   • Possibility of incurring a loss
   • Long-term effect vs short-term inconvenient
   • Individual vs Business
   • Insurable vs Uninsurable
   • Careful planning may reduce the change of occurrence or reduce its impact

2. Types

   • Economic
     • Result in financial loss
     • Categories
       • Personal
         • Health, personal well-being
       • Property
         • Loss of personal or business property
       • Liability
         • Harm or injury to other people or their property because of your actions
   • Non-economic
     • Result in inconvenience
     • Examples
       • Late for school
         • Embarrassed but no economic impact
       • Late for work
         • May result in penalty or loss of job, economic risk
   • Pure
     • loss only, no opportunity for gain
     • Severe weather such as typhoon may result in business close down and will reduce sales
   • Speculative
     • Either gain or loss
     • Examples
       • Investment in business
       • Invest in Option or Future
   • Controllable
     • Can be reduced or eliminated by actions
       • Prevent loss from theft by installing a security system
       • Install a tracking device on gas-tank truck to reduce the chance of loss because gasoline gets stolen
   • Uncontrollable
     • Cannot be reduced by actions
       • Century storm is unpredictable and little can be done to reduce the lost
   • Insurable
     • Exchanges the uncertainty of a possible large financial loss for a certain smaller payment
       • Losses are predictable and a large number of people face similar risk
       • Insurance
         • Provide financial protection
         • Losses usually are more than financial
           • Recovery rather than financial interest
           • Need quantification to claim
         • Basics
           • Insured person or business
           • Insurer (policy owner) who take on certain economic risks and to pay for losses if they occur
           • Insurable interest, i.e. the right for the policy owner to buy insurance for the insured
           • Insurability, i.e. the quality of the insured
           • Policy holder, i.e. the person or company buying the policy
           • Insurance policy, i.e. the document which states the condition
           • Premium, i.e. amount to pay for the coverage
           • Claim, i.e. request for payment for a loss
           • Beneficiary, i.e. who gets the business from the policy
       • Insurable items for business
         • Personnel
           • Keyman
             • Life insurance
           • Employee
             • Health insurance
             • Disability insurance for worker's compensation
         • Property (assets)
           • Commercial property insurance
           • Vehicle insurance
         • Operation
           • Business interruption insurance
           • Third party liability insurance
       • Insurance for Construction Project
         • Performance bond, demand bond, tender bond
         • Contractor All Risk Insurance, Employee Compensation Insurance
         • Levies
   • Uninsurable
     • Not common or impossible to predict the amount of loss
       • Circumstances
         • Economic conditions
           • Downturn in the economy
             • Monitor economic changes
         • Consumer demand
           • Understand consumer behavior
         • Competitors' actions
           • Marketing
           • Pricing
           • Promotion
         • Technology changes
         • Local factors
           • Geographical facilities
           • Political community
           • Laws
           • Regulations
           • Taxes
           • Infrastructure of a local community
         • Business operations
           • High cost
           • Low morale
           • Poor customer image
             • Maintain corporate image
           • Lack of training
             • Staff development and promotion
           • Poor management
           • Poor equipment maintenance
             • Regular maintenance and inspection
           • Accidents and injuries

3. Ways to dealing with risks

   • Avoid
     • Experience
     • Planning
     • Decision based on likelihood of risk or the amount of loss
   • Transfer
     • When risk is too great to assume but cannot be avoided
     • Examples
       • Credit transfer to bank or credit card company
       • Distribute products through resellers
       • Partner with experienced research institution through joint venture for research or project development
   • Insure
     • Same type of risk also faced by others
     • Reasonable or limited losses
     • Statistically predictable occurrence
     • Pay a small amount for insurance that will cover the losses of the business
       • Fire
       • Shipping
       • Public Liability
   • Assume
     • Risks that are taken by the company
       • Usually measurable and the extend is not serious