Risk Management Risk Management and Types of Risksand Types of Risks

Lesson ObjectivesLesson Objectives

Define Risk and Risk ManagementDefine Risk and Risk Management List and Describe 3 Types of RisksList and Describe 3 Types of Risks Know and Understand 4 Basic Ways Know and Understand 4 Basic Ways

to Handle and Control these Risksto Handle and Control these Risks List 3 types of Ways to Transfer RisksList 3 types of Ways to Transfer Risks Know the Difference Between Risk Know the Difference Between Risk

Avoidance and Risk AcceptanceAvoidance and Risk Acceptance

What is Risk Management?What is Risk Management?

RiskRisk - The possibility of financial loss - The possibility of financial loss

ManagementManagement - The business function used - The business function used to plan, organize, and control all available to plan, organize, and control all available resources to reach company goalsresources to reach company goals

Risk ManagementRisk Management - The systematic - The systematic process of managing an organization’s risk process of managing an organization’s risk exposure to achieve objectives in a exposure to achieve objectives in a manner consistent with public interest, manner consistent with public interest, human safety, environmental factors, and human safety, environmental factors, and the law.the law.

Kinds of RisksKinds of Risks

3 Types3 Types

Economic Economic

NaturalNatural

HumanHuman

Economic RisksEconomic Risks

– These risks occur from changes in These risks occur from changes in overall business conditions.overall business conditions.

– This can includeThis can include:: amount or type of competitor(s)amount or type of competitor(s) changing consumer lifestylechanging consumer lifestyle population changespopulation changes government regulationsgovernment regulations inflationinflation recessionrecession

Natural RisksNatural RisksNatural risks are result from natural Natural risks are result from natural disasters or disruptionsdisasters or disruptions

floodsfloods tornadoestornadoes hurricaneshurricanes firesfires droughtsdroughts lightninglightning earthquakesearthquakes even sudden abnormal weather even sudden abnormal weather

conditionsconditions

Human RisksHuman Risks

These are caused by human mistakes and errors, These are caused by human mistakes and errors, as well as the unpredictability of customers, as well as the unpredictability of customers, employees, or the work environmentemployees, or the work environment

This could include: This could include: TheftTheft injury on the job injury on the job bad checks bad checks employee error employee error NegligenceNegligence IncompetenceIncompetence etc.etc.

Ways to Handle Business Ways to Handle Business RisksRisks

There are 4 principle ways to handle risksThere are 4 principle ways to handle risks

–Risk Prevention and Control Risk Prevention and Control

(Loss Prevention)(Loss Prevention)–Risk TransferRisk Transfer–Risk AcceptanceRisk Acceptance–Risk AvoidanceRisk Avoidance

Risk Prevention and ControlRisk Prevention and Control

– Screening and Training EmployeesScreening and Training Employees– Providing Safe ConditionsProviding Safe Conditions– Providing Safety InstructionProviding Safety Instruction– Preventing External TheftPreventing External Theft– Deterring Employee TheftDeterring Employee Theft

– This is often called “Loss Prevention” in the This is often called “Loss Prevention” in the business worldbusiness world

Risk TransferRisk Transfer

3 Common3 Common

Risk TransfersRisk Transfers– insuranceinsurance– product/service product/service

warrantieswarranties– transference transference

through business through business ownershipownership

InsuranceInsurance– Insurance policyInsurance policy - contract that covers a - contract that covers a

business with a specific type of insurance business with a specific type of insurance reducing risksreducing risks

– Business liabilityBusiness liability - insurance protects a - insurance protects a business against damages for which it may business against damages for which it may be held legally liable, usually up to only $1 be held legally liable, usually up to only $1 million.million.

– Personal liabilityPersonal liability - covers damages by - covers damages by customer and/or employeescustomer and/or employees

– Product liabilityProduct liability - protects from personal - protects from personal injury caused by product manufactured or injury caused by product manufactured or sold by the businesssold by the business

Product/Service WarrantiesProduct/Service Warranties

Warranties are Warranties are simply promises simply promises made by the seller made by the seller or manufacturer or manufacturer with respect to the with respect to the performance and performance and quality of a product quality of a product and protection and protection against lossagainst loss

Transference Through Transference Through OwnershipOwnership

The total amount of risk the business The total amount of risk the business must handle depends in part on the must handle depends in part on the type of business ownershiptype of business ownership– For example, a entrepreneur who owns a For example, a entrepreneur who owns a

sole-proprietorship assumes all the risk sole-proprietorship assumes all the risk as where a stockholder in a corporation as where a stockholder in a corporation assumes only his percentage of the risk.assumes only his percentage of the risk.

Risk AcceptanceRisk Acceptance

When the business assumes the loss When the business assumes the loss responsibility into the upkeep of the responsibility into the upkeep of the companycompany

Most companies pull out a certain Most companies pull out a certain percentage of their revenue for percentage of their revenue for damages, loss to theft, and unsold damages, loss to theft, and unsold items.items.

Risk AvoidanceRisk Avoidance

Risks can be avoided by advance Risks can be avoided by advance anticipationanticipation

Following market research can assist a Following market research can assist a business in making the decision on business in making the decision on whether or not to invest in a product.whether or not to invest in a product.

To determine whether the product is a low To determine whether the product is a low risk you must weigh the potential benefits risk you must weigh the potential benefits against the potential risksagainst the potential risks

Risk Management PlanRisk Management Plan

Develop an overall Risk Management Develop an overall Risk Management Plan for the businessPlan for the business

Develop a specific Risk Management Develop a specific Risk Management Plan for specific events that occur Plan for specific events that occur within the businesswithin the business

Revisit the plan regularly to updateRevisit the plan regularly to update

What We Have LearnedWhat We Have Learned The three types of risks: The three types of risks: economic, natural, humaneconomic, natural, human

The terms important to Risk Management:The terms important to Risk Management:– riskrisk - the possibility of financial loss - the possibility of financial loss– risk managementrisk management - the process of how a business controls the - the process of how a business controls the

risk of financial loss while staying consistent with the public’s risk of financial loss while staying consistent with the public’s interest, safety, environmental factors, and the lawinterest, safety, environmental factors, and the law

There are more ways than one to handle risks There are more ways than one to handle risks effectively.effectively.– Loss preventionLoss prevention– risk transferrisk transfer - insurance, warranties, and transferring - insurance, warranties, and transferring

ownershipownership– risk acceptancerisk acceptance - assume responsibility of loss - assume responsibility of loss– risk avoidancerisk avoidance - anticipating product failure and not investing - anticipating product failure and not investing

in product/servicein product/service