Introduction

The etymology of the word risk can be traced to the Latin word rescue
meaning risk at sea or that which cuts. Risk is associated with uncertainty
and reflected by way of charge on the fundamental/ basic i.e. in the case of
business it is the capital, which is the cushion that protects the liability
holders of an institution from any unexpected loss. In the process of
financial intermediation the gap of which becomes thinner and thinner
banks are exposed to severe competition and hence are competition to
encounter various types of financial and non-financial risks viz., credit,
interest rate, foreign exchange, liquidity, equity price, commodity price,
legal reputation, brand equity risks etc. These risks are interdependent and
events affecting and area of risk can have ramifications and penetrations
for a range of other categories of risks. Foremost thing is to understand the
risks run by the bank and to ensure that the risks are properly confronted,
effectively controlled and rightly managed.

A risk is any uncertainty about future event that threatens yours

organization’s ability to accomplish its mission. Business is a trade off
between risk and return. There can be no risk free or zero risk oriented
business. This is due to the fact that the concept of a project implies
effecting current investment, for a future activity and a future gain after
the project construction period can be dither ways. When such changes are
adverse, when there is time over run or cost escalation the investment in
the project comes to grief even before the project is completed. There con
be also be several unexpected developments both internal and from the
external environment that can render your project calculation go away

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There van be minimum risk in a captive controlled economy, where high
tariff walls protect industry and banks by directed credit and directed
interest rates, and directed investments, but along with such minimum risk,
there would also be minimum growth of the economy. In India after total,
regulation for several decades, the economy witnesses around 3% average
growth. The Indian economy has now been freed of state

Management risk: When you invest in a mutual fund, you depend on the
fund's manager to make the right decisions regarding the fund's portfolio.
If the manager does not perform as well as you had hoped, you might not
make as much money on your investment as you expected.

Risk:

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Risk/Return Trade-Off: The most important relationship to understand is
the risk-return trade-off. Higher the risk greater the returns/loss and lower
the risk lesser the returns/loss.

Market Risk: Sometimes prices and yields of all securities rise and fall.
Broad outside influences affecting the market in general lead to this. This
is true, may it be big corporations or smaller mid-sized companies. This is
known as Market Risk. A Systematic Investment Plan (“SIP”) that works
on the concept of Rupee Cost Averaging (“RCA”) might help mitigate this
risk.

Credit Risk:
The debt servicing ability (may it be interest payments or repayment of
principal) of a company through its cash flows determines the Credit Risk
faced by you. This credit risk is measured by independent rating agencies
like CRISIL who rate companies and their paper. A ‘AAA’ rating is
considered the safest whereas a ‘D’ rating is considered poor credit
quality. A well-diversified portfolio might help mitigate this risk.
Interest risk:
In a free market economy interest rates are difficult if not impossible to
predict. Changes in interest rates affect the prices of bonds as well as
equities. If interest rates raise the prices of bonds fall and vice versa.
Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.

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Determinations of objectives:

It is very important for an organization to identify the objectives of the risk

management function. This includes the expectations that the organization
has from the risk manger. The efficiency of the risk management may be
seriously hampered if its objectives are not clearly specified. The clear
declination of objective helps in identification of the risk management
process as holistic approach rather than as isolated individual problems to
be dealt with. In order to ascertain the risk management objective of the
organization, it is very important to link the priorities, goals and on
objectives of risk management with that of the organization from various
exposures.

Post loss objectives

1. Survival of the organization
2. Perpetuity of the organizations operations
3. Steady flow of income’ earnings
4. Social obligation

Pre-loss objectives
1. Economy
2. Fulfillment of external obligations
3. Reduction in anxiety
4. Social obligation

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Identification of the objectives
Identification of the objectives of a risk management process
depends of the type of the organization. However, the guiding principle of
development of objectives for any organization remains the same; to save
the organization from the perceived risks.

Usually the organization develops a risk management policy, which

lays down the objectives of risk management. The top management of the
organization usually develops the policy for risk management. The
ultimate responsibility of the welfare of the organizations rests with the
top management because of which they lay down the important policy
decisions. However, the risk manager can provide valuable suggestions,
which will help the top management in arriving at well-developed policies.

SCOPE:

• My study about the risk management covers the following

Aspects
• Various types of risks in insurance sectors
• Need for risk management
• Managing various types of risk

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METHODOLOGY AND DATA COLLECTION

PRIMARY SOURCE:

• I gathered information by interacting with employees at

Various levels in the insurance

SECONDARY SOURCE:

• I referred to risk management related books

• Material provided by ICICI prudential

6
 ICICI PRUDENTIAL LIFE INSURANCE

ICICI prudential Life Insurance was established in the 2000 with a

commitment to expand and reshape the life insurance industry in India.
The company was amongst the first private sector insurance companies to
begin operations after receiving approval from Insurance Regulatory
Development Authority (IRDA)

Products
Insurance Solutions for Individuals
ICICI Prudential Life Insurance offers a range of innovative, customer-
centric products that meet the needs of customers at every life stage. Its
products can be enhanced with up to 4 riders, to create a customized
solution for each policyholder.

Savings & Wealth Creation Solutions

Cash Plus is a transparent, feature-packed savings plan that offers3 level
of protection as well as liquidity options.

Save'n'Protect is a traditional endowment savings plan that offers life

protection along with adequate returns.

Cashbook is an anticipated endowment policy ideal for meeting milestone

expenses like a child's marriage, expenses for a child's higher education or
purchase of an asset. It is available for terms of 15 and years.

Lifetime Super & Lifetime Plus are unit-linked plans that offer
customers the flexibility and control to customize the policy to meet the
changing needs at different life stages. Each offers 4 fund options -
Preserver, Protector, Balancer and Maxi miser.

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Lifeline Super is a single premium unit linked insurance Plan, which
combines life insurance cover with the opportunity to stay, invested in the
stock market.

Premier Life Gold is a limited premium-paying plan specially structured

for long-term wealth creation.

Invest Shield Life New is a unit linked plan that provides premium
guarantee on the invested premiums and ensures that the customer
receives only the benefits of fund appreciation without any of the risks of
depreciation.

Invest Shield Cashbook is a unit linked plan that provides premium

guarantee on the invested premiums along with flexible liquidity options.

Protection Solutions Lifeguard is a protection plan, which offers life

cover at low cost. It is available in 3 options - level term assurance, level
term assurance with return of premium & single premium.

Home Assure is a mortgage reducing term assurance plan designed

specifically to help customers cover their home loans in simple and cost-
effective manner.

Education insurance under the Smart Kid brand provides guaranteed

educational benefits to a child along with life insurance cover for the
parent who purchases the policy. Smart Kid plans are also available in
unit-linked form - both single premium and regular premium.

Retirement Solutions

Forever Life is a traditional retirement product that offers guaranteed

returns for the first 4 years and then declares bonuses annually.

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Lifetime Super Pension is a regular premium unit linked pension plan
that helps one accumulate over the long term and offers an annuity option
(guaranteed income for life) at the time of retirement.

Life Link Super Pension is a single premium unit linked pension plan.

Immediate Annuity is a single premium annuity product that guarantees

income for life at the time of retirement. It offers the benefit of 5 payout
options.

Health Solutions

Health Assure and Health Assure Plus: Health Assure is a regular

premium plan which provides long term cover against 6 critical illnesses
by providing policyholder with financial assistance, irrespective of the
actual medical expenses. Health Assure Plus offers the added advantage of
an equivalent life insurance cover.

Cancer Care: is a regular premium plan that pays cash benefit on the
diagnosis as well as at different stages in the treatment of various cancer
conditions.

Diabetes Care: Diabetes Care is the first ever critical illness product
specially for individuals with Type 2 diabetes.

Group Insurance Solutions: ICICI Prudential also offers Group

Insurance Solutions for companies seeking to enhance benefits to their
employees.

Group Gratuity Plan: ICICI Pru's group gratuity plan helps employers
fund their statutory gratuity obligation in a scientific manner. The plan can

9
also be customized to structure schemes that can provide benefits beyond
the statutory obligations.

Group Superannuation Plan: ICICI Pru offers both defined contribution

(DC) and defined benefit (DB) superannuation schemes to optimize
returns for the members of the trust and rationalize the cost. Members
have the option of choosing from various annuity options or opting for a
partial commutation of the annuity at the time of retirement.

Group Immediate Annuities: In addition to the annuities offered to

existing superannuation customers, we offer immediate annuities to
superannuation funds not managed by us.

Group Term Plan: ICICI Pru's flexible group term solution helps provide
affordable cover to members of a group. The cover could be uniform or
based on designation/rank or a multiple of salary. The benefit under the
policy is paid to the beneficiary nominated by the member on his/her
death.

Flexible Rider Options: ICICI Pru Life offers flexible riders, which can
be added to the basic policy at a marginal cost, depending on the specific
needs of the customer.

Accident & disability benefit: If death occurs as the result of an accident

during the term of the policy, the beneficiary receives an additional
amount equal to the rider sum assured under the policy. If the death occurs
while traveling in an authorized mass transport vehicle, the beneficiary
will be entitled to twice the sum assured as additional benefit.

Critical Illness Benefit: protects the insured against financial loss inthe
event of 9 specified critical illnesses. Benefits are payable to the insured
for medical expenses prior to death.
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Income Benefit: This rider pays the 10% of the sum assured to the
nominee every year, till maturity, in the event of the death of the life
assured. It is available on SmartKid and Cash Plus.

Waiver of Premium: In case of total and permanent disability due to the

future premiums continue to be paid by the company till the time of
maturity.

This rider is available with Lifetime Super, Lifetime Super Pension and
Cash Plus.

Awards

India's Most Customer Responsive Insurance Company

Avaya Global Connect - Economic Times
Customer Responsiveness Awards

Most Trusted Private Life Insurer

The Economic Times - A C Nielsen Survey of Most Trusted Brands2003,

2004 and 2005

Prudence Customer Centricity Award 2004 & 2005

Prudential Corporation Asia

Outlook Money Awards 2003 & 2004

Best Life Insurer 2003

Silver Effie for Effectiveness of the ‘Retire from Work not life’
advertising campaign

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 ABOUT THE COMPANY

ICICI Prudential Life Insurance Company is a joint venture between ICICI

Bank, a premier financial powerhouse, and Prudential plc, a leading
international financial services group headquartered in the United
Kingdom. ICICI Prudential was amongst the first private sector insurance
companies to begin operations in December 2000 after receiving approval
from Insurance Regulatory Development Authority (IRDA).

ICICI Prudential capital stands at Rs. 18.15 billion with ICICI Bank and
Prudential plc holding 74% and 26% stake respectively. For the 10 months
ended January 31, 2007, the company garnered Rs 3,240 core of weighted
retail + group new business premiums and wrote over 1.3 million policies.
The company has assets held to the tune of over Rs. 14,000 core.

ICICI Prudential is also the only private life insurer in India to receive a
National Insurer Financial Strength rating of AAA (Ind) from Fitch
ratings. The AAA (Ind) rating is the highest rating, and is a clear assurance
of ICICI Prudential's ability to meet its obligations to customers at the
time of maturity or claims.

For the past six years, ICICI Prudential has retained its position as the No.
1 private life insurer in the country, with a wide range of flexible products
that meet the needs of the Indian customer at every step in life. To know
more about the company, please visit www.iciciprulife.com.

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Distribution
ICICI Prudential has one of the largest distribution networks amongst
private life insurers in India. As of January 31, 2007 the company has over
540 offices across the country and over 200,000 advisors.
The company has over 20 bancassurnace partners, having tie-ups with
ICICI Bank, Federal Bank, South Indian Bank, Bank of India, Lord
Krishna Bank, Idukki District Co-operative Bank, Jalgaon Peoples Co-
operative Bank, Shamrao Vithal Co-op Bank, Ernakulam Bank and 9
Bank of India sponsored Regional Rural Banks (RRBs). It has also tied up
with NGOs MFIs and corporates for the distribution of rural policies.
ICICI Bank (NYSE:IBN) is India's second largest bank and largest
private sector bank with assets of Rs. 2958.32 billion as on December 31,
2006. ICICI Bank provides a broad spectrum of financial services to
individuals and companies. This includes mortgages, car and personal
loans, credit and debit cards, corporate and agricultural finance. The Bank
services a growing customer base through a multi-channel access network
which includes over 695 branches and extension counters, 3051 ATMs,
call centers and Internet banking.

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MANAGEMENT

The ICICI Prudential Life Insurance Company Limited Board comprises

reputed people from the finance industry both from India and abroad.

Mr. K.V. Kamath, Chairman

Mr.BarryStowe
Mrs.KalpanaMorparia
Mrs.ChandaKochhar
Mr.RNarayanan
Mr.KekiDadiseth
Ms.ShikhaSharma,ManagingDirector
Mr.N.S.Kannan,ExecutiveDirector
Mr. Bhargav Dasgupta, Executive Director

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 RISK SPECTRUM
Risk is better understood in terms of and in relations to uncertainty.
Whatever we do there is an element of risk or uncertainty. Whatever we
do there is an element of risk or uncertainty attached to the outcome.
Certainty and uncertainty are two extremes on a continuum, and risk exists
some where between the two. The following paragraphs would help you
understand these concepts.

Every action is followed by outcomes. Some action have single outcome,

while most action have a wide range of out come, consider the tossing of
coin. When we toss a fair coin there are two possible outcomes; it either
lands heads or tails. Similarly, six outcomes are possible when we throw a
dice. Profitability from a business activity is characterized by a range of
outcomes; from maximum loss to maximum profit
DEFINING RISK
Usually, the term ‘risk’ is used synonymously with insurance, which is not
correct. There is no universally accepted definition of risk.
In one sense, risk is defined as “a variation in the possible outcome”. In
another sense, risk is defined as “The degree of uncertainty associated
with apostle loss”.
The degree of risk is estimated based on the certainty level with which the
outcome of an activity can be forecast. The greater the accuracy with
which the outcome can be predicated the lower is the risk.
 Possibility of loss or injury: Peril.
 Someone or something that creates or suggests a hazard.
The chance of loss or the perils to the subject matter of an insurance
contract; also the degree of probability of such loss.
 A person or a thing that is a specified hazard to an insurer.

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 An insurance hazard from a specified cause or source.

Apart from the words ‘uncertainty’,’ certainty’, ‘risk’ other words such as
‘peril’ and ‘hazard’ are most frequently used in the field of risk and
insurance management quite often they are used interchangeably with risk.
It is better to understand the distinction between them before we start
using these words.
A peril is a cause of risk. Fire, earthquake, flood, criminal activities, etc.,
are examples of perils. Thus perils are causes of losses. Organizations and
individuals buy insurance policies and use other methods to protect their
assets from perils.
THE EFFECT OF RISK
As mentioned earlier risk results in gains or losses. If we invest in an
equality share we may gain or lose when we sell it at a later date. If a fire
accident occurs in a warehouse it will result in losses only. We are very
much concerned with negative impact of risk when we attempt to manage
it. ‘Loss’ is a state wherein someone is deprived of something he/she had.
It may refer to loss of money, memory, stock, or reputation. Loss as used
in the insurance, has limited meaning. It is defined as an undesired
unplanned reduction in economic value resulting from chance.

Those losses, which do not result from chance, are not covered as loss in
insurance. For instance, depreciation, expenditure, age, time, friction, etc,
are not insurable, as they do not occur from chance events. Some losses
are immediate in nature and result from insured peril. These are called
‘Direct losses’. If a fire reduces the building to ash, the building is a direct
loss. A direct loss leads to consequential or indirect losses, which are in
the from of increased expenses on account of construction of new

16
building. Other establishment expenses, etc. Such losses are termed as
‘indirect losses’.

CERTAINTY, RISK AND UCERTAINTY

The term ’certainty’ refers to the state where there is a little or no doubt
about the outcome of an event or action. Webster’s New Collegiate
dictionary defines certainty as ‘a state of being free from doubt’. Opposite
of certainty is uncertainty. Uncertainty results from the doubt or inability
to predict the future outcome of current actions. Thus, uncertainty crops up
when there is a doubt in the achievement of target or the desired
objectives. The potential variation in the outcome is called risk. In is a
certain other words, it is not possible to determine the outcome of an
action with certainty when there degree of risk. Let us look at the concept
of risk with the help of an example. Table 1.1 shows the outcome of two
bets. In one of them, the amount at risk is Re .1 and in the other, it is
Rs.100.

CLASSIFICATION OF RISK
Different risks require different methods and approaches to deal with
them.

Board Classification of pure Risks

Types of losses from pure Risks

 Direct losses

 Indirect losses

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Direct losses

Damage to assets

Injury /illness to employees

Liability claims and defense cost

Indirect losses

Loss of normal profit

Higher cost of funds
Foregone Investment
Bankruptcy costs

Classification of Pure Risks

There are four broad categories of pure risk. They are

 Property risk
 Personal risk
 Liability risk
 Loss of income risk.

PROPERTY RISK
In this case there is a fear of loss of property because of some unforeseen
events. Property includes both movable and immovable assets.
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PERSONAL RISK
It refers to the possibility of loss of income or assets as a result of the loss
of the ability; to earn income. This may result from untimely death of the
earning member, dependent old age, prolonged illness, disability or
unemployment.
LIABILITY RISK
Liability risk arises when there is a possibility of an unintentional damage
to other person or to his property because of negligence. However, the
chances of intentional harm are not ruled out in certain circumstances.

LOSS OF INCOME RISK

Loss of income risk is an indirect loss from a given risk. As discussed
under property risks, whenever there is a direct loss, it is followed by some
consequences that result in indirect loss.

Dynamic vs. Static Risk

Static risk remains constant over an observed period of time. Risks remain
static because the environments in which they exist are static.
Dynamic risks arise from the changes that occur in an environment, which
may be economic, social, technological, and political. Change in the
environment creates risk and uncertainty about the future.

Fundamental vs. Particular Risks

Those risks, which affect a larger group, such as a society or an industry,
or a particular segment of an industry, are termed as fundamental risks.
For example, natural calamities such as flood, earthquake, drought,
epidemics, etc. affect the whole mass in the same manner irrespective of
caste, creed or religion or geographical boundaries..

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ATTITUDE TOWARDS RISK
Attitude towards risk reflects the perception or a mental position with
regard to a fact or state, or it is a feeling or emotion towards a fact or a
situation. Individuals can be grouped into three different categories as per
their attitude towards risk. They are:
 Those who are neutral/indifferent to risk,
 Those who are willing to take up risks, and
 Those who avoid risk.

HUMAN RESPONSE TO RISK

It is not possible for an individual or an organization to avoid risk. Every
organization is exposed to risks of various degrees in the course of
business. It is the duty of the risk manager of a company to analyze the
characteristics of risks to which the organization is exposed and develop
suitable strategies to minimize the same.

Mankind has developed various tools and techniques to safeguard itself

against the perceived risks and hazards since the dawn of civilization.
Though the procedures or methods adopted for the purpose might have
undergone a sea change, the objective remains the same. As the saying
goes, “Man proposes and God disposes”, the uncertainty of outcome of
any future event adds to the severity of risk in any situation. There is
always a certain degree of uncertainty involved in achievement of any task
regardless of the precautionary measures taken up. This is because any
system draws its strength from two sources viz. external and internal. It is
very important that for the smooth functioning ;of the organization both
the external and internal environments must be understood well.

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MANAGEMENT OF RISK
In risk management, the term “management” refers to the efforts of an
individual or an organization for achieving the desired objective. For
example, a businessman would like to plan the production level as per the
demand of the market. Designing of the product shall be in accordance
with the needs of the consumers. Pricing of the product will take into
consideration the cost of production and competitor’s prices. Moreover the
businessman would like to instill confidence in consumers by offering
after sales service.

RISK MANAGEMENT STRATEGIES

Risk is all pervasive and there is no escape. Hence, human beings must
always find different ways in dealing with risks. Several methods can be
used in everyday life to handle both pure risk and speculative risks. They
are.

 Risk avoidance
 Risk reduction
 Risk retention
 Risk combination
 Risk sharing
 Risk hedging

Risk avoidance
This is the strongest method of dealing with risks. Risk avoidance results
in the total elimination of exposure to loss due to a specific risk. It

21
involves abandoning some activity and so losing the benefits associated
with it.
There are two ways by which risk can be avoided. In the first case the
person will not assume any risk, therefore, he will not do any project that
exposes him to risks. This is known as proactive evidence. In the second
case a person will try to abandon the exposure to loss assumed earlier, by
discontinuing the activity or winding up the project. This is called
abandonment avoidance.
Proactive avoidance is resorted into many situations.

Risk reduction
Risk reduction aims at decreasing the number of losses by reducing the
occurrence of loss through various measures. Risk may be reduced in two
ways namely loss prevention and loss control.

LOSS PREVENTION
It is the most desirable means of dealing with risks. Since the possibility of
loss is eliminated., risk is also completely eliminated. Safety programmers
like medical care, security guards etc. and other measures like fire
sprinkler systems, burglar alarms, are all examples of loss prevention
activities.
These measures intervene at various stages of the activity such as the
perceived activity itself, its environment and the link between the activity
and its environment. It tries to.

LOSS CONTROL
Organizations buy insurance in order to protect themselves against a
perceived loss from a risk. This may be because of occurrence of a
certain event. At the same time the insurance company would like to

22
avoid occurrence of such event. For this purpose it would provide
various methods or incentives to the company to undertake safety
measures.

Risk retention
It is the most common method of dealing with risks. Individuals face
a number of risks some of which cannot be avoided, reduced or
transferred. Individuals and organizations retain such risks. Risk may
be retained knowingly or unknowingly. Transfer it or reduce it. When
the risk is perceived and no attempts are made to transfer it or reduce
it. When the risk is not perceived at all then it is retained
unknowingly. In such cases, the person retains the financial
consequences of the possible loss without realizing of doing so.

Risk transfer
If risk or effect of risk is borne by a party other than the one who is
primarily exposed to risk, it may be called risk transfer. For example, a
building contractor who does not expertise in interior decoration may hire
an interior decorator for the building. Thus the contractor has passed on
the risk of loss of reputation in the market because of the poor interior
decoration. Similarly if there is an expectation of increase in price of wood
and furniture material the contractor passes the contract to some other
agency. In this way the perception and chances of occurrence of risk is
being transferred from one agency to the other. Thus it is different from
abandonment wherein the risk is totally eliminated by abandoning the
activity.

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Risk sharing
Risk sharing is an arrangement to share losses. Risk is usually shared in a
number of forms. One conmen example is the corporation, where
investments of large number of persons are pooled and each bears only a
portion of risk that the enterprise may incur. Insurance is an other advice
of risk sharing where members of the group share risk.

Hedging
Corporation in which individual investors and organization place money
have exposure to fluctuations in all kind of financial prices like foreign
exchange rate, interest rates, commodity prices and equity prices. The
effect of changes in these prices on the earnings is huge. Hence
organization resort to hedging which reduces the risk evolved in holding
an investment’s
LOSS REDUCTION
The aim of the loss reduction into reduces the degree of loss incurred by
the occurrence of a particular event. Though it does not reduce the chances
of occurrence of the event. It reduces the impact of the loss caused by the
event. For example, the seat belt in a car does not reduce the chances of
accident but it reduces the extent of injury inflicted upon the person. So is
the case with wearing helmets, using parachutes, fire sprinkler system in a
building etc. all these safety devices add to the reduction of loss rather
than the reduction of probability of occurrence of the event itself.
 The hazard
 The environment
 The interaction
 The outcome

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  The consequences

RISK MANAGEMENT ESSENTIALS

After reading this chapter, you will be conversant with

• The nature of risk management
• The evolution of risk management
• Risk in personal life
• Corporate/organizational risks
• The process of risk management

NATURE OF RISK MANAGEMENT

Risk management aims to at controlling the risk exposure of a firm. It is

a rational approach towards controlling the our risk to which an
organization or an individual is exposed to, risk management function
can be grouped with other management functions such as financial
management, human resources management, etc.
An over view of different risks will help us to understand the nature of
risk management organizations and individuals are exposed to a wide
arrays of risk in their day-to-day operations, such:

 Fire risk
 Risk of theft
 Loss of customers

25
 Delay in delivery of raw materials
 Break down of machinery
 Accidents
 Bad debts

CORPORATE RISK MANAGEMENT

Private corporate sector adopted active risk management for a variety of
reasons. The risk management program of a corporate entity aims at
logical way to solve problems it perceives. These problems if not managed
properly, can result in heavy losses. The loss may be in term of money,
material, opportunities or human life.
The risk manager of a company develops plans for protecting against any
unfavorable events. He undertakes the risk management process, whish
starts from information, supervising the initiation and progress plans of
loss control measures, which are critical for the organization. He also
undertakes negotiation for the terms and conditions to cover the losses and
takes adequate steps for amicably setting them against the insurers.
The risk management process of an organization involves answering
questions like:
 What are the various activities or circumstances, which can cause
loss to the organization?
 What are the alternatives available to the organization to protect it
self against these activities and circumstances?

The first question aims at identifying the different potential risky activities
and the second one price to protect the organization against the
consequences of these activities. The risk management process as

26
discussed in the first chapter is used by organizations and is represented in
terms of the following diagram. On the x-axis, ‘frequency of loss’ is
depicted on the Y-axis, the severity of loss. Depending on the intensity of
these two (high-low, low-high, low-low and high-high) the organization
assumes a particular strategy. For example, in high degree of ‘free of loss’
and high degree of ‘severity of loss’, the organization aims at avoiding
risk.

Y Severity

X Low-high High-high
Frequency Low-low High-low

it is difficult to predict certain losses before hand, for instance the personal
liability exposure. Claims because of accident are a more common form of
liability exposure. These exposures are uncertain in nature and the amount
claimed in some cases runs into millions of dollars. Therefore, it is
important to have them covered by a suitable insurance policy.
The risk management process of an individual is guided more or less by
the same principles. The important steps of the personal risk management
process are;
 Identification and measurement of personal risks
 Development and implementation of risk management plans
 Constant review and control of plans

RISK MANAGEMENT PROCESS

27
There are six distinct steps in risk management process, which are stated
below:
 Evaluation of risk/exposures
 Consideration and selection of risk management techniques
Implementation of decisions
 Evaluation and review

Identification of risks
The second objective of the risk management process is to identify the
potential risks to which the organization can be exposed. Therefore, the
risk manager has to analyze various systems of the organization in detail
and identify the maximum possible risk exposure of the firm. The risk
manager usually undertakes a systematic study of identifying the potential
risks. A few other methods used in general are checklist, questionnaire,
flowchart, financial system analysis and close examination of company
operations. A brief description of the techniques applied by risk managers
to identify organizational risk is given below.

ORIENTATION
It is important for the risk managers to have clear understanding of the
various processes of the organization and orient their thinking towards
these processes. They should have in depth knowledge about the aims and
objectives of the organization as well as specific characteristic of the
organization, which distinguishes it from other. The past documents of the
organization will provide data about the history and scope of the
organization.

RISK ANALYSIS QUESTIONNAIRE

28
The risk analysis questionnaire is very much helpful in identifying the
possible risk of a particular department. A structured questionnaire is to be
prepared for a particular department keeping in mind its activities, past
performance and personnel. The questionnaire is to be distributed among
the employees. Thus, by analyzing the response from the questionnaire,
one can identify the different potential risks to which that particular
department risks to both insurable and uninsurable risks.

CHECKLIST OF EXPOSURES
In this case, a list of those activities is prepared which may prove risky to
the organization. Though the list is not exhaustive, it covers the major
potential risky activities. The list of such activities depends basically on
the business of the organization, its priorities, sizes, location, etc. the
checklist, along with other risk identification methods, helps in identifying
the potential risk to which the organization may be exposed to.

INSURANCE POLICY CHECKLIST

These checklists are usually available with the insurance companies. They
are also periodically published in the insurance related journals or
magazines. These checklists provide insight about the type of insurance
that particular insurance that a particular industry may need. Thus the job
of a risk manager is to identify the best-suited checklist emphasizes mostly
only on the insurable risks and very little focus is given on non-insurable
pure risks.

FLOW CHARTS
Flow charts are usually system specific. These concentrate on specific
events, which may be potentially risky to the organization, are depicted in
a structural manner and each of these activities is analyzed. The most

29
important objective of the flow chart is that the risk manger becomes
though roughly acquainted with the technicalities of the company. This is
turn help in the determination of specific risk, which may be potential and
hazardous to the organization.

ANALYSIS OF FINANCIAL SYSTEM

The financial systems of a company include the balance sheet, profit and
loss account, cash flow statement, auditors, report, report of the
chairperson, etc. the balance sheet analysis helps in identifying, for
example, the overlooked assets or contingent liabilities. Similarly, the
profit and loss statement identifies those areas of business which the risk
manager to have thorough knowledge of the source and utilization of
funds of a company. Because, ultimately the effort of risk manager is
going to be reflected in these statements. The risk manager must also
gather as much information as he can from the notes to the accounts and
reports of the auditors and the chairperson.

INSPECTION
Inspection of premises and departments of the company gives practical
knowledge to the risk manager about particular process followed. It is very
helpful in getting clear understanding of the operations. The concerned
officials of the company provide immediate information about the
subsystem. Different activities and the potential risks involved are clearly
mentioned at the time of inspection. Thus the risk manager has little
chance of overlooking a particular risky activity.

30
COMBINATION APPROACH
This the most suitable and justified approach for identification of risk. In
the approach, all the above-mentioned methods are used in different
degrees of intensity for identification of the potential exposure. This is a
multipronged strategy where as every possible care is being taken to
identify the risks. It covers the gap left by the above methods. Thus, this
method eliminates (to the possible extent) the involuntary retention of risk
within the organization.
EVALUATION OF RISK
After identification of different risks from all the possible angles, it is
important to evaluate each of them. What would be the degree of loss
(both in quantitative and qualitative terms)? What is the probability of the
carryout with its occurrence of these activities? There may be a few risks,
which need immediate attention, and others, which demand to loss or even
bankruptcy to the organization, rank equally. And it is not possible to align
these into separate categories. If a firm becomes bankrupt because of
earthquake or legal liability or financial liability or heavy fire, the final
outcome of all these risks in the same and that is bankruptcy. Therefore,
instead of assigning some numerical or alphabetical value such as 1,2,3…
or A, B, C…one should attempt to group them into different categories.
These may be:

 Critical categories
 Important categories
 Unimportant categories

CRITICAL CATEGORIES

31
These include those risks, which are left exposed, would result into heavy
loss to the company. These risks mostly lead to bankruptcy of the
company. For example, flood, earthquake, volcano eruption, legal battles,
loss in exports, etc.
IMPORTANT RISKS
This category includes those risks, which would become detrimental to the
survival f the company. Though the company may not become bankrupt, it
has to borrow funds from the market in order to business. For example,
popularly because of the fact that reduction of risk exposure is a more
economic approach theft or fire to go down, lockout, strike, bomb blast in
the premises, etc.

UNIMPORTANT RISK
These are the risks, which though disadvantageous to the company, can
meet the loss from its existing recourses. Foe example, injury to a worker,
delay in receipt of material, temporary power failure, etc.
In order to classify the various exposures , it id=s important to ascertain
the degree of financial loss and the extent to which the company can
absorb such loss. Moreover, it is also important to ascertain the extent to
which the company can meet the uninsured part of the loss without
resorting to borrowing from the market. It is difficult to standardize the
risks into the above-mentioned three categories for different types of
organization. However, this is an important guideline, which will help the
organization in prioritizing their respective exposures.
RISK AVOIDANCE
In this case, the entity does not accept the risk even for a momentary
period. Thus, the entity retains from undertaking any risky activity. A
person who is afraid of meeting with an accident of while driving does not
drive. Similarly, a company, which is afraid of some chemical leakage,

32
may not undertake production of such goods. Thus the entity identifies to
avoids the potential various risks
RISK REDUCTION
In this case all activities undertaken by the entity to reduce the risk
exposure are included so that the organization can decrease the frequency,
severity and unpredictability of loss. This method gained than
underwriting an insurance policy. This results in giving more emphasis to
development of such procedures and approaches, which will decrease the
occurrence, or severity of the losses.
RISK RETENTION
When an organization fails to avoid or reduce or transfer the risk, then if=t
retains the risk with itself. It may be voluntary retention or involuntary
retention. Lastly, it maybe funded retention or unfounded retention. In
case of funded retention, the firm sets a side some property may be in a
liquid or semi liquid form for the retained risk. This depends on the cash
position of the firm. In case of unfunded risk, the risk is left exposed
RISK TRANSFER
In this case, the risk is transferred through agreements, contracts, surety
bonds or insurance. Purchase of insurance is the most prevalent practice
amongst the businessmen. In addition to insurance there are other risk
transfer techniques, which will be discussed in chapter V.

33
 MEASUREMENT OF RISK IDENTIFICATION AND
EVALUATION

After reading this chapter, you will be conversant with:

• Various sources of risk
• The exposure to risk
• How risk can be identified
• How to analyze hazards and losses
• How risk can be evaluated
• The uses of budgets and other quantitative methods

IDENTIFICATION OF RISK
Risk is a process of identifying risk and uncertainties systematically and
continuously. Identification of risk is a crucial step in the process of risk
management for both individuals as well as organizations. The process
leads to the development of information on various sources of risk,
hazards, risk, factors, perils and various exposures to loss, since some of
these words are new we will give their meaning in brief.

34
Sources of risk are the sources from which hazards, perils and risk factors
develop.
Hazard is a condition in the environment that creates or increases the
chance of loss or its severity.
Peril is a cause of loss.
Exposure to loss means properties, situations or persons facing the
possibility of loss.

SOURCES OF RISK
Hazards, perils, risk factors emanate from different sources. a ;riot’ may
arise from a social environment. A governments decision to grant or
withdraw subsidy given to farmers on fertilizers arise from political
environment create different risks to organizations and individuals.
Though the sources of environment can be classified on different bases,
we have tried to use a general classification. Given below are the sources
of risk.
Physical environment
It is one of the primary sources or risk. It is important for two reasons it is
all pervasive or is a general risk and it is unavoidable. Perhaps this one
environment, which is common to both individuals and organizations.
Each organization should study the prevailing physical environments in
terms of climatic conditions, possibility of flood or eruption of volcanoes
among others.

Technological environment

35
Today technological rules every walk of life. Organizations use
technology in the process of production. Individuals use technology to
increase their output, decrease the defects, to make their life easier.
Greatest risk all of us face from ever changing technology is the risk of
obsolescence. A technological breakthrough renders some old technology
useless or economically infeasible, which is called obsolescence. The four-
stroke technology in motorbikes has made the two stroke engines
obsolescent.
However, the risk of technological failures is also high, when we depend
too much on technology.

Social Environment
It broadly covers the customs, habits, and level of education, tastes and
standard of living of the people in the society. Today’s social environment
is influenced to a major extent to the technological environment. With
rapid progress in technology and economic liberalization, the physical
boundaries between people of various nations are blurring.
Political environment
Political environment consists of the ideology of the government, by-laws
and regulations, regulatory authorities and other agencies, which
command the activities of the individuals as well as the organizations.
Changes in the above factors may affect the interest of individuals and
corporations t5hus creating new risks. Any change in the fiscal policy may
affect an industry either positively or negatively.
Some countries like India, US, UK have a democratic government, while
china and Cuba still follow the old communist ideology which does not
favor opening of the economy to international business.
Economic environment

36
Economic environment of a country comprises the national income,
money supply, inflation, consumption and savings habits of the public,
capital markets, export and import policies, government expenditure and
nature of investment. Any change in income level, consumption pattern
habits influence the demand-supply conditions of goods and services as
well as the growth of an industry.
Legal environment
Law is usually evolved on the basis of the established habits and thoughts
of people. It performs the following functions;

 It ensures stability and security in society.

 It clearly sets the limits on the actions of individuals and
organization.
 It establishes the rule of law by ensuring fairer justice.

Operational environment
Business organizations produce and sell some products or services. They
employ some technology and people; use a place and other resources in
the process of production. By nature of product or service some
organizations are exposed to risk. For instance, a coal mining business
exposes the company to accidents in the field. Air carrier business is
exposed to aviation risks. A cinema theatre is exposed to the risk of riots.
State transport buses are exposed to the risk of fire from public.
Cognitive environment
Cognitive environment consists of ability to understand, see, measure and
assess a given situation. The thinking process, risk perception and the
assessment of risk are prone to errors. In every stage of human life, the
37
possibility of committing an error cannot be ruled out. The chances of
error in judgment and the ability to assess risk vary from person to person.

Since person in various positions populates an organization, the

organization as an entity may be penalized for the mistakes committed by
any of its employees. Cognitive risk arise due to human errors such as
error in perception., error in assessment and error in perception, error in
assessment and error in judgment about a given environment, hazard or
peril.

EXPOSURES TO RISK
Usually in any business enterprise, people only bother to manage risks
when the organization is directly exposed it them. These exposures create
hazardous conditions, which in turn influence the acts of perils. So one of
the important parts of risk identification is to find out the exposures well in
advance to avoid direct exposures to loss. Broadly speaking, any
organization is exposed to risk. But the nature of exposure needs to be
categorized for an easier evaluation of the negative financial impact.
Based on the nature, exposure can be classified into three categories;
property exposures, liability exposures and human resource exposures.

Property exposures
Property can be of two types; real and personal.

Real property may be defined as the land and whatever is growing on it,
or erected on it or affixed to it.

38
Personal property is anything that is subject to owner ship that another
real property. According to another classification, property may be divided
into physical assets (consisting of land, buildings, plant and machinery),
financial assets (comprising of investments in stocks, bonds, government
securities and cash on hand) and intangible assets (like goodwill,
intellectual properties).
These are exposed to different types of hazards or risk factors depending
up on their nature. Physical property may be damaged, destroyed, stolen of
may suffer a loss of value. The physical property exposure leads to direct
losses (the property itself is lost) or indirect losses (the loss of property,
such as plant, results in business discontinuity and income loss.

Liability exposures
The legal environment in a given country determines the liability
exposures. These exposures are pure risks. Under a given law, rights can
be enforced while the obligations have to be fulfilled. Every organization
is exposed to the risk of losses due to the failure in fulfilling the legally
imposed obligations. Civil and criminal law describe the duties and
responsibilities a citizen is expected to follow. On certain activities,
statutory limitations are imposed through state and union legislations.
Statutory authorities impose rules and directives to establish the standards
of care.

Human resources exposures

People are the prime movers of any organization. The employees of a
company are exposed to several risks. Due to this risk the organizations as
well as the employees suffer the loss. Human resources of a company are
exposed to poor as well as speculative risk. A company may have to
sustain the following types of human resources exposures.

39
A person may meet with an accident and suffer physical injury while
working. It may result in temporary or permanent disability or even death.
Either of the above outcome forces the company as well as the injured to
sustain loss. This is a pure risk.

FRAMEWORK FOR POTENTIAL RISK IDENTIFICATION

A formal procedure is needed to identify the risks in a systematic way,
without which formulation of strategies for managing will difficult. If a
risk manager does not identify the losses or gains to which an organization
is an exposed to, he would find it too difficult to handle when the
undiscovered risks confront the organization.
Systematic procedures must be evolved to developed a framework all the
risks, pure as well as speculative. The identification process must
continuously monetarily internal and the external environment to capture
the information on various risks, since the risk identification is not a one-
time affair or an episodic event.
A well-developed framework results in a comprehensive checklist that
captures all the risks. When the checklist of risk is developed, the manager
needs to evaluate to which of these risks the organization is exposed so
that effective measures can be taken to control the risks.

LOSS EXPOSURE CHECK LIST

A detailed understanding of the events that cause loss will help in the
preparation of a risk check list a check list of potential losses can be
prepared from the insurance survey and loss analysis questionnaires.
Insurance survey questionnaires eliciting information of exposures that are
insurable whereas the loss in a analysis questionnaires generally deal with
all pure risks. The questionnaires published by American management
association (AMA), international risk management institute and risk and

40
insurance management society (RIMS) are often referred by many.
AMA’s risk analysis guide provides a checklist of (a) the possible assets
and (b) possible exposures. Further, the exposures are categorized in to
direct, indirect and third party exposures. Such checklist may not be fully
useful as they fail to cover some risks usual to a given organization and
they failed to cover speculative risks.

PROPERTY EXPOSURES
Tangible assets: building, plant, stocks, vehicles, and vessels.
Intangible assets: patents copyrights, trademarks, and goodwill
Liability exposure: liabilities for failure of products, process, and
compensation claims etc.

Human resource exposures

Key personal resignation, accidents etc.
Application of checklist
A checklist is very helpful to an organization to frame the potential risk
identification systems how ever; a standard checklist has drawbacks,
which are given below .
 It may fail to consider the risks, which are unusual and uniquely
related to a particular organization or situation .
 It does not focus on the speculative risk properly, as is done in the
traditional risk practices.
 It does not include all risk exhaustively.

41
 The first in Appling the checklist is to have a look at the seven
sources of risks, mention in the sections. The risk management can
briefly describe each of the sources. Some experts suggest a slightly
different approach. They say that a careful analysis must be made of
not only the external environment but also internal exposures. As
for this organization they consider the arising from (a) customer or
client, (b) suppliers, (c) competitors, (d) regulators

FINANCIAL STAMENT ANALYSIS

Trading account profit and loss account and balance sheet are refer to as
financial statement. The risks applicable to a given organization can be
identified from the check list the advocates of this method argue that it is
possible to identify the property, liability and personal exposures from a
careful study and detailed analysis of the organizations financial
statements

Using this method a detailed study of each account is made to determine

what risks it create. The risks identified will be reported under each
account title. Merits of this method are:
 It is objective and reliable as the results are based on readily
available figures
 The result can be presented in a clear and concise form
 It translates risks identification in to financial terminology which
is more acceptable to the managers, accountants, bankers, creditors and
shareholders
42
 Apart from risk identification, it can also be used in risks
measurement fund and risk management.
Example showing the potential losses from perils under the account
vehicles.
Account title: vehicles
Specific property: martin esteem car
Loss: direct and Indirect
Perils: accident fire, theft and human perils
Specific liability exposure: commensuration for damaging others property,
injuring or killing other people.
Perils: accidents

FLOW CHARTS
Flow charts act as an important tool for identifying risks and uncertainties
in organizations. Flow charts generally show the material flow of all
operation of the organization. This is more suitable for organization in the
manufacturing industry. The flow-charts starts with the introduction of
raw material into the production process, passing through every stage of
production and ends when the finished goods reach the customers.
It shows all operation at a glance the following points from the flow charts
help us in the process of risk identification

Blooming mill Steel casting

Axie forge shop Wheel forging

shop

Heat treatment Heat treatment

shop 43 shop
 Machining Machining

Assembly of axie and wheels

Balancing

Flow charts describing the flow of materials in a wheel and axle plant,
manufacturing and assembling wheels and axles for trains

 The potential production bottle necks can be identify easily, which

will be useful in identifying the operational risk of the company
 The property, liability and human resource exposures can be
identify and the estimated through out flow

The following or sum of the potential losses arising from risks.

Property losses: repairs and replacement of machines, equipment, raw
materials and finished goods. In addition to the direct loss there will be
indirect loss due to production stoppage.
Liability loss: liability exposures arise when the organization supply
defective products, when it trucks damage other property or injure people
on the road through negligence.

44
Human resource exposure: loss arising from the death of key employ, loss
to the families of employee due to the death, retirement, accident, or poor
health.

INPUT-OUTPUT ANALASYS
Input-output analysis is based on the flow of goods and services in the
economy where the output of one organization or entity becomes the input
for another organization. In an organization the output of one department
is assumed to be the input for another department. It is applicable mostly
to process industry or assembly line production processes, or wherever
interdependencies exist between organization units.
The difference between the value of input and output of each
department is considered to be value addition in the given department.
With the help value additions data, we can determine the contribution
from each department to the profits of the organization and the
interdependencies between them. Input-output analysis highlights the
departments whose output is critical.

45
Risk Chain Methods
It can be termed as a loss and hazard analysis tool. the relationship
between hazards and losses is analytically examined. This approach
performs a detailed analysis of the environmental influence on the hazrd,
result of the influence and its long-tern effects.the events in the chain will
be discussed in the chapters ahead.however,they are listed below as a
foretaste:

The hazard,
 The environment,
 The interaction,
 The outcome, and
 The consequence,
RISK EVALUATION

Risk identification involves the perception of risk and analyzing its

possible outcomes, while risk evaluation
Helps an organization to find out the possible

CONSEQUENCES OF RISK IN MONETARY TERMS.

 To develop a benchmark based on the importance of the risk to

the organization.
 To apply this yardstick to all the risks identified.

The consequences of risk may lead to direct and indirect losses, which
may have some adverse financial impact on the company. Risk evaluation

46
begins with the risk identification and its outcomes; Risk identification is
the initial step in the process of risk evaluation or assessment.

RISK CLAIMS & RISK ANALYSE

INTRODUCTION
A claims is the demand that the insurer should redeem the promise made
in the contract. The insurer has then to perform his part of the contract i.e.
settle the claim, after satisfying himself that all the condition and
requirements for settlement of claim have been complied. In particular he
should check.
• Whether an insured event has taken place?
• What are the obligations assumed under the contract, which are
required to be performed? These may be payment of bonus, payment of
sum assured in installments, waiver of future premiums, etc
47
MATURITY CLAIMS
Under endowment type of policies, the SA is to be paid when the term of
the policy is over. The date on which the term is complete, is the date of
maturity and the settlement of the SA on that date, is the maturity claim.
The amount payable on maturity is the SA, less any debts like loan and
interest or outstanding premium. To this bonuses, if any would be added,
if it is a with profit policy.
Action on maturity claims is initiated by the insurer, based on the records
showing the policies that will mature every month. the insurer normally
send advance intimation to the insured. The insurer has to satisfy that

• There are no assignments

• The identity of the policyholder is proved.
• The age stands admitted
• The premiums are all paid (this is not required for a paid-up policy)
• The original policy is handed in
• The discharge voucher is duly complete.
The insurer is expected to make payment on the maturity date. Post-dated
cheques are normally sent a few days in advance of the maturity date,
provided the discharge form is received duly signed.

SURVIVAL BENEFIT PAYMENTS

A survival benefit is paid during the currency of the policy, before the date
of maturity. The procedure will be similar to payment of maturity claims.
Action will be initiated by the insurer and post dated cheques will be sent
in advance

48
If the policy is reported to be lost, insurers are unlikely to settle on the
basis of an indemnity, as may done in the case of a maturity claim. The
reason is that when a maturity claim is paid, no further obligations remain
under the policy. but, the policy does not cease to exist after the survival
benefits.
If the life assured dies after the date when the survival benefit was due,
but before it is settled, the survival benefit will not be paid to the nominee.
The death claim will be paid to the nominee.

DEATH CLAIM
The procedures in settling a death claim are more complex than in the case
of maturity claims. This is mainly because, the facts relating to death have
to be studied and the identities of claimants have to be established.
The death claim action beings with an intimation being received in the
insurer’s office. The intimation may be sent by the nominee, assignee
relative of the life assured, the employee, agent or development officer.
This intimation may have very little information other than the police
number, the name of the life assured and the data of death.
The following will be necessary before a death claim can be settled
• Policy document
• Deeds of assignments / reassignments

CLAIM CONCESSION
There are situation when, though the policy has lapsed and nothing is
payable, yet the insurer pays the death claim. For example, assume that in
a 30 years old. Endowment policy, 30th annual premium is not paid and the
policy is in a state of lapse in the last year. If the life assured dies a few

49
weeks before maturity, it would be wrong to say that the death claim is not
payable. There is practically no risk in the last year.
The L.I.C pays claims in full in the following circumstances, after
deducting the outstanding premiums with interest. In both the cases, the
policy could have been revived by just paying the arrears of premium and
no proof of good health would have been necessary.
• After there years, if the death claims arises within six months from the
date of lapse.
• After five years, if the death claims arises within twelve months from
the date of lapse.
In cases where premiums are being advanced from surrender value, the
claim amount will be payable in full.

PERSUMPTION OF DEATH
Proof of death is essential. A death certificate issued by the municipal
office or similar local body is the acceptable proof of death. A certificate
of burial or cremation can also be obtained. Statements from witness to the
last rites will be supporting evidence. In the case of accidents, air crashes
or an seas, or natural calamities, the bodies may not be found. In such
cases, insurers rely on statements from the carriers or other authorities
with relevant information. In case of defense personnel, a certificate from
the commanding officer of the unit is to be obtained. If a court of enquiry
is ordered, its findings should be obtained.

PRECAUTIONS
50
As per the Indian lunacy Act, if a person is mentally deranged, a court of
law is required to appoint a person to act as a guardian to manage the
properties of the lunatic. Where the assured or the person to sign the
discharge form. If the person to sign the discharge is known to be a
lunatic, only such a guardian can sign the discharge form. If the person has
recovered from the mental disorder, a medical certificate to that effect,
would be necessary.
If the life assured is reported to have died before the maturity date, the
claim has to be treated as a death claim and processed accordingly. But if
the assured is reported to have died after the date of maturity but be fore
the receipt is discharged, the claim is to be treated as a maturity claim and
paid to the legal heirs. Death certificate and evidence of title would be
necessary.
Payments of claim amount to non-residents are governed by the foreign
exchange control regulations.

ACCIDENT AND DISABILITY BENEFITS

These benefits are conditional on conclusive evidence, that all the
eligibility conditions are satisfied and that the exclusions do not apply.
The conditions are that
 The accident must be caused by outward, violent means, not self
inflicted
 The death must be result of injuries caused by that accident

 The death must occur within 120 days or such other period as may
be specified
The exclusions may be

51
 Intentional self-injury, attempted suicide, insanity, immorality,
intoxication

 Accident while engaged in civil aviation or aeronautics, other than

as
assenger
 Injuries resulting from riots, civil commotion etc

IRDA REGULATIONS
The IRDA Regulations stipulate that
 The insurer should ask for all the requirements in the case of a death
claim at one time and not piecemeal
 The decision to admit or to repudiate should be made within 30 days
of receipt of papers
 If an investigation is necessary, it should be completed within 6
months
 Interest at 2% over the bank rate, will be payable for delays in
settling the death claims
 Interest at the savings Bank rate will be paid if the insurer is ready
to pay but the claimants are not ready to collect.

RISK ANALYSER
You thought you and your childhood friend had the same likes and
dislikes, preferences and prejudices because you grew up together.
Ever wondered why he continues to put his money in bank fixed
deposit while you thrive on playing the stock markets? Its all about
how different your risk profiles are…

52
Your risk profile is essentially determined by objective factors (age,
income level, number of dependence, security of your job) and
subjective factors(risk behavior intrinsic to each individual’s
psychology).
The risk analyzer takes you through a series of scientifically design
multiple choose questions to understand risk taking capacity and
behavior and there by arrive assessment of your risk profile.
1. Your age:
• Under – 30

• 30– 40

• 41 – 50
• 51 – 60
• 60 or over
•
2. Your current annual take-home income is:
• Under Rs. 100,000
• Between Rs. 100,000 and Re.200, 000
• Between Rs. 200,000 and Re.500, 000
• Between Rs. 500,000 and Re.10, 00,000
• Over Rs. 10,00,000

1 The number of years you have until retirement is:

• 3years or less
• to 5 years
• to 10years

53
• 1-3 years
• More than 3 years
2 Your present job or business is :
• Is not dependable
• Is relatively secure
• Is secure
• Doesn’t matters you already have enough wealth
• Doesn’t matter as you can easily find an equally good new
job/career
3 What is your expectation of how your future earnings would be:
• It would far outpace inflation
• It would be some what ahead of inflation
• It would keep pace with inflation
• It may not be able to keep pace with inflation

4 How would you describe your self as a risk-taker?

• Careless
• Willing to take risks for higher return
• Can take calculate risks
• How risk taking capability
• Extremely averse to risk
5 How good is your knowledge of finance?
• I’m an expert in the field of finance
• I’m proficient in finance
• I don’t know much about finance but I keep myself up date about
the development through newspapers, journals, TV, etc.

54
• Limited to knowing things like how the stock market or certain
select script is/are moving
• I’m totally zero as far as knowledge of finance is concerned
6 If you lose your job or stop working today, how long do you think
Your savings can support you?
• Less than 3 months
– 6 months
• months to 1 year
• 1 – 3 years
• More than 3 years

7 If you had Rs.50, 000 to invest, which of the following choices would
you make?
• Put the money in bank fixed deposits and bonds
• Invest the money in mutual funds
• Invest the money in shares
• Invest in a combination of the above with higher proportion
of bank FDs and bonds
• Invest in a combination of the above with higher proportio of mutual
funds and shares
10 you have a market tip on the price appreciation of a certain scrip, you :
• Immediately invest in the scrip
• Invest if feel that the source of tip an experienced /expert market
player
• Give some enquiry and analysis and then decide
• Want to invest but are generally unable to take a decision in such
cases
• Don’t relay on such tip are totally ignore it
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1 You are on a TV game show and you rs 10000. you have a choice
to keep the money or risk it to win a higher amount. You:
• Are happy with the rs 10000 that we earned
• Risk the rs 10000 on a 50% chance of winning rs 30000
• Risk the rs 10000 on a 25% chance of winning rs 75000
• Risk the rs 10000 on a 10% chance of winning 100000
2 Which one of the following best describes your feeling
immediately after making an investment, you:
• Aren’t bothered –its just another for you
• Are satisfied and contained with the decision
• Are very sure whether you made the right decision
• Are worried
• Generally regret your decision
3 The stock market has dropped 25% and a share that you won also
dropped 25%, but the market expects the share to go up again. What
would you do?
• Sell all the shares
• Sell some of them
• Buy more of them
• Keep all of them as you expect the price to reach the earlier
level
• Keep all of them as you are afraid of booking a loss
4 You have a substation sum of money spare about 6 month after
which you need this sum to repay a loan this sum is currently not invested
anywhere. You would:

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 • Keep the money in your bank fixed deposit or open ended
debt mutual fund
• Invest the in open ended equity oriented mutual fund
• Invest the money in equity shares
• Loan the money at market rates to businessmen
• Invest in a combination of above
5 You are financially responsible for (exclude dependants who can
be supported by your spouse’s income)
• Only yourself
• One person besides yourself
• 2 to 3 person besides yourself
• to 5 person besides yourself
• More 5 person besides yourself

Risk capacity
1 what is your age (in years)? 30-40
2 how many dependants do you Have ? None/1 person
3 your present occupation is CA
4 what is your current annual 1 Lac-3Lac
Income?
5 how many more years do you plan to work? 11 to 15 years

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Risk behavior
1 how good is your knowledge of finance & markets?
Expert knowledge
2 if you had Rs. 1 lack with you, where would you invest?
Mostly in deposits & rest in shares / Miffs
3 which of the full instruments have you invested before?
Bank deposits, NSC, PPF, Bonds etc
4 you have a tip from a friend on the price appreciation of a
Certain share, you:
Want to invest but unable to decide when to
5the stock market has dropped by 25% &the share that you own has also
dropped by 25%, but the market expects the share to go up again. What would
you do?
6 you win Rs.10, 000 in a game show. You have the choice to keep the money
or risk it to win a higher amount. You
. Risk the 10000 on 25% chance of winning 750

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 Final output
Real risk capacity is Higher

Your attitude towards risk is Balanced

Suggestion Equity exposure may be

Increased marginally

Recommended portfolio

36%
Debt
equity
64%

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Risk capacity
1 what is your age (in years)? 40-49
2 how many dependants do you Have? 3 person
3 your present occupation is Business
4 what is your current annual 1 Lac-3Lacs
Income?
5 how many more years do you plan to work? 11 t0 15 years

Risk behavior
1 how good is your knowledge of finance & markets?
No knowledge
2 if you had Rs. 1 lack with you, where would you invest?
Mostly in deposits & rest in shares / MFs
3 which of the full instruments have you invested before?
Bank deposits, NSC, PPF, Bonds etc
4 you have a tip from a friend on the price appreciation of a
Certain share, you:
Want to invest but unable to decide when to
5the stock market has dropped by 25% &the share that you own has also
dropped by 25%, but the market expects the share to go up again. What would
you do?
Sell some of them

6 you win Rs.10, 000 in a game show. You have the choice to keep the money or
risk it to win a higher amount you:
Happy with the money have won

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Final output
Real risk capacity is medium

Your attitude towards risk is very conservative

Suggestion equity exposure may be increased

Recommended portfolio

equity
38%
Debt
Debt equity
62%

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Risk capacity
1 what is your age (in years)? 30 -40
2 how many dependants do you Have? 1 Person
3 your present occupation is Business
4 what is your current annual 1 Lac to 5 Lacs
Income?
5 how many more years do you plan to work? 11 to 15 years

Risk behavior
1 how good is your knowledge of finance & markets?
Expert knowledge
2 if you had Rs. 1 lack with you, where would you invest?
Mostly in deposits & rest in shares / MFs
3 which of the full instruments have you invested before?
Bank deposits, NSC, PPF, Bonds etc
4 you have a tip from a friend on the price appreciation of a
Certain share, you:
Want to invest but unable to decide when to
5the stock market has dropped by 25% &the share that you own has also
dropped by 25%, but the market expects the share to go up again. What would
you do ?
Sell some of them
6 you win Rs.10, 000 in a game show. You have the choice to keep the money or
risk it to win a higher amount. You:

Risk the 10000 on 25% chance of winning 750

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 Recommended portfolio

Equity
27%
Debt
Equity
Debt
73%

Risk capacity
1 what is your age (in years)? 30 -40
2 how many dependants do you None /1 Person
Have?
3 your present occupation is CA
4 what is your current annual 10 Lac to 13 Lac
Income?
5 how many more years do you plan to work? 11 to 15 years

Risk behavior
1 how good is your knowledge of finance & markets?
Expert knowledge
2 if you had Rs. 1 lack with you, where would you invest?
Mostly in deposits & rest in shares / MFs
3 which of the full instruments have you invested before?
Bank deposits, NSC, PPF, Bonds etc

4 you have a tip from a friend on the price appreciation of a

Certain share, you:
Want to invest but unable to decide when to

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5the stock market has dropped by 25% &the share that you own has also
dropped by 25%, but the market expects the share to go up again. What would
you do?
Sell some of them
6 you win Rs.10, 000 in a game show. You have the choice to keep the money or
risk it to win a higher amount. You:
Risk the 10000 on 25% chance of winning 750

Final output
Real risk capacity is Medium
Your attitude towards risk Is Balanced
Suggestion Current Asset Allocation may be
Maintained

Recommended portfolio

Equity
36%
Debt

Debt Equity
64%

Risk capacity
1 what is your age (in years)? 18-30
2 how many dependants do you 4 persons or more

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 Have?
3 your present occupation is Doctor
4 what is your current annual 5 Lacs-10Lacs
Income?
5 how many more years do you plan to work? 15 years or more

Risk behavior
1 how good is your knowledge of finance & markets?
Aware of only fixed return investments
2 if you had Rs. 1 lack with you, where would you invest?
Mostly in deposits & rest in shares / MFs
3 which of the full instruments have you invested before?
Bank deposits & mutual funds
4 you have a tip from a friend on the price appreciation of a
Certain share, you:
Want to invest but unable to decide when to
5the stock market has dropped by 25% &the share that you own has also dropped
by 25%, but the market expects the share to go up again, what would you do?
Keep all of them as you expect price to go up
6 you win Rs.10, 000 in a game show. You have the choice to keep the money or risk
it to win a higher amount. You:
Risk the 10000 on 25% chance of winning 750

Final output
Real risk capacity is Medium
Your attitude towards risk is Balanced
Suggestion Current Asset Allocation may
be
Maintain

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 Recommended portfolio

equity
38%
Debt
equity
Debt
62%

Risk capacity
1 what is your age (in years)? 30-40
2 how many dependants do you 2person
Have?
3 your present occupation is Salaried
4 what is your current annual 1 Lac- 3Lac
Income?
5 how many more years do you plan to work? 15years or more

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Risk behavior
1 how good is your knowledge of finance & markets?
Expert knowledge
2 if you had Rs. 1 lack with you, where would you invest?
Mutual funds only
3 which of the full instruments have you invested before?
Savings bank & fixed Deposits
4 you have a tip from a friend on the price appreciation of a
Certain share, you:
Invest immediately
5the stock market has dropped by 25% &the share that you own has also
dropped by 25%, but the market expects the share to go up again. What would
you do?
Sell all the shares
6 you win Rs.10, 000 in a game show. you have the choice to keep the money or
risk it to win a huger amount. You:
Happy with the money you have won

Final output
Real risk capacity is medium
Your attitude towards risk is balanced
Suggestion current asset allocation may be
Maintained

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 Recommended portfolio

equity
38% Debt
Debt equity
62%

Risk capacity
1 what is your age (in years)? 50-59
2 how many dependants do you None/1 person
Have?
3 your present occupation is professional
4 what is your current annual 5Lacs-10Lcs
Income?
5 how many more years do you plan to work? 5 to 10 years

Risk behavior
1 how good is your knowledge of finance & markets?
Expert knowledge
2 if you had Rs. 1 lack with you, where would you invest?
Shares only
3 which of the full instruments have you invested before?
Bank deposits & shares
4 you have a tip from a friend on the price appreciation of a
Certain share, you:
You ignore the tip
5the stock market has dropped by 25% &the share that you own has also

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dropped by 25%, but the market expects the share to go up again. What would
you do?
Keep all of them as you expect price to go up
6 you win Rs.10,000 in a game show.you have the choice to keep the money or
risk it to win a higer amount. You:
Risk the 10000 on 25% chance of winning 750

Recommended portfolio

Equity
45% Debt
Debt Equity
55%

CONCLUSION

Risk is sometimes referred to as the possibility of loss or injury. This is

termed as peril. A hazard is a condition that serves to increase the
occurrence of perils. There are different types of hazards such as physical
hazards, moral hazards and moral hazards.

• There are two types of losses: direct losses and indirect losses.
Direct losses refer to the loss of an object that is exposed to risk, such as
property. Indirect losses refer to the losses arising from direct losses.

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• Risk can be avoided or prevented by risk avoidance, loss control,
loss prevention, loss reduction and risk transfer. Insurance is one methods
of transferring risk to a third party by paying a premium for the same.

• Risk management widely perceived as an attempt to manage firm’s

risk levels using various available sources out of which insurance is the
most commonly used one

• It’s imperative that risk manager must have a holistic approach.

Ignorance of risk management is still the main reason given by many
corporate entities for not practicing it.

SUGGESTION

• If the risk is at the prospective stage, try to avoid it.

• If the risk is likely to occur, and it is unavoidable, accept the risk
and retain it in an economically justifiable basis.
• Try to execute some effective actions as to reduce or eliminate the
loss likely to be incurred due to happening of the particular risky incident.

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• Try to diversify within a portfolio of risks with a view to shortening
the loss.
• For risky business areas, introduction of prudent exposure norms in
advance may help in minimizing the loss.
• Sound risks measurement procedures and information systems, if
put in place in the right perspective, will help in taking timely decisions
for avoidance of risk.
• If suitable, hedge the risks artificially i.e., counter balance and
neutralize the risk to a certain degree, b use of derivative instruments.
This, in itself, is a very risky option.
• Monitor various categories of risks on continuous basis and report
to appropriate authority that risk can be overcome in future.

BIBLIOGRAPHY

• RISK MANAGEMENT PRACTICES BY MR. KANNAN.

WEBSITES:

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• PERSONAL WEBSITE OF MR. KANNAN.
• WWW. ICICI PRUDENTIAL .COM

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