Risk Management

Overview
1. Possibility of incurring a loss
2. Long-term effect vs short-term inconvenient
3. Individual vs Business
4. Insurable vs Uninsurable
5. Careful planning may reduce the change of occurrence or reduce its impact
Types
1. Economic
  1. Result in financial loss
  2. Categories
    1. Personal
      1. Health, personal well-being
    2. Property
      1. Loss of personal or business property
    3. Liability
      1. Harm or injury to other people or their property because of your actions
2. Non-economic
  1. Result in inconvenience
  2. Examples
    1. Late for school
      1. Embarrassed but no economic impact
    2. Late for work
      1. May result in penalty or loss of job, economic risk
3. Pure
  1. loss only, no opportunity for gain
  2. Severe weather such as typhoon may result in business close down and will reduce sales
4. Speculative
  1. Either gain or loss
  2. Examples
    1. Investment in business
    2. Invest in Option or Future
5. Controllable
  1. Can be reduced or eliminated by actions
    1. Prevent loss from theft by installing a security system
    2. Install a tracking device on gas-tank truck to reduce the chance of loss because gasoline gets stolen
6. Uncontrollable
  1. Cannot be reduced by actions
    1. Century storm is unpredictable and little can be done to reduce the lost
7. Insurable
  1. Exchanges the uncertainty of a possible large financial loss for a certain smaller payment
    1. Losses are predictable and a large number of people face similar risk
    2. Insurance
      1. Provide financial protection
      2. Losses usually are more than financial
        Recovery rather than financial interest
        Need quantification to claim
      3. 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
    3. Insurable items for business
      1. Personnel
        Keyman
        Life insurance
        Employee
        Health insurance
        Disability insurance for worker's compensation
      2. Property (assets)
        Commercial property insurance
        Vehicle insurance
      3. Operation
        Business interruption insurance
        Third party liability insurance
    4. Insurance for Construction Project
      1. Performance bond, demand bond, tender bond
      2. Contractor All Risk Insurance, Employee Compensation Insurance
      3. Levies
8. Uninsurable
  1. Not common or impossible to predict the amount of loss
    1. Circumstances
      1. Economic conditions
        Downturn in the economy
        Monitor economic changes
      2. Consumer demand
        Understand consumer behavior
      3. Competitors' actions
        Marketing
        Pricing
        Promotion
      4. Technology changes
      5. Local factors
        Geographical facilities
        Political community
        Laws
        Regulations
        Taxes
        Infrastructure of a local community
      6. 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
Ways to dealing with risks
1. Avoid
  1. Experience
  2. Planning
  3. Decision based on likelihood of risk or the amount of loss
2. Transfer
  1. When risk is too great to assume but cannot be avoided
  2. Examples
    1. Credit transfer to bank or credit card company
    2. Distribute products through resellers
    3. Partner with experienced research institution through joint venture for research or project development
3. Insure
  1. Same type of risk also faced by others
  2. Reasonable or limited losses
  3. Statistically predictable occurrence
  4. Pay a small amount for insurance that will cover the losses of the business
    1. Fire
    2. Shipping
    3. Public Liability
4. Assume
  1. Risks that are taken by the company
    1. Usually measurable and the extend is not serious

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