Introduction to Risk Management in Insurance

In Insurance, there is a term known as risk management. Today we are going to gain knowledge about risk management. Without any more unnecessary talking, let’s get into the article.

Risk management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures. Because the term risk is ambiguous and has different meanings, risk managers typically use the term loss exposure to identify potential losses. However, new forms of risk management are emerging that consider both pure and speculative loss exposures. This chapter discuss only the traditional treatment of pure loss exposures. The newer forms of risk management such as enterprise risk management.

Objectives of Risk Management; Risk management has important objectives. These objectives can be classified as follows;

  • Pre-loss objectives.
  • Post-loss objectives.

Pre-Loss Objectives; Important objectives before a loss occurs include economy, reduction of anxiety, and meeting legal obligations. The first objective means that the firm should prepare for potential losses in the most economical way. This preparation involves an analysis of the cost of safety programs, insurance premiums paid, and the costs associated with the different techniques for handling losses. The second objective is the reduction of anxiety. Certain loss exposures can cause greater worry and fear for the risk manager and key executives. For example, government regulations may require a firm to install safety devices to protect workers from harm, to dispose of hazardous waste materials properly, and to label consumer products appropriately. Workers compensation benefits must also be paid to injured workers. The firm must see that these legal obligations are met.

Post-Loss Objectives; Risk management also has certain objectives after a loss occurs. These objectives include survival of the firm, continued operations, stability of earnings, continued growth, and social responsibility. The most important post-loss objective is survival of the firm. Survival means that after a loss occurs, the firm can resume at least partial operations within some reasonable time period.

The second post-loss objective is to continue operating. For some firms, the ability to operate after a loss is extremely important. For example, a public utility firm must continue to provide service. Banks, bakeries and other competitive firms must continue to operate after a loss. Otherwise, business will lost to cempetitors.

The third post-loss objective is stability of earnings. Earnings per share can be maintained if the firm continues to operate. However, a firm may incur substantial addition expenses to achieve this goal operating at another location, and perfect stability of earnings may be difficult to attain.

The fourth post-loss objective is continued growth of the firm. A company can grow by developing new products and markets or y acquiring or merging with other companies. The risk management must therefore consider the effect that a loss will have on the firm’s ability to grow.

Finally the objective of social responsibility is to minimize the effects that a loss will have on other persons and on society. A severe loss can adversely affect employees, suppliers, customers, creditors and the community in general. For example, a severe loss that shuts down a plant in a small town for an extended period can cause considerable economic distress in the town.

Steps in the Risk Management Process; There are four steps in the risk management process are mentioned below;

  • Identify loss exposures.
  • Measure and analyze the loss exposures.
  • Select the appropriate combination of techniques for treating the loss exposures.
  • Implement and monitor the risk.

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