Non Insurance Methods of Risk Management

NON-INSURANCE METHODS
OF RISK MANAGEMENT
BY
ASHOK RATNA
1009-21-672-050
NON-INSURANCE METHODS OF RISK
MANAGEMENT
RISK AVOIDANCE LOSS CONTROL RISK RETENTION
1. Risk Transfer 1. Severity reduction 1. Planned retention

● Hedging 2. Seperation 2. Unplanned retention
● Insurance 3. Duplication 3. Funded retention
● Diversion 4. Unfunded retention
2. Risk Aversion
RISK AVOIDANCE
Risk avoidance means avoiding those activities which involve risk. The technique is
effective when the loss is known and is not serious. There ways of avoiding risk are:
1. Risk Transfer
a. Hedging
b. Insuring
c. Diversifying
2. Risk Aversion
(a) Risk transfer
Transferring of Risk plays an important role in the financial system.

Selling of assets that acts as the source of risk is one of the basic
methods of transferring risk.
Example:
A car owner is subjected to risk like damage due to accidents, natural
calamities or reduction in value. Then he can sell the car to transfer the
risk or he may transfer the risk by Insuring the car.
(i) Hedging
It is a risk management strategy employed to offset

losses by taking an opposite position in a related asset
For example, if you buy homeowner's insurance, you are
hedging yourself against fires, break-ins, or other
unforeseen disasters.
(ii) Insuring
An insurance is a legal agreement between an insurer (insurance
company) and an insured (individual), in which an insured receives
financial protection from an insurer for the losses he may suffer under
specific circumstances.
Under an insurance policy, the insured needs to pay regular amount of

premiums to the insurer. The insurer pays a predetermined sum assured
to the insured if an unfortunate event occurs, such as death of the life
insured, or damage to the insured or his property.
(iii) Diversifying
Under this method similar amount of different risky assets are held,
instead of holding an investment into a single risky asset. This is known
as diversifying, as the risk is diversified among various risky assets.
Investors and fund managers usually diversify their investments across

various asset classes and evaluate what portion of the portfolio to
allocate to each.
(b) Risk aversion
Risk Aversion refers to the technique in which the investor choose the
one project which is less risker from the other investment projects. If two
investment projects have similar cost and expected return Is also same,
but the return from one of the project is less certian and the return from
the other project Is more certain, then the project containing high
certainity will be selected.
LOSS CONTROL
The risks that are unavoidable by the organizations have to be

controlled. Therefore, in such situations the technique of loss control is
adapted.
Loss control focuses on two activities, i.e, frequency and severity if

losses to reduce risk. It has two major objectives, loss prevention and
loss reduction.
Loss prevention concentrates on controlling the frequency of losses, i.e,
it tries to prevent the regular loss from occuring. Ex: Accidents can be
reduced by driving carefully and safely.
Loss reduction pays attention to reduce the severity of losses when an

event occurs. For example: A community’s warning system can reduce
the number of injuries and deaths from an approaching cyclone.
Types of loss control
1. Severity reduction:
This technique focuses on the reduction of severity of losses. Ex: A car manufacturing
company installs air bags in the cars. It doesn't reduce the accidents, but reduces the
number of injuries due to accidents.
2. Seperation:
This loss control method focuses on reducing the amount of loss associated with
specific risk.
3. Duplication :
Duplicate equipments are made ready to replace the damaged items or equiments
immediately.
Timing of loss control
1. Pre - loss activities :
Such loss control activities are implemented before the occurence of
losses.
2. Concurrent loss control :
When the activities take pace in concurrent with the losses, then it is
known as concurrent loss timing.
3. Post - loss activities :
The timing of loss control activities is known as post - loss when it
focuses on severity reduction.
RISK RETENTION
Under this technique the firm retains the part of losses or all the losses
resulting from the loss exposure. The losses are paid off from the firms
net income or funds established for this purpose or bank overdraft.
For example, risk of getting a flat tyre while on a long road trip. Although
the risk is unknown, it is not as significant and you can easily manage it
out of your pocket.
TYPES OF RISK RETENTION
1. Planned retention :
Planned retention is the retention type under which the risk is
recognised. Plans and conscious efforts are made for the assumption of
recognized risk. Absence of the alternatives also forces the firm to adapt
planned retention.
2. Unplanned retention:
Retention made by the firm without the recognition of exact risk is
known as unplanned retention.
3. Unfunded retention:
Unfunded retention refers to the type of retention when no funds are

arranged in advance for the payment of losses.
4 Funded retention:
When the organization makes an arrangement of funds in advance to

pay for the losses that may occur in future, it is known as funded
retention.
THANK YOU

Non Insurance Methods of Risk Management

Uploaded by

Copyright:

Available Formats

Non Insurance Methods of Risk Management

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Non Insurance Methods of Risk Management

Uploaded by

Copyright:

Available Formats

NON-INSURANCE METHODS

RISK AVOIDANCE LOSS CONTROL RISK RETENTION

1. Risk Transfer 1. Severity reduction 1. Planned retention

Transferring of Risk plays an important role in the ﬁnancial system.

It is a risk management strategy employed to offset

Under an insurance policy, the insured needs to pay regular amount of

Investors and fund managers usually diversify their investments across

The risks that are unavoidable by the organizations have to be

Loss control focuses on two activities, i.e, frequency and severity if

Loss reduction pays attention to reduce the severity of losses when an

Unfunded retention refers to the type of retention when no funds are

When the organization makes an arrangement of funds in advance to

You might also like