Chapter 1

RISK MANAGEMENT CONCEPTS AND

PRINCIPLES
Risk Defined

There is no better way of starting the discussions in this book except through
defining what risk is. Risk provides opportunities while exposing us to outcomes that
we may not desire. It is the coupling of risk and reward that lies at the core of the risk
definition, and the innovations that have been generated in response make risk central
to the study of not just finance but to all the business.
(http://www.stern.nyu.edu/~adamodar/pdfiles/valrisk/ch1). The definition of risk here
implies awareness that risk is something foreseeable in every kind of business even
in the tourism and hospitality world. The exposure to something that we do not desire
should not be a barrier for us to execute what is being expected and demanded from
us. Our knowledge of risk should be considered as a better opportunity for us to plan
and mitigate its adverse effect in our undertakings.
Risk, according to World Tourism Organization (UNWTO), is a situation that
exposes someone or something to danger harm or loss. Risk can be a physical safety
matter, a risk of property loss, a financial business risk, and more. From the moment
a person engages himself in the business of tourism and hospitality, whether a sole
proprietorship, partnership, or corporation, the risk immediately attaches.
Examples:
1. Food handling is one issue that must be adequately addressed whenever
someone prepares food for the customers. The danger of food poisoning due
to the contamination of food is high if the necessary precaution based on
standards will not be followed. The government has provided regulations that
must be complied with by any business ventures to make sure that the danger
or harm is mitigated. Food sanitation permit is a mandatory requirement for
businesses in the food industry.

2. It is an inevitable practice in both tourism and hospitality businesses to get the

necessary information about their guests and clientele for security reasons, not
only on the part of the guests but also on the part of the management as well.
The giving and obtaining information per se are considered risk in itself that
must be safeguarded accordingly.

The business dictionary has defined risk as the probability of threat of damage, injury,
liability, or any other adverse occurrence that is caused by external or internal
vulnerabilities, and that may be avoided through pre-emptive action
(http://www.businessdictionary.com/definition/risk.htmloccur). The same has stressed
out the definition of risk as applied to the food industry: the possibility that due to a
particular hazard in food, there will be an adverse effect on absolute magnitude.
Tourism like hospitality is a trade or a business. It may sometimes reach its
desired outcome, but the possibility of not realizing it should not be set aside. Engaging
in a business, like tourism and hospitality has a probability of threat or damage as
there are events beyond the contemplation of man. The weather as of the time of
entering an agreement with clientele may be entirely different from the actual day of
the event. Those actual occurrences must have a pre-emptive action.
The recent declaration of the World Health Organization about the novel
coronavirus as a pandemic has resulted to business losses in the industries of
aviation, tourism, and hospitality. The lockdown and Enhanced Community Quarantine
were implemented not only in the Philippines but as well as whole world, causing
limitations in the movement of the people and goods.
In the point of view of economics, risk implies future uncertainty about deviation
from expected earnings or expected outcome. Risk measures the uncertainty that an
investor is willing to take to realize a gain from an investment
(https://economictimes.indiatimes.com/definition/risk). The very reason why people
engage themselves in business is to realize gains that could address their respective
economic interests.
However, realizing gain is not an easy thing because of the hazards and risks
attaching to it. There is a need to plan on time and think of the best possible means to
address the risks and hazards barring the full implementation of the desired plan of
the business.

When one is in the business of simple sari-sari store, there is a hazard of the
proliferation of minor and major competitors. The same would make one realize the
need to deviate to usual strategy of capturing the market to a more relevant and
significant strategy. When a person is in the business of transportation, they have to
think of the erratic agency, prices of the oil in the market. When a person is in the
business of travel there is a chance to deviate the tour packages as an effect of the
peso equivalency in the foreign exchange.

Risk vs. Hazard

There are instances wherein risk and hazard are being used interchangeably
as they thought they were the same, but the Canadian Center for Occupational Health
and Safety gave a concrete definition to distinguish the two. Accordingly, hazard
pertains to any source of potential damage, harm or adverse health effects on
something or someone, while risk is the chance or probability that a person will be
harmed or experience an adverse health effect if exposed to a hazard. It may also
apply to situations with property or equipment loss, or harmful effects on the
environment.
According to workSMARK, (n.d.) a hazard is something that can cause harm
while a risk is a chance that any hazard will cause harm to somebody.
 RISK
HAZARD How great the chance
Anything that can cause harm. that someone will be
(e.g., a chemical. electricity, ladders, etc) harmed by the hazard.

Let us explain further the distinction between the risk and hazard using the
hospitality and tourism industry-related activities as the framework.

Event organizing is effective in boosting the economy of both industries,

tourism, and hospitality. One cannot accomplish it in just a wink of an eye. Must
undergo a tedious study and planning because some risks and hazards are attached
to it. Guest performers are considered hazard as they may cause commotion and
stampede because of the unruly people. The unruly people are also considered a
hazard as they can cause chaos to the whole event process. The overwhelming
attendance of guests might also be considered hazard as it can cause traffic
congestion and noise nuisance to the nearby establishments. There is a hazard of
terrorist attack and robbery as bad elements would love to take chance of executing
an evil design in populated and busy areas. On the other hand, the risks that those
hazards can cause damage to property and injury to people are very high should the
management ignore the essence of risk management in the design of their event.
There is also a hazard in the food preparation in the hotel industry. The people
preparing might be a factor of hazard as their knowledge, training, and skills are
needed to make sure the foods are adequately prepared. Thus, food contamination is
avoided. The risk of food contamination vis-à-vis with food poisoning is imminent if the
one handling the food has done no precautionary measure. The supplier of the
ingredients is also a factor of hazard. The trouble will come in even the one preparing
the food is careful in food handling or if the ingredients per se are contaminated.
Risk management, as defined in ISO 31000, is the identification, evaluation,
and prioritization of risks. It is followed by coordinated and economical application of
resources to minimize, monitor, and control the probability of unfortunate events
(Hubbard, 2009) to achieve the desired output.
To address the issue of risk, which is inevitable but foreseeable in any business
venture, circumstances must be studied carefully to identify all the risks involved,
followed by an intense evaluation of the same to determine which among those risks
should be addressed first and which should be treated lastly. Risk management, based
on the definition of ISO 31000 and Hubbard, follows a systematic approach to
mitigating, if not eradicating entirely the risks. Close coordination with the key people
in an organization is something essential to the control of the unfortunate events.

Sources of Risks
Risk can come from varied sources like:
1. Financial market uncertainty;
2. Threats from failure of project (at any phase in the life-cycle);
3. Legal liabilities;
4. Credit risk;
5. Accidents;
6. Natural happenings or disasters;
7. Attack that is deliberate from an adversary;
8. Uncertainty or unpredictable root causes

Uncertainty in the Financial Markets

One consideration that a manager should take into in the conduct of his or her
business is the uncertainty in the financial markets. Managers must be vigilant enough
in determining those uncertainties that could give more impact in the entirety of his
business. The press briefing statement of Former US Defense Secretary Donald
Rumsfeld was quoted in https://www.ezonomics.com/whti/ uncertainty (retrieved,
2018). “We know there are known unknowns; that is to say we know there are some
things we do not know. However, there are also unknown unknowns – the ones we do
not know we do not know.” The statement of Rumsfeld is a reminder to everyone that
the awareness on the distinction between certainty and uncertainty could be helpful in
many circumstances like the reduction of so much confidence for investors and the
protection of wealth for an extended period.
In the paper of Nick Bloom, an economist, he argued that uncertainty can hit
different groups in different ways. He gave oil-price spike as an example, contending
that it may give a good impact for the producers of oil, but not for airlines. As pointed
out by Bloom, the OPEC oil embargo in 1973 had tipped the US into recession by
tripling oil prices and increasing uncertainty over future oil prices.
In the paper of Slovik (n.d.), he said that although the efficient market prices
already enunciated the known factors, the primary sources of market sources are
considered unknown factors. According to him, the said unknown factors should be
referred as market uncertainty. He finally concluded that from the perspective of
market stability, the most critical aspect is not the market risk, but the degree of market
uncertainty embedded in different assets or business models.
 The Tax Reform for Acceleration and Inclusion (TRAIN) Law or RA 10963 which
took effect on January 01, 2018, overhauled the National Internal Revenue Code
(NIRC) which was adopted twenty years ago. Although the TRAIN may be considered
as beneficial to some extent as it decreases the tax on personal income, estate, and
donation, it could somehow also produce uncertainty to the financial market as it
increases the tax on certain passive incomes, documents (documentary stamp tax) as
well as excise tax on petroleum products, minerals, automobiles, and cigarettes.
The primary commodities for food and hospitality industry were likewise
affected by the TRAIN law when it imposes excise taxes on sweetened beverages and
non-essential services (invasive cosmetic procedures) and removes tax exemption of
Lotto and other PCSO winnings amounting to more than Php 10,000.

Threats from Project Failures

Another source of risk that could hamper the success of the tourism and
hospitality business is the threat usually embedded in the project. As a manager, you
cannot just avoid the threat; you have to deal with it. As per https://ppp-
certification.com/ppp-certification-guide/81-what-project-failure-types-project-
failures, the success of Public-Private Partnership is being measured by avoiding the
project failure or minimizing their consequences. It means that: the PPP is the right
project; it is the right delivery model for the project; the project is appraised, structured,
and managed to lessen the negative impacts on cost, scope, time, and quality.
Based on Taylor Jr. (2014), the compelling business development requires
taking on calculated risk. Throughout the whole process of project development, the
managers could direct their teams on the right actions utilizing establishing the
distinction between risks and effects. Consequently, late projects and its failure to meet
the quality guidelines could produce an adverse impression on the new members.

Legal Liabilities in Tourism and Hospitality Industry

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

Risk management in tourism and hospitality industry is a two-way process: (1)

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

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

Accidents
Risks and accidents are sometimes being used interchangeably, but they are
different, though they complement each other. Accidents are reactive while risks are
preventive. The effects are well known in an accident. There is a possibility of shock
on the part of the injured, anger at the one in fault, and confusion on the thing that is
supposed to be done immediately after the accident. Accident management is
necessary to reduce the costs pertinent to the accident, to wit: damage to property,
rental costs, maximization of subrogation recovery.
To emphasize, the management of risk is preventive as it would like to limit the
occurrence of accidents (automotive-fleet.com). It pertains to the precautionary
measures that a manager should do to limit or avoid the accidents.

A. Some common injuries in the hospitality industry

The following are some of the common injuries in the hospitality industry
(https://www.entenlaw.com (2017):
1. Slip-and-fall injuries;
2. Musculoskeletal injuries;
3. Skin reactions;
4. Respiratory illnesses;
5. Security-related accidents (Accidentshttp://www.automotive-fleet.com/
channel);
6. Food poisoning;
7. Elevator and escalator accidents (Winston, n.d.)
 Slip-and-fall Injuries. Hotel workers are at risk of falling and slipping because of
the nature of their work which requires them to move quickly and faster as they can to
accomplish their time the soonest possible. Clientele and guests are being valued in
the hotel industry, the reason why the workers are pampering guests and clientele
employing service with utmost efficiency. Guests are not supposed to be given long
waiting time. The persons assigned in a pool area, lobby, or hallways are also
susceptible of meeting the slip-and- fall injuries.
Musculoskeletal Injuries. Working in a hotel requires a lot of strengths and agility
because of the requirement of their work to bend and lift that could cause muscular
pains and injuries. The severity of the injuries would usually de pend on the factors
that trigger the injury and the early medical attention.
Skin Reactions. The skin reactions may be caused by the exposure of the hotel
workers to a variety of chemicals on a daily basis, like strong cleaning agents. Skin
reactions need early medical attention to avoid severe complications.
Respiratory Illnesses. There is a possibility that hotel employees usually
assigned to the Housekeeping Department could acquire respiratory illnesses due to
their exposure to infectious diseases carried through bodily fluids like vomit, feces,,
and blood.
The following are in addition to what has been enumerated in (Accidents
http://www.automotive-fleet.com/channel/safety-accident-management).
Security-related Accidents. No matter how careful the management of a hotel and
similar establishment is, there were still some reports of accidents that could be
attributed to accident and negligence cases like robbery and theft. In this section, the
authors have opted to include the provisions of the Revised Penal Code of the
Philippines, specifically Article 102 so that the students would be able to determine the
corresponding liability of their actions if they would engage themselves in the hotel
and similar establishments in the future.

Under the law, the innkeepers, tavernkeepers, and proprietors of establishments are
liable for the presence of the following elements:
1. The innkeeper, tavernkeepers, and proprietor of establishments or his employee
violated a municipal ordinance or some general or police regulation;
2. A crime is committed in such inn, tavern or establishment;
3. The person criminally liable is insolvent.
In the second paragraph of Article 102, when all of the following elements are present,
the innkeeper is subsidiarily liable:
1. The guests have notified in advance the innkeeper or the person representing him
of the deposit of their goods within the inn.
2. The guests have followed the direction of the innkeeper or his representative
concerning the care and vigilance of their goods.
3. Robbery or theft took such goods of the guests lodging in therein.
It must be noted that even if the guests did not deposit their goods and a notice of
disclaimer of liability was posted in a hotel, it does not free the owner from secondary
liability. It is enough that the goods were stolen from the inn.

Food Poisoning. Food poisoning is typically being experienced in the

restaurants and similar establishments, even in luxury hotels and resorts. It is usually
caused by undercooked food, cross-contamination in the kitchen, or other negligent

In the Inquirer section by Castillo (2011), it was alleged that a mass food poisoning
happenedpreparation measures. a 5-star hotel. Victims were participants of the convention
at Edsa Shangri-la,
of heart specialists from all over the country. He lamented that “It is quite discomforting
thought that the source of the problem has not been identified, yet there was no effort to
report it to the proper health authorities.”

There was also a report of food poisoning in the National Athletics Meet held at
Dumaguete City in 2013. A total of 158 athletes and coaches were hospitalized after they
allegedly suffered food and water poisoning before the official start of a national
competition. The athletes and coaches were brought to Negros Oriental Provincial
Hospital after they complained of fever, dizziness, headache diarrhea, and vomiting.
(Dacanay, 2013)

Elevator and Escalator Accidents. Elevators and escalators which are

common in the hotels, malls and similar establishments are very beneficial to both the
guests and management as it could give them convenience in getting from one level
of a building to another. The management however of the said establishments must
exercise due diligence to make sure it is well-maintained, and that any safety of the
guests is of paramount consideration.
According to Winston (n.d.) “The hotel owners are responsible for making sure
that any elevators or escalators in their building are well-maintained and that any
safety concerns that arise during maintenance checks are quickly addressed. When
hotel owners fail to do this, accidents can happen.”
 B. Some Accidents in the Tourism Industry
Accidents occur when there is an unintentional external action at a particular time
and place, with the non-apparent and deliberate cause but with marked effects. It is
an adverse outcome which could have been prevented if the attendant circumstances
could have been recognized and attended with before its happening. There are many
tourism-related activities which are susceptible to harm and damage people and
property. Examples will be presented as per their category:
1. Accidents due to fortuitous events or acts of God. Accidents in connection
with this category are beyond the contemplation of man. The causes are not
within the bounds of man. Who would ever forget the horrible Indian Ocean
earthquake and tsunami which killed almost 250,000 people, including tourists
in Phuket, Thailand and 13 other countries? Listed below are some of the
natural phenomena identified around the world: Earthquakes; Volcanic
eruption; Flood; Landslides; Erosion; Fire; Storm; Typhoon.

2. Transportation accidents. Operators in the tourism industry usually create

packages with the following different modes of transportation to accommodate
tourists:
a) Air
b) Water
c) Land

The said modes of transportation are not free to danger of meeting an accident
no matter how diligent the operators are because of the different perils attaching to it.
Notable land-sea-air transportation disasters based on https://www.rappler.
Com/world/ 46909- 2013- land are as follows:

“The MV Our Lady of Mt. Carmel sank in Masbate, Philippines last June 2013 and
cost the lives of two of the 57 documented passengers on the ship. At least 91 people
died on June 16, 2013 when the ferry St. Thomas Aquinas collided with cargo ship MV.
Sulpicio Express 7 while both vessels were traversing the sea off Talisay City in the
province of Cebu. Several more bodies were recovered which gave rise to at least 116
dead.”
“Malaysia Airlines Flight MH370 became the world’s greatest aviation mystery
when it disappeared without a trace flying from Kuala Lumpur in Malaysia to Beijing,
China, in March 2014.” (https://www.thesun.co.uk/ news/2100795/flight-mh370-
malaysia-airlines-search-latest-news/)

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

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

Natural Causes and Disasters

The natural disasters may be categorized into three broad groups
(http://www.earthtimes.org/encyclopaedia):
1. Caused by movements of the earth
2. Disasters related to weather
3. Floods, mudslides, landslides, and famine
The movements of the earth may include earthquakes, volcanic eruptions, and
tsunamis. Risk managers could hardly predict the occurrences of this phenomenon.
The only thing that they can do is to take necessary measure to lessen damage to
property and loss of life after the event.

Disasters related to weather include hurricanes, tornadoes, el Niño, la Niña,

extreme heat, and freezing water. There is no way to stop these occurrences as the
weather system develops. Risk managers can only do something to lessen the effect
of these natural occurrences, but they cannot get rid of it.
Floods, mudslides, landslides, and famine are considered as magnitudes of the
occurrences of the extreme weather events. They are the results of unforeseen
conditions.

Deliberate Attack from an Adversary

In an article of Sinai (2016), he expressed his belief on the vital role of tourism
in the economy of the nation as evidenced by the revenue of the government,
employment, and national income. He said that by attacking the industry, economic
recession and unemployment could be at stake. He concluded that terrorist groups
perceive hotels, restaurants, and tourist resorts as significant targets for attack.
He cited the incident of June 26, 2015, wherein an Islamic terrorist carried out
mass shooting killing 30 British tourists at Port El Kantaoui. Further, he also claimed
the impact of this terrorism in Tunisia which caused the forced shut down of 70 hotels
and a decline of an estimated 80% foreign tourism.

Sinai said in his article that “In response to such terrorist threats, the hotel
industry around the world has beefed up its security departments, implementing a
range of security measures to protect guests at their properties, ranging from armed
guards to concrete barriers and metal detectors.”
Terrorism, according to Albu (2016), has become one of the more and more
active and threatening calamities that affect the international community. He
concluded that tourists avoid the tourist areas where terrorist events have occurred,
their confidence in the respective destination being very hard to recover. The attacks
had resulted in the strengthening of security sectors in the states affected, review of
domestic boarding policy, and the strict passenger’s control, even if the purpose of
travel is tourism.

Events of Uncertain or Unpredictable Root-cause

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

Two Types of Events in Risk Management

There are two types of events, to wit:
1. Negative events or risks;
2. Positive events or opportunities.