LESSON 2:

Sources of Risks

LESSON OBJECTIVES:

• Enumerate the sources of risks

• Identify the sources of risks
• Provide industry-related examples of each source of risks

Risk can come from varied sources like:

1. Financial market uncertainty;

2. Threats from failure of project (at any phase in the life-cycle);
3. Legal liabilities;
4. Credit risk;
5. Accidents;
6. Natural happenings or disasters;
7. Attack that is deliberate from an adversary;
8. Uncertainty or unpredictable root causes.

1. Uncertainty in the Financial Markets

One consideration that a manager should take into in the conduct of

his or her business is the uncertainty in the financial markets. Managers
must be vigilant enough in determining those uncertainties that could give
more impact in the entirety of his business. The press briefing statement of
Former US Defense Secretary Donald Rumsfeld was quoted in
https://www.ezonomics.com/whti/ uncertainty (retrieved, 2018). "We know
there are known unknowns; that is to say we know there are some things we
do not know. However, there are also unknown unknowns - the ones we do
not know we do not know." The statement of Rumsfeld is a reminder to
everyone that the awareness on the distinction between certainty and
uncertainty could be helpful in many circumstances like the reduction of so
much confidence for investors and the protection of wealth for an extended
period.

In the paper of Nick Bloom, an economist, he argued that uncertainty

can hit different groups in different ways. He gave oil-price spike as an
example, contending that it may give a good impact for the producers of oil,
but not for airlines. As pointed out by Bloom, the OPEC oil embargo in 1973
had tipped the US into recession by tripling oil prices and increasing
uncertainty over future oil prices.

In the paper of Slovik (n.d.), he said that although the efficient market
prices already enunciated the known factors, the primary sources of market
sources are considered unknown factors. According to him, the said unknown
factors should be referred as market uncertainty. He finally concluded that
from the perspective of market stability, the most critical aspect is not the
market risk, but the degree of market uncertainty embedded in different
assets or business models.

The Tax Reform for Acceleration and Inclusion (TRAIN) Law or RA 10963
which took effect on January 01, 2018 overhauled the National Internal
Revenue Code (NIRC) which was adopted twenty years ago. Although the
TRAIN may be considered as beneficial to some extent as it decreases the tax
on personal income, estate, and donation, it could somehow also produce
uncertainty to the financial market as it increases the tax on certain passive
incomes, documents (documentary stamp tax) as well as excise tax on
petroleum products, minerals, automobiles, and cigarettes.

The primary commodities for food and hospitality industry were

likewise affected by the TRAIN law when it imposes excise taxes on sweetened
beverages and non-essential services (invasive cosmetic procedures) and
removes tax exemption of Lotto and other PCSO winnings amounting to more
than Php 10,000.

2. Threats from Project Failures

 Another source of risk that could hamper the success of the tourism
and hospitality business is the threat usually embedded in the project. As a
manager, you cannot just avoid the threat; you have to deal with it. As per
https://ppp- certification.com/ppp-certification-guide/81-what-project-
failure-types-project- failures, the success of Public-Private Partnership is
being measured by avoiding the project failure or minimizing their
consequences. It means that: the PPP is the right project; it is the right
delivery model for the project; the project is appraised, structured, and
managed to lessen the negative impacts on cost, scope, time, and quality.

Based on Taylor Jr. (2014), the compelling business development

requires tąking on calculated risk. Throughout the whole process of project
development, the managers could direct their teams on the right actions
utilizing establishing the distinction between risks and effects. Consequently,
late projects and its failure to meet the quality guidelines could produce an
adverse impression on the new members.

3. Legal Liabilities in Tourism and Hospitality Industry

As discussed, the risk may be defined as a potential loss or harm to

persons and property. When applied to tourism and hospitality industry, it
could be any of the following: financial loss, damage to property, or injury to
workers or guests. It is a given fact that most people in the hospitality and
tourism industry would like to get rid of any legal responsibility attaching to
the risks, the reason why they have been using risk management as a
precautionary measure. To emphasize, risk management is a tool to avoid
injury to guests and employees and to protect their business operations from
financial or physical inconveniences.

Risk management in tourism and hospitality industry is a two-way

process: (1) The safety of the guests and employees, which includes avoidance
to emotional and physical harm is a moral and ethical responsibility of the
operators; (2) Protection to business operations which includes protection
against damage to property persons and property and future litigation. Risk
management is like hitting two birds with one stone: safety of the guests and
employees plus the avoidance of suits and other causes of actions.

4. Credit Risk

Credit is another source of risk that could impact the tourism and
hospitality industries. Credit risk as defined in Principles for the Management
of Credit Risk, https://www.bis.org/publ/bcbsc125, is the potential that a
bank borrower or counterparty will fail to meet its obligations following agreed
terms. The goal of credit risk management is to maximize a bank’s risk-
adjusted rate of return by maintaining credit risk exposure within acceptable
parameters. Banks need to manage the credit risk inherent in the entire
portfolio as well as the risk in individual credits or transactions. Barnks
should also consider the relationships between credit risk and other risks.
The effective management of credit risk is a critical component of a
comprehensive approach to risk management and is essential to the long-
term success of any banking organization.

5. Accidents
 Risks and accidents are sometimes being used interchangeably, but
they are different, though they complement each other. Accidents are reactive
while risks are preventive. The effects are well known in an accident. There is
a possibility of shock on the part of the injured, anger at the one in fault, and
confusion on the thing that is supposed to be done immediately after the
accident. Accident management is necessary to reduce the costs pertinent to
the accident, to wit damage to property, rental costs, maximization of
subrogation recovery.

To emphasize, the management of risk is preventive as it would like to

limit the occurrence of accidents (automotive-fleet.com). It pertains to the
precautionary measures that a manager should do to limit or avoid the
accidents.

A. Some common injuries in the hospitality industry

The following are some of the common injuries in the hospitality

industry (https://www.entenlaw.com (2017):

1. Slip-and-fall injuries;
2. Musculoskeletal injuries;
3. Skin reactions;
4. Respiratory illnesses;
5. Security-related accidents (Accidentshttp://www.automotive-
fleet.com/. channel);
6. Food poisoning;
7. Elevator and escalator accidents (Winston, n.d.)

Slip-and-fall Injuries. Hotel workers are at risk of falling and slipping

because of the nature of their work which requires them to move quickly and
faster as they can to accomplish their time the soonest possible. Clientele and
guests are being valued in the hotel industry, the reason why the workers are
pampering guests and clientele employing service with utmost efficiency.
Guests are not supposed to be given long waiting time. The persons assigned
in a pool area, lobby, or hallways are also susceptible of meeting the slip-and-
fall injuries.

Musculoskeletal Injuries. Working in a hotel requires a lot of strengths

and agility because of the requirement of their work to bend and lift that could
cause muscular pains and injuries. The severity of the injuries would usually
depend on the factors that trigger the injury and the early medical attention.

Skin Reactions. The skin reactions may be caused by the exposure of

the hotel workers to a variety of chemicals on a daily basis, like strong
cleaning agents. Skin reactions need early medical attention to avoid severe
complications.

Respiratory Illnesses. There is a possibility that hotel employees

usually assigned to the Housekeeping Department could acquire respiratory
illnesses due to their exposure to infectious diseases carried through bodily
fluids like vomit, feces, and blood.

The following are in addition to what has been enumerated in (Accidents

http://www.automotive-fleet.com/channel/safety-accident-management).

Security-related Accidents. No matter how careful the management

of a hotel and similar establishment is, there were still some reports of
accidents that could be attributed to accident and negligence cases like
robbery and theft. In this section, the authors have opted to include the
provisions of the Revised Penal Code of the Philippines, specifically Article 102
so that the students would be able to determine the corresponding liability of
their actions if they would engage themselves in the hotel and similar
establishments in the future.

Under the law, the innkeepers, tavernkeepers, and proprietors of

establishments are liable for the presence of the following elements:

1. The innkeeper, tavernkeepers, and proprietor of establishments or his

employee violated a municipal ordinance or some general or police
regulation;

2. A crime is committed in such inn, tavern, or establishment;

3. The person criminally liable is insolvent.

In the second paragraph of Article 102, when all of the following elements
are present, the innkeeper is subsidiarily liable:

1. The guests have notified in advance the innkeeper or the person

representing him of the deposit of their goods within the inn.

2. The guests have followed the direction of the innkeeper or his

representative concerning the care and vigilance of their goods.

3. Robbery or theft took such goods of the guests lodging in therein.

It must be noted that even if the guests did not deposit their goods and a
notice of disclaimer of liability was posted in a hotel, it does not free the owner
from secondary liability. It is enough that the goods were stolen from the inn.

Food Poisoning. Food poisoning is typically being experienced in the

restaurants and similar establishments, even in luxury hotels and resorts. It
is usually caused by undercooked food, cross-contamination in the kitchen,
or other negligent preparation measures.
 In the Inquirer section by Castillo (2011), it was alleged that a mass food
poisoning happened at Edsa Shangri-la, a 5-star hotel. Victims were participants
of the convention of heart specialists from all over the country. He lamented that
“It is quite discomforting thought that the source of the problem has not been
identified, yet there was no effort to report it to the proper health authorities.”
There was also a report of food poisoning in the National Athletics Meet
held at Dumaguete City in 2013. A total of 158 athletes and coaches were
hospitalized after they allegedly suffered food and water poisoning before the
official start of a national competition. The athletes and coaches were brought to
Negros Oriental Provincial Hospital after they complained of fever, dizziness,
headache, diarrhea, and vomiting. (Dacanay, 2013)

Elevator and Escalator Accidents. Elevators and escalators which are

common in the hotels, malls and similar establishments are very beneficial to
both the guests and management as it could give them convenience in getting
from one level of a building to another. The management however of the said
establishments must exercise due diligence to make sure it is well-maintained
and that any safety of the guests is of paramount consideration. According to
Winston (n.d.) “The hotel owners are responsible for making sure that any
elevators or escalators in their building are well-maintained and that any
safety concerns that arise during maintenance checks are quickly addressed.
When hotel owners fail to do this, accidents can happen.”

B. Some Accidents in the Tourism Industry

Accidents occur when there is an unintentional external action at a

particular time and place, with the non-apparent and deliberate cause but
with marked effects. It is an adverse outcome which could have been
prevented if the attendant circumstances could have been recognized and
attended with before its happening. There are many tourism-related activities
which are susceptible to harm and damage people and property. Examples
will be presented as per their category:

1. Accidents due to fortuitous events or acts of God. Accidents in

connection with this category are beyond the contemplation of man.
The causes are not within the bounds of man. Who would ever forget
the horrible Indian Ocean earthquake and tsunami which killed almost
250,000 people, including tourists in Phuket, Thailand and 13 other
countries? Listed below are some of the natural phenomena identified
around the world: Earthquakes; Volcanic eruption; Flood; Landslides;
Erosion; Fire; Storm; Typhoon.
 2. Transportation accidents. Operators in the tourism industry usually
create packages with the following different modes of transportation to
accommodate tourists:
2.1 Air
2.2 Water
2.3 Land

The said modes of transportation are not free to danger of meeting an

accident no matter how diligent the operators are because of the different
perils attaching to it. Notable land-sea-air transportation disasters based on
https://www. Rappler.com/world/46909-2013-land are as follows:

“The MV Our Lady of Mt. Carmel sank in Masbate, Philippines last June
2013 and cost the lives of two of the 57 documented passengers on the ship. At
least 91 people died on June 16, 2013 when the ferry St. Thomas Aquinas collided
with cargo ship MV. Sulpicio Express 7 while both vessels were traversing the sea
off Talisay City in the province of Cebu. Several more bodies were recovered which
gave rise to at least 116 dead.”

“Malaysia Airlines Flight MH370 became the world’s greatest aviation

mystery when it disappeared without a trace flying from Kuala Lumpur in
Malaysia to Beijing, China, in March 2014.” (https://www.thesun.co.uk/
news/2100795/flight-mh370-malaysia-airlines-search-latest-news/)

3. Accidents pertinent to tourism-related activities. There are various

activities in connection with the tourism industry that are susceptible
to give harm and danger not only to the employees but as well as to the
tourists and various stakeholders. Listed below are some of the
accidents that could be confronted while enjoying tourism-related
activities: pool accident; animal bites or attacks; drowning;
electrocution.

6. Natural Causes and Disasters

 The natural disasters may be categorized into three broad groups
(http://www. Earthtimes.org/encyclopaedia):

1. Caused by movements of the earth

2. Disasters related to weather
3. Floods, mudslides, landslides, and famine

The movements of the earth may include earthquakes, volcanic

eruptions, and tsunamis. Risk managers could hardly predict the occurrences
of this phenomenon. The only thing that they can do is to take necessary
measure to lessen damage to property and loss of life after the event.

Disasters related to weather include hurricanes, tornadoes, el niño, la

niña, extreme heat, and freezing water. There is no way to stop these
occurrences as the weather system develops. Risk managers can only do
something to lessen the effect of these natural occurrences, but they cannot
get rid of it.

Floods, mudslides, landslides, and famine are considered as

magnitudes of the occurrences of the extreme weather events. They are the
results of unforeseen conditions.

7. Deliberate Attack from an Adversary

In an article of Sinai (2016), he expressed his belief on the vital role of

tourism in the economy of the nation as evidenced by the revenue of the
government, employment, and national income. He said that by attacking the
industry, economic recession and unemployment could be at stake. He
concluded that terrorist groups perceive hotels, restaurants, and tourist
resorts as significant targets for attack. He cited the incident of June 26,
2015, wherein an Islamic terrorist carried out mass shooting killing 30 British
tourists at Port El Kantaoui. Further, he also claimed the impact of this
terrorism in Tunisia which caused the forced shut down of 70 hotels and a
decline of an estimated 80% foreign tourism.
 Sinai said in his article that “In response to such terrorist threats, the
hotel industry around the world has beefed up its security departments,
implementing a range of security measures to protect guests at their
properties, ranging from armed guards to concrete barriers and metal
detectors.”

Terrorism, according to Albu (2016), has become one of the more and
more active and threatening calamities that affect the international
community. He concluded that tourists avoid the tourist areas where terrorist
events have occurred, their confidence in the respective destination being very
hard to recover. The attacks had resulted in the strengthening of security
sectors in the states affected, review of domestic boarding policy, and the
strict passenger’s control, even if the purpose of travel is tourism.

8. Events of Uncertain or Unpredictable Root-cause

The strategies to manage risk typically include transferring the risk to

another party, avoiding the risk, reducing the adverse effect or probability of
the risk, or even accepting some or all of the potential or actual consequences
of a particular risk. Certain aspects of many of the risk management
standards have come under criticism for having no measurable improvement
on risk, whether the confidence- in estimates and decisions seem to increase
(waterfronthotels.com., 2018).

Two Types of Events in Risk Management

There are two types of events, to wit:

1. Negative events or risks;

2. Positive events or opportunities.