Polytechnic University of the Philippines

Quezon City Campus

Written
Report
Group 1 – Enterprise Risk Management

Members:

Acabado Rowel

Bale, Kathlyn

Babon, Luis Carlo

Baylon, Xeneth

Bardoquillo, Crisben

Carolino, Gesyl
Topic: Basic Concepts in Risk Management and Insurance

Risks, Concept.

 It is the probability that some future event could adversely impact the

organization. Risk is measured in terms of probability and impact.

 Risk is Exposure to the possibility of loss, injury, or other adverse or unwelcome

circumstance; a chance or situation involving such a possibility.

 Risk is inherent in every business, organizations and entrepreneurship need to be

willing to take risks as without risk there can be no meaningful gain. Like stress

one has to live with risk and it cannot be avoided. At best risk can be managed

or mitigated.

Risk Mitigation Strategy

All businesses face risk. Along with their day-to-day operations, the company can set

themselves apart from their competition based on their ability to manage and deal with

risk. Risk mitigation strategies refer to the different methods of dealing with business

risk.

Risk Acceptance: Risk acceptance comes down to “risking it.” It’s coming to terms

that the risk exists and there is nothing you will do to mitigate or change it. Instead, it

understands the probability of it happening and accepting the consequences that may

occur. This is the best strategy when risk is small or unlikely to happen. It makes sense

to adopt risk when the cost of mitigating or avoiding it will be higher than merely
accepting it and leaving it to chance.

Risk Avoidance: If a risk from starting a project, launching a product, moving your

business, etc. is too large to accept, it may be better to avoid it. In this case, risk

avoidance means not performing that activity that causes the risk. Managing risk in this

way is most like how people address personal risks. While some people are more risk-

loving and others are more risk- averse, everyone has a tipping point at which things

become just too risky and not worth attempting.

Risk Reduction: Businesses can assign a level at which risk is acceptable, which is

called the residual risk level. Risk reduction is the most common strategy because there

is usually a way to at least reduce risk? It involves taking countermeasures to decrease

the impact of consequences. For example, one form of risk reduction is risk transfer,

like that of buying insurance.

Risk Transfer: As mentioned, risk transfer involves moving the risk to another third

party or entity. Risk transfers can be outsourced, moved to an insurance agency, or

given to a new entity as is what happens when leasing property. Risk transfers don’t

always result in lower costs. Instead, a risk transfer is the best option when it can be

used to reduce future damage. So, insurance can cost money, but it may end up being

more cost-effective than having the risk occur and being solely responsible for

reparations.
 CHANCE OF LOSS

It is defined as the probability that an event will occur.

1. OBJECTIVE PROBABILITY
It refers to the long-run relative frequency of an event based on the assumptions of an
infinite number of observations and of no change in the underlying conditions.

Can be determined in two ways:

DEDUCTIVE REASONING
“priori probabilities
INDUCTIVE REASONING

2. SUBJECTIVE PROBABILITY
It is the individual’s personal estimate of the chance of loss

DIFFERENCE BETWEEN PERIL AND HAZARD

What is Peril?
A Peril is that which causes loss to the insured.

Fire losses:
1. smoke damage

2. scorching

3. water damage

What are Hazard?

Hazards are conditions that increase the chances of a loss happening.

Four (4) Types of Hazard

1. PHYSICAL
A physical condition that increases the frequency or severity of loss.

2. MORAL
A dishonesty or character defects in an individual that increase the frequency or severity
loss.

3. ATTITUDINAL
It is the carelessness or indifference to a loss, which increases the frequency or severity
of a loss.

4. LEGAL
The characteristics of the legal system or regulatory environment that increase the
frequency or severity of losses.

TYPES OF RISK/ CLASSIFICATION

PURE RISK
Is a situation in which there are only the possibilities of loss or no loss?
(e.g., fire risk, flood risk, etc.)
SPECULATIVE RISK
A chance to either gain or lose (profit or loss).
(Including investment risk, reputational risk, strategic risk, brand risk, product success risk etc.)
PERSONAL LOSS EXPOSURES – PERSONAL PURE RISK
all exposures are personal. Some risks, however, have a more direct impact on people’s
individual lives. These events may be catastrophic or accidental.
PROPERTY LOSS EXPOSURES – PROPERTY PURE RISK
Property owners face the possibility of both direct and indirect (consequential) losses.
LIABILITY LOSS EXPOSURES – LIABILITY PURE RISK
a party can be held responsible for the financial consequences of causing damage to others.
CATASTROPHIC LOSS EXPOSURE AND FUNDAMENTAL OR SYSTEMATIC PURE
RISK
A loss that is catastrophic and includes a large number of exposures in a single location is
considered a non-accidental risk.
DIVERSIFIABLE RISK
a diversifiable risk, also called as Non-systematic or Particular risk are a risk that affects only
individuals or small groups.
NONDIVERSIFIABLE RISK
Nondiversifiable Risks, also called as Systematic Risk are a risks that affects the entire economy
or large numbers of groups within the economy.
ENTERPRISE RISK
Encompasses all major risks faced by a business, firm which include: pure risk, speculative risk,
strategic risk, operational risk, and financial risk.
Different types of Enterprise Risks
 Strategic Risk - refers to uncertainty regarding the firm’s financial goals and objectives.
 Operational Risk - results from the firms business operations.
 Financial Risk - refers to the uncertainty of loss because of adverse changes in
commodity prices, interest rates, foreign exchange rates, and the value of money.
MAJOR PERSONAL RISKS
Are risks that directly affect an individual or family. They involve the possibility of a loss or
reduction in income, extra expenses, or depletion of financial assets, due to:
 Premature death of Family head
 Insufficient income during retirement
 Poor Health (catastrophic medical bills and loss of earned income)
 Involuntary unemployment
Types of Major Personal Risks
Property Risks - Involves the possibility of losses associated with the destruction or theft of
property.
Liability Risks - Involve the possibility of being held legally liable for bodily injury or property
damage to someone else.
MAJOR COMMERCIAL RISKS
Firms face a variety of pure risks that can have serious financial consequences if a loss occurs;
 Property risks
 Liability Risk
 Loss of business income
 Other risks like crime exposures, HR exposures, foreign loss exposure, intangible
exposures and government exposures.
BURDEN OF RISKS IN SOCIETY
The presence of risk resulted in certain undesirable social and economic effects. Risk entails
three major burdens on society:
1. Size of an emergency fund must be increased.
2. Society is deprived of certain goods and services.
3. Worry and fear are present.
Larger Emergency Fund - individuals and business firms would have to increase the size of
their emergency fund to pay for unexpected losses.
Loss of Certain Goods and Services - Another burden of risk is that society is deprived of
certain goods and services. Because of the risk of a liability lawsuit, many corporations have
discontinued manufacturing certain products.
Worry and Fear - A final burden of risk is that worry and fear are present. numerous examples
can illustrate the mental unrest and fear caused by risk for example some passengers in a
commercial jet may become extremely nervous and fearful if the jet encounters severe
turbulence during the flight.

Risk is a consequence of uncertainty. Consequences can be positive and negative. Some

expected risks are negative because it results in negative outcomes, and uncertainties or
unexpected situations can result in negative outcomes. So any factor or event that creates
uncertainty in achieving organizational objectives is a risk.

A risk occurs because an organization does not manage risk at all, it is called unmanaged risks.
Unmanaged risks happen for example when a construction project fails to consider how
neighbors will react to the noise and commercial disruption, so the project causes a lot of
disputes. Another example, when a country allows a commercial interest to pollute the air and
water without consideration of costs to health, quality of life and the environment is unmanaged
risks.
By managing risks, you can reduce the impact of unexpected events on your business. From
financial to operational to new global health and safety risks, many companies may find
themselves wishing to avoid every type of risk out there. Yet, not all risks are created equal,
some are worth the reward and are essential to business growth. The trouble is, how do
you prepare for the countless number of threats all with varying scope and severity?

3 Main Techniques for Managing Risks

The three main techniques for risk management so the business can stay on a resilient and agile
track and ensure every risk is evaluated.

Step 1: Assess the Risks

To assess the risk there are three subtasks to do.

Task 1. Identify the threats

The first and most crucial step is to identify the dangers to your company. It is important that you
must always watch for emerging trends and threats that affect your sector. It’s also important to
categorize the threats as internal or external. Internal threats including occupational fraud can be
more damaging to your business. There are also a variety of resources to help you stay ahead in
the competition and avoid future risks like reading trade publications, participating in industry
conferences and loss prevention forums and obtaining case studies are just a few examples.
Make sure to include threats and risks for all areas of the organization including Health and
Safety Risk, Operational Risks, Financial Risks, Strategic Risks and Regulatory Risks.

Task 2. Determining the Likelihood of their Occurence

When considering the impact of any threat, you need to consider two factors such as the
likelihood and outcome. The likelihood is how probable it is for the risk event or threat to occur.
The outcome is what would be the overall ramification of the occurrence.

Task 3. Analyze the Impact

To analyze how the damage of a threat may impact the business, we need to so the risk matrix.
To do this, rate each threat on its potential likelihood and outcome severity on a scale of 1 to 10,
with 1 being low and 10 being high.

Step 3. Manage the Risks

After you have identified the threats along with their potential impact and likelihood of
occurrence. We will now begin the process of managing the risks. Generally, there are 4
buckets you can choose from in managing specific risks.

Option 1: Avoid the Risk

If you find the risk level too high or too risky to move forward, then remove the threat, avoid it or
abandon it. For example, not entering a business to avoid risk of loss also avoids the possibility
of earning profits.

Option 2: Accept the Risk

Accept the risks if there are less costs or can free up your budget. If you do want to mitigate
them, look for simple, low-cost options or simply continue the business as usual. However, just
be sure to continue monitoring even the smallest of hazards to reduce any unwanted surprises.

Option 3: Mitigate the Risk

After assessing the risk, you can decide if you don’t want to eliminate it, you can take measures
to mitigate or reduce it. The advantage of mitigating risk is that you can continue conducting
activities that are essential to business growth all while having measures in place to protect your
business.

Option 4: Transfer the Risk

You can take some or most of the burden from risks and share it with a third party. You can
transfer financial risks through hedging strategies, future contracts and derivatives. Businesses
can also transfer risk to a third party typically by buying insurance. So when an individual or
entity purchases insurance, they are insuring against financial risks.

For example, an individual who purchases car insurance is acquiring financial protection against
physical damage or bodily harm that can result from traffic incidents. As such, the individual is
shifting the risk of having to incur significant financial losses from traffic incidents to an
insurance company. In exchange for bearing such risks, the insurance company will typically
require periodic payment from the individual. So insurance protects you against potential
financial losses as a result of unexpected events or the risks.

3 Basic Characteristics of Insurance

To know more about insurance, let’s characterize it as pooling of losses, payment of fortuitous
losses, risk transfer and indemnification.

1. Pooling of Losses

It is the spreading of losses incurred by the few over the entire group, so average loss is a
substitute for actual loss. You can actually pool risks where a group decides to spread the risk
among its members. If any of the group members suffer a loss everyone contributes to the
restitution.

2. Payment of Fortuitous loss

Insurance pays for losses that are unforeseen, unexpected, and occur as a result of chances. A
fortuitous loss is when the loss must be accidental, not by anyone’s intention. Insurance policies
provide coverage against these losses, where the insured cannot control the loss. For example, a
person may slip on a muddy sidewalk and break his leg.

3. Risk Transfer

A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial
position to pay the loss than the insured. Pure risks that are typically transferred to insurers
include risk of premature death, poor health, disability, destruction and theft of property &
personal liability lawsuits. For example, a service provider asking their customer to indemnify
them to protect against misuse of their work product

4. Indemnification

The insured is restored to his/her approximate financial position to the occurrence of the loss.
Indemnification is the act of providing restoration, protection against potential damage or loss by
compensating them.

Step 3: Monitor the Risk

New risks constantly emerge and existing risks may grow or change in size and scope, so
continue to monitor risks, reassess threats, and apply lessons learned to become more adaptable,
proactive, and agile in responding to hazards.

One way to make monitoring risks easier and less a drain to your resources is by using a Risk
Management Information System, and it helps you save time and improve accuracy by
automating tasks and streamlining workflows.

Every year, risks are growing in complexity and increasing in number. Unpredictable events,
stricter regulations and increased scrutiny from employed customers and investors put more
pressure on companies to stay ahead of unforeseen and adverse circumstances.

So formalize your defense eith industry-standard risk management techniques is critical to

combating this pressure, improving your company reputation and increasing risk protection for
the long run.

Characteristics of an ideally insurable risk

Accidental in nature – A contingency that has occurred should be beyond the insured’s control.
To the best of their ability, the insured should take all the precautions to avoid such an event.

Definiteness – Any loss should be attributable to a cause, a specific time, and a place. For the
insured to assert their claims, solid proof of loss is necessary.
Measurability – The insurability of risk depends on the extent of the loss. A calculable loss
makes it easier for the insurer to determine premiums and the claim amount.

Non-catastrophic in nature – Insurance companies do not usually insure catastrophic risks that
are usually unforeseen or cannot be precisely predicted.

Large loss – The financial loss incurred by the insured should be large enough from the
individual’s perspective. This necessitates an insurance policy should any significant event arise
for the insured.

Statistical probability – Any contingency should be statistically predictable to become

insurable. This helps in the determination of premiums. For instance, highly probable events will
attract high premiums.

Adverse Selection in insurance

Adverse selection generally refers to any situation where one party in a contract or negotiation,
such as a seller, possesses information relevant to the contract or negotiation that the
corresponding party, such as a buyer, does not have. Typically, the more knowledgeable party is
the seller. Adverse selection occurs when this asymmetric information is exploited, leading the
party that lacks relevant knowledge to make decisions that cause it to suffer adverse effects.

In the insurance industry, adverse selection refers to situations in which an insurance company
extends insurance coverage to an applicant whose actual risk is substantially higher than the risk
known by the insurance company. The insurance company suffers adverse effects by offering
coverage at a cost that does not accurately reflect its actual risk exposure.

Types of Insurance

There are two broad types of insurance:

Life Insurance - Life insurance is a contract that offers financial compensation in case of death
or disability. Some life insurance policies even offer financial compensation after retirement or a
certain period of time.

Types of life insurance

Term Insurance - It is the most basic type of insurance. -It covers you for a specific period. -
Your family gets a lump-sum amount in the case of your death. -If, however, you survive the
term, no money will be paid to you or your family.

Whole Life Insurance - It covers you for a lifetime. - Your family receives a certain sum
of money after your death. -They will also be entitled to a bonus that often accrues on such
amount.

Child Plan -This ensures your child’s financial security. -In the event of your death, your
child gets a lump-sum amount. -The insurer pays the premium amounts after your death. -Your
child will continue to get a certain sum of money at specific intervals.
Pension Plans-This helps build your retirement fund. -You can get a regular pension amount
after retirement. -In the case of your death, your family can claim the sum assured.

General Insurance - A general insurance is a contract that offers financial compensation on any
loss other than death. It insures everything apart from life. A general insurance compensates you
for financial loss due to liabilities related to your house, car, bike, health, travel, etc.

Types of general insurance

Health Insurance - This type of general insurance covers the cost of medical care. It pays for or
reimburses the amount you pay towards the treatment of any injury or illness.

Motor Insurance - It is a general insurance cover that offers financial protection to your
vehicles from loss due to accidents, damage, theft, fire or natural calamities

Travel insurance - A travel insurance compensates you or pays for any financial liabilities
arising out of medical and non-medical emergencies during your travel abroad or within the
country.

Home Insurance - Home insurance is a cover that pays or compensates you for damage to your
home due to natural calamities, man-made disasters or other threats.

BENEFITS OF INSURANCE TO SOCIETY

1- Indemnification of loss

2- Reduction of worry and fear

3- Source of investment funds

4- Loss prevention

5- Enhancement of credit

1-Indemnification of loss

Indemnification is an agreement where your insurer helps cover loss, damage or liability incurred
from a covered event. Indemnity is another way of saying your insurer pays for a loss, so you
don't have financial damages. Indemnification to business firms also permits firms to remain in
business and employees to keep their jobs.

2-Reduction of worry and fear

If a person has any insurance coverage one of the benefit of insurance is that worry and fear are
reduced.

Example: -If family head has life insurance coverage, those who are financially dependent are
less likely to worry about the financial security in the event of premature death.
-Owners of auto insurance policy or any other type of property insurance enjoy greater peace of
mind because they know they are covered if a loss occurs.

3-Source of Investment funds

The insurance industry is an important source of funds for capital investment and accumulation.

The main sources of funding are retained earnings, debt capital, and equity capital. Companies
use retained earnings from business operations to expand or distribute dividends to their
shareholders. Businesses raise funds by borrowing debt privately from a bank or by going public
(issuing debt securities).

4- Loss Prevention

Insurance companies are actively involved in numerous loss-prevention activities and also
employ a wide variety of loss-prevention personnel, including safety engineers and specialists in
fire prevention, occupational safety and health, and products liability.

Examples of loss-prevention activities that property and casualty insurers strongly support:

 Highway safety and reduction of automobile deaths

 Fire prevention Prevention of auto thefts

 Prevention of defective products that could injure the user

Society benefits because both types of direct and indirect losses are reduced by loss-prevention
activities.

5. Enhancement of Credit

Insurance makes a borrower a better credit risk because it guarantees the value of the borrower's
collateral or gives greater assurance that the loan will be paid.

Example:

When a house is purchased. the lending institution requires property insurance on the house
before the mortgage is granted. The property insurance protects the lender's financial interest if
the property is damaged or destroyed.

If a new car is purchased and financed by a bank or other lending institution auto insurance
policy may be required before the loan is made.

COSTS OF INSURANCE TO SOCIETY

The major costs of insurance include:

1- Cost of doing business

 2- Fradu lent claims

3- Inflated claims

1- Cost of doing business

Insurers consume scarce economic resources land, labor, capital, and business enterprise in
providing insurance to society.

2-Fraudulent claims

Submission of fraudulent claims is another cost of insurance. Examples of fraudulent claims:

1- Auto accidents are faked or staged to collect benefits.

2- Phony burglaries, thefts, or acts of vandalism are reported to insurers.

3- False health insurance claims are submitted to collect benefits.

2- Inflated claims

Submission of inflated claims is another cost of insurance. Although the loss is not intentionally
caused by the insured, the dollar amount of the claim may exceed the actual financial loss.

Examples: Insureds exaggerate the amount and value of property stolen from a home or business.
Disabled persons often malinger to collect disability-income benefits for a longer duration.

Risk management

Risk management is the process of identifying, assessing and controlling threats to an

organization’s capital and earnings. These threats, or risk, could stem from a wide variety of
sources, including financial uncertainty, legal liabilities, strategic management errors, accidents
and natural disasters. IT security threats and data-related risks, and the risk management
strategies to alleviate them have become a top priority for digitized companies. As a result, a risk
management plan increasingly includes companies’ processes for identifying and controlling
threats to its digital assets, including proprietary corporate data, a customer’s personally
identifiable information and intellectual property.

Definition of Risk Management:

1) Risk management is an integrated process of delineating (define) specific areas of risk,

developing a comprehensive plan, integrating the plan, and conducting the ongoing evaluation’ –
Dr. P.K. Gupta.

2) Risk Management is the process of measuring, or assessing risk and then developing strategies
to manage the risk’ – Wikipedia.
3) Managing the risk can involve taking out insurance against a loss, hedging a loan against
interest rate rises, and protecting an investment against a fall in interest rates’ – Oxford Business
Dictionary.

The risk management process involves identifying, assessing, and prioritizing risks, and
developing strategies to mitigate or manage those risks.

1. Risk Identification: The first step in the risk management process is to identify potential risks
that may impact a project, organization, or process. This can be done through brainstorming
sessions, analysis of historical data, expert opinion, or other methods.

2. Risk Assessment: Once risks are identified, they need to be assessed to determine the
likelihood of occurrence and the potential impact if they were to happen. This step helps
prioritize risks based on their level of severity and enables effective risk management planning.

3. Risk Analysis: Risk analysis involves a deeper examination of identified risks to understand
the causes, potential consequences, and potential risk response strategies.

4. Risk Mitigation: This step involves developing and implementing strategies to mitigate or
reduce the likelihood of occurrence of identified risks. Mitigation strategies may include
avoiding the risk, transferring the risk, accepting the risk, or implementing control measures to
reduce the likelihood of the risk occurring.

5. Risk Monitoring and Review: Once mitigation strategies are implemented, ongoing
monitoring and review are necessary to ensure they are effective and identify new risks or
changes in existing risks. This step ensures the risk management plan stays relevant and effective
over time.

6. Risk Communication: Effective communication of risks and risk management strategies is

critical to the success of the risk management process. It ensures all stakeholders are aware of the
risks and the steps taken to mitigate or manage them.

By following these steps, businesses can effectively manage and mitigate potential risks and
minimize the negative impact on projects or operations.
Risk management provides numerous benefits for organizations.

1. Minimizing Losses: Risk management helps organizations identify and mitigate risks that
could lead to financial losses, reputational damage, or other negative impacts. By implementing
appropriate risk management strategies, organizations can reduce the likelihood of adverse
events occurring and minimize the potential damage.

2. Enhancing Decision-Making: By analyzing risks, organizations can make more informed

decisions and allocate resources more effectively. This helps to ensure that resources are focused
on the most significant risks and opportunities

3. Increasing Resilience: By identifying and managing risks, organizations can improve their
ability to withstand disruptions, crises, or unexpected events. This helps to build resilience and
agility, allowing organizations to respond to challenges more effectively.

4. Improving Compliance: Risk management helps organizations to comply with legal and
regulatory requirements. By identifying and managing risks, organizations can ensure they meet
regulatory obligations and avoid potential legal or financial penalties.

5. Fostering a Culture of Safety and Accountability: Risk management promotes a culture of

safety and accountability within organizations. By encouraging employees to identify and report
risks, organizations can create a more transparent and responsible workplace.

6. Enhancing Stakeholder Confidence: Effective risk management helps to build trust and
confidence with stakeholders, including customers, investors, and regulators. This can enhance
an organization's reputation and create a competitive advantage.

Overall, risk management helps organizations to protect their assets, optimize their performance,
and achieve their strategic objectives. It is a critical process for any organization that wants to
manage uncertainty and succeed in today's complex business environment.
Personal risk management involves identifying, assessing, and managing risks that could impact
an individual's life, health, and financial well-being.

1. Identify potential risks: Start by identifying potential risks that could impact your life, such
as accidents, illnesses, natural disasters, or financial losses.

2. Assess the likelihood and impact of each risk: Once you have identified potential risks,
assess the likelihood and potential impact of each risk. This can help prioritize risks and
determine which ones require immediate attention.

3. Develop a risk management plan: Based on your assessment, develop a risk management
plan that outlines strategies to mitigate or manage each risk. This could include taking steps to
reduce the likelihood of a risk occurring, such as improving your health habits or securing your
home, or developing a plan to respond to a potential risk, such as having insurance or an
emergency fund.

4. Implement the risk management plan: Once you have developed a risk management plan,
take action to implement it. This could involve purchasing insurance, improving your health
habits, or taking steps to secure your home or finances.

5. Review and adjust the plan as necessary: Regularly review and adjust your risk
management plan as necessary. This can help ensure that it remains effective over time and
adapts to changing circumstances.

By following these steps, individuals can effectively manage personal risks and protect their
well-being, health, and financial security. It is essential to take a proactive approach to risk
management to reduce the likelihood of adverse events and ensure that you are prepared to
respond if they occur.