RISK MANAGEMENT AND INSURANCE

MGT-FM-210
Risk Management
The concept of risk management originates from the business of insurance. It has assumed
significance over the years as an important function of management. It basically consists of
five processes that aim to mitigate business losses. No organization can completely eliminate risks
but it is certainly possible to prepare for t Risk management is the process of identifying, assessing,
and prioritizing risks, followed by the coordinated application of resources to minimize, control, and
monitor the impact of such risks. It is a systematic approach that organizations use to address
uncertainties that could affect the achievement of their objectives. Risk management involves
understanding potential risks, evaluating their likelihood and potential impact, and implementing
strategies to mitigate or exploit them.

Key components of risk management include:

1. **Risk Identification:** This involves identifying and documenting potential risks that could
impact the organization's objectives. Risks can arise from various sources, including financial,
operational, strategic, regulatory, and environmental factors.

2. **Risk Assessment:** Once risks are identified, they need to be assessed in terms of their
likelihood of occurrence and their potential impact on the organization. This assessment helps
prioritize risks based on their significance.

3. **Risk Mitigation or Treatment:** After assessing risks, organizations develop strategies to

manage them effectively. This may involve mitigating the risk to reduce its likelihood or impact,
transferring the risk through insurance or contracts, avoiding certain activities that pose high risks,
or accepting the risk if its impact is within acceptable limits.
4. **Risk Monitoring and Review:** Risk management is an ongoing process that requires
continuous monitoring and review. Organizations need to adapt to changes in their internal and
external environments, reassess risks periodically, and adjust their risk management strategies
accordingly.

5. **Communication and Reporting:** Effective communication of risk-related information is

crucial. Stakeholders need to be informed about the identified risks, the strategies in place to
manage them, and any changes in the risk landscape. Transparent reporting helps build trust and
ensures that all relevant parties are aware of the organization's risk exposure.

6. **Integration with Decision-Making:** Risk management should be integrated into the overall
decision-making processes of an organization. By considering risks during strategic planning and
daily operations, organizations can make informed decisions that align with their risk tolerance and
objectives.

7. **Crisis Management and Business Continuity Planning:** In addition to routine risk

management, organizations often develop plans for responding to crises and ensuring business
continuity. This involves preparing for and responding to unexpected events that could severely
impact operations.

Effective risk management is essential for organizations to navigate uncertainties and achieve their
goals while minimizing the negative impacts of potential threats. It is a dynamic and iterative
process that requires ongoing attention and adaptation to changing circumstances. hem.

vCharacteristics of Risk Management

Risk management is a systematic process that deals with the problem of uncertainty. It is an
important discipline under the broad subject of management.
Secondly, one can also refer to it for responding to undesirable events. In this regard, it helps in
preparing for worst-case scenarios.

Lastly, it is also a system that helps in making choices. It provides various alternatives and
approaches to help managers select one that has minimum chances of losses.

Risk Management Process

Management of risks involves the following five key steps:

Step 1: Establishing the Context

Before dealing with risks, managers must be able to understand and identify them clearly. In order
to do this, they first need to comprehend the context in which the risks arise.

In other words, managers need to figure which environment their business functions in and what
risks may arise therein. They should also be aware of their organization’s functions, goals and
core activities.

Step 2: Identifying the Loss

After understanding the context, managers should list down all possible risks that may arise. This
will depend on the nature of the organization’s business, its environment, etc. For example, a
company manufacturing chemicals may face the risk of leakage from its production units.

Risks can be of four types.

Firstly, physical risks are those which involve an organization’s physical (tangible) assets and
environmental factors.

Secondly, Financial risks include the likes of insurance costs, payment of damages, loans, taxes, etc.

Thirdly, risks may also be ethical if they involve harm in the nature of one’s beliefs or reputation.

Finally, there can also be legal risks which arise from laws and regulations.

Step 3: Analysing and Evaluating Risks

Every organization faces several kinds of risks but the chances of them occurring differ in every
case. Managers should analyze each possible risk individually and evaluate the chances of it
happening. This is because they have to accord more importance to serious risks than less serious
ones.

A business often incurs financial expenses for mitigating risks. For example, payment of insurance
premium, costs of hiring security personnel, etc.

The greater the chances of a risk occurring, the greater will be its cost of mitigation. Analysis of
risks, thus, helps in realizing how expensive it will be to prepare for a risk.

Managers can take the help of a ‘likelihood scale’ to fix the chances of risks occurring. This scale
basically ranks risks on the likelihood of them causing losses. They can even rank risks in terms of
priorities for this purpose.

Step 4: Treating the Risks

After identifying and analyzing risks, managers next have to treat them. This process can include
avoiding risks altogether. Alternatively, it is also possible to reduce the possible impact of a risk.

For example, a factory can deploy safety measures and equipment to prevent injuries to its workers.

One can even transfer risks to other entities. This process includes the use of contracts and notices to
shift any possible liability on others.

For example, shopping malls often shift the responsibilities of parked vehicles on their owners in
case any damage occurs.

Step 5: Monitoring and Reviewing Risks

Monitoring and reviewing of risks is a continuous process. Managers need to keep checking the
likelihood of risks occurring. They must also regularly follow up on their risk prevention strategies.
This step is important because risks are inevitable and they never remain static.

Risk Management Process

The risk management process is a framework for the actions that need to be taken. There are five
basic steps that are taken to manage risk; these steps are referred to as the risk management
process. It begins with identifying risks, goes on to analyze risks, then the risk is prioritized, a
solution is implemented, and finally, the risk is monitored. In manual systems, each step involves
a lot of documentation and administration.

Here Are The Five Essential Steps of A Risk Management Process

1. Identify the Risk

2. Analyze the Risk
3. Evaluate or Rank the Risk
4. Treat the Risk
5. Monitor and Review the Risk

Step 1: Identify the Risk

The initial step in the risk management process is to identify the risks that the business is
exposed to in its operating environment.

There are many different types of risks:

 Legal risks
 Environmental risks
 Market risks
 Regulatory risks etc.

It is important to identify as many of these risk factors as possible. In a manual environment,

these risks are noted down manually. If the organization has a risk management solution
employed all this information is inserted directly into the system.

The advantage of this approach is that these risks are now visible to every stakeholder in the
organization with access to the system. Instead of this vital information being locked away in a
report which has to be requested via email, anyone who wants to see which risks have been
identified can access the information in the risk management system.

Learn in depth about risk identification

Step 2: Analyze the Risk

Once a risk has been identified it needs to be analyzed. The scope of the risk must be determined.
It is also important to understand the link between the risk and different factors within the
organization. To determine the severity and seriousness of the risk it is necessary to see how
many business functions the risk affects. There are risks that can bring the whole business to a
standstill if actualized, while there are risks that will only be minor inconveniences in the
analysis.
In a manual risk management environment, this analysis must be done manually.When a risk
management solution is implemented one of the most important basic steps is to map risks to
different documents, policies, procedures, and business processes. This means that the system
will already have a mapped risk management framework that will evaluate risks and let you
know the far-reaching effects of each risk.

Step 3: Evaluate the Risk or Risk Assessment

Risks need to be ranked and prioritized. Most risk management solutions have different
categories of risks, depending on the severity of the risk. A risk that may cause some
inconvenience is rated lowly, risks that can result in catastrophic loss are rated the highest. It is
important to rank risks because it allows the organization to gain a holistic view of the risk
exposure of the whole organization. The business may be vulnerable to several low-level risks,
but it may not require upper management intervention. On the other hand, just one of the highest-
rated risks is enough to require immediate intervention.

There are two types of risk assessments: Qualitative Risk Assessment and Quantitative Risk
Assessment.

Qualitative Risk Assessment

Risk assessments are inherently qualitative – while we can derive metrics from the risks, most
risks are not quantifiable. For instance, the risk of climate change that many businesses are now
focusing on cannot be quantified as a whole, only different aspects of it can be quantified. There
needs to be a way to perform qualitative risk assessments while still ensuring objectivity and
standardization in the assessments throughout the enterprise.

Quantitative Risk Assessment

Finance related risks are best assessed through quantitative risk assessments. Such risk
assessments are so common in the financial sector because the sector primarily deals in numbers
– whether that number is the money, the metrics, the interest rates, or any other data point that is
critical for risk assessments in the financial sector. Quantitative risk assessments are easier to
automate than qualitative risk assessments and are generally considered more objective.
Step 4: Treat the Risk

Every risk needs to be eliminated or contained as much as possible. This is done by connecting
with the experts of the field to which the risk belongs. In a manual environment, this entails
contacting each and every stakeholder and then setting up meetings so everyone can talk and
discuss the issues. The problem is that the discussion is broken into many different email threads,
across different documents and spreadsheets, and many different phone calls. In a risk
management solution, all the relevant stakeholders can be sent notifications from within the
system. The discussion regarding the risk and its possible solution can take place from within the
system. Upper management can also keep a close eye on the solutions being suggested and the
progress being made within the system. Instead of everyone contacting each other to get updates,
everyone can get updates directly from within the risk management solution.
Step 5: Monitor and Review the Risk

Not all risks can be eliminated – some risks are always present. Market risks and environmental
risks are just two examples of risks that always need to be monitored. Under manual systems
monitoring happens through diligent employees. These professionals must make sure that they
keep a close watch on all risk factors. Under a digital environment, the risk management system
monitors the entire risk framework of the organization. If any factor or risk changes, it is
immediately visible to everyone. Computers are also much better at continuously monitoring
risks than people. Monitoring risks also allows your business to ensure continuity.
Risk Management Evaluation

Any business that wants to maximize its risk management efficiency needs to focus on risk
management evaluations. These evaluations and assessments help businesses truly understand
their own capabilities, strengths, and vulnerabilities. More evaluations result in more insights
about where the business needs to improve its risk management framework. It can be difficult to
carry out these evaluations manually, but risk management solutions and technology can
simplify the evaluation and assessment workflow. It is important to do an evaluation before
making any major changes to the risk management framework.

What is Risk Management

Risk management is an important business practice that helps businesses identify, evaluate,
track, and improve the risk mitigation process in the business environment. Risk management is
practiced by the business of all sizes; small businesses do it informally, while enterprises codify
it.
Businesses want to ensure stability as they grow. Managing the risks that are affecting the
business is a critical part of this stability. Not knowing about the risks that can affect the business
can result in losses for the organization. Being unaware of a competitive risk can result in loss of
market share, being unaware of financial risk can result in financial losses, being aware of a
safety risk can result in an accident, and so on.

Businesses have dedicated risk management resources; small businesses may have just one risk
manager or a small team while enterprises have a risk management department. People who
work in the risk management domain monitor the organization and its environment. They look at
the business processes being followed within the organization and they look at the external
factors which can affect the organization one way or the other.

A business that can predict a risk will always be at an advantage. A business that can predict a
financial risk will limit its investments and focus on strengthening its finances. A business that
can assess the impact of a safety risk can devise a safe way to work which can be a major
competitive advantage.

If we think of the business world as a racecourse then the risks are the potholes which every
business on the course must avoid if they want to win the race. Risk management is the process
of identifying all the potholes, assessing their depth to understand how damaging they can be,
and then preparing a strategy to avoid damages. A small pothole may simply require the business
to slow down while a major pothole will require the business to avoid it completely.

Techniques of risk management Manag

There are five basic techniques of risk management:

 Avoidance
 Retention
 Spreading
  Loss Prevention and Reduction
 Transfer (through Insurance and Contracts)

Avoidance: Many times it is not possible to completely avoid risk but the possibility should not
be overlooked. For example, at the height of a thunderstorm, Physical Plant may not release
vehicles for travel until the weather begins to clear, thus avoiding the risk of auto accidents
during severe weather. Some buildings on campus have had repeated water problems in some
areas. By not allowing storage of records or supplies in those areas, some water damage claims
may be avoided.
Retention: At times, based on the likely frequency and severity of the risks presented, retaining
the risk or a portion of the risk may be cost-effective even though other methods of handling
the risk are available. For example, the University retains the risk of loss to fences, signs, gates
and light poles because of the difficulty of enumerating and evaluating all of these types of
structures. When losses occur, the cost of repairs is absorbed by the campus maintenance
budget, except for those situations involving the negligence of a third party. Although
insurance is available, the University retains the risk of loss to most University personal
property.
Spreading: It is possible to spread the risk of loss to property and persons. Duplication of
records and documents and then storing the duplicate copies in a different location is an
example of spreading risk. A small fire in a single room can destroy the entire records of a
department's operations. Placing people in a large number of buildings instead of a single
facility will help spread the risk of potential loss of life or injury.
Loss Prevention and Reduction: When risk cannot be avoided, the effect of loss can often be
minimized in terms of frequency and severity. For example, Risk Management encourages the
use of security devices on certain audio visual equipment to reduce the risk of theft. The
University requires the purchase of health insurance by students who are studying abroad, so
that they might avoid the risk of financial difficulty, should they incur medical expenses in
another country.
Transfer: In some cases risk can be transferred to others, usually by contract. When outside
organizations use University facilities for public events, they must provide evidence of
insurance and name the University as an additional insured under their policy, thereby
transferring the risk of the event from the University to the facility user. The purchase of
insurance is also referred to as a risk transfer since the policy actually shifts the financial risk of
loss, contractually, from the insured entity to the insurance company. Insurance should be the
last option and used only after all other techniques have been evaluated.
Contracts: Often vendors and service providers will attempt through a contract to release
themselves from all liability for their actions relating to the contract. These are often referred to
as "hold harmless or indemnification" clauses. Due to the complexity of interpreting these
provisions, the President has delegated contracting authority for the University solely to
staff in Contracts & Procurement. The Office of University Risk Management reviews
contracts and agreements as requested by Contracts & Procurement to identify and assess risks,
evaluate insurance standards, and review hold harmless and indemnification provisions. The
Chancellor's Office requires that the University obtain in most instances not only a Certificate
of Insurance, but also an Endorsement. Collecting these documents is often the most time
consuming aspect of the contracting process.
WHAT ARE THE ESSENTIAL TOOLS OF RISK MANAGEMENT?

Risk identification and assessment should be part of the planning and development of all
department and unit programs or activities. To assess the risks posed by a program or activity,
take the following steps:
1. Identify the tasks associated with the program or activity. For example, the tasks
associated with conducting a lab experiment might include traveling to an off-site
location, preparing the experiment, conducting the experiment, cleaning up the
experiment and disposing any waste.
2. Identify the hazards associated with each task. A thorough identification of the tasks
involved and the hazards they present is very important. Risks that aren't identified cannot
be managed! For example, hazards related to preparing the experiment might include
improper set up and lack of appropriate equipment.
3. Evaluate and select risk management techniques. The goal is to conduct the program or
activity in such a way as to reduce the likelihood that something will go wrong and/or
reduce the severity of any losses if something does go wrong. For example, the hazards
related to preparing the experiment might be addressed through training and supervision,
creating several different experiment stations so that not all of the students are working at
the same station, and bringing extra equipment.
4. Assess the risks associated with the program or activity with the selected risk controls or
transfers in place.
5. Determine whether to modify or proceed with the program or activity based on the risk
assessment.
6. Implement the selected risk management techniques and monitor the results. Designating
who will implement the selected risk management measures and setting a time table for
completion of those tasks is very important
7. "Frequency" and "severity"are used to measure the risk remaining after appropriate risk
management techniques have been implemented.
o Activities or programs that include tasks that pose a high severity of loss, i.e. major
injuries or death, significant property damage, significant operational interruptions,
should be avoided if the frequency or likelihood of a loss occurs regularly or often.
Activities with a high severity of loss but a moderate or low frequency of loss must
at the least be well-supervised and require participants to sign releases of liability.
o Most of the programs and activities of the University include tasks that pose a
moderate severity of loss, i.e. minor injuries, property damage or operational
interruptions, and a moderate or low frequency of loss. Nonetheless, these
activities should be well-planned and have adequate supervision.
 o Activities or programs that include a negligible severity of loss, i.e. injuries that
only require first aid or minor medical treatment and little or no property damage,
and little likelihood of loss require very little risk management.

What Is Risk Avoidance?

As a small business owner, you may be wondering about the risk avoidance definition. Risk
avoidance means not doing certain actions to help protect your small business. It’s impossible to
completely eliminate risks for your small business, but a well-defined risk avoidance strategy can
help you get as close as possible. You can implement risk avoidance measures in many ways
with your business through:

 Company policies
 Employee trainings
 Small business insurance coverages
 Hold harmless agreements

Risk Avoidance vs. Risk Reduction

Risk avoidance and risk reduction are both risk mitigation strategies. Risk avoidance means
you’re trying to avoid compromising events as a way to eliminate liability exposures. Risk
reduction is a way to help you control the damages to your business, like claims or losses. Learn
more about risk avoidance versus risk reduction and how you can use both as part of your risk
management plan.

Risk Avoidance Example

With risk avoidance, small business owners won’t run their company in a way that puts them at a
specific risk. For example, you may realize sending employees to work at a customer’s home can
open your business to more risk of bodily injury, vicarious liability or property damage claims.
So, to reduce risk and avoid potential losses, you decide not to offer those kinds of services.

Risk Reduction Example

Risk reduction involves taking actions to mitigate your business’ risks. There are many types of
risk reduction strategies. For example, you invest in more equipment to help you operate your
small business. Without these tools, it’d be difficult to run your company. However, this
equipment can get damaged or stolen, which can put your entire business at risk.
Having commercial property insurance can help you reduce your risks. Or if your equipment
breaks down due to internal failure, equipment breakdown coverage can also reduce your risk.

Risk Transfer

A risk management technique involving the transfer of risk to a third party

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What is Risk Transfer?

Risk transfer refers to a risk management technique in which risk is transferred to a third party.
In other words, risk transfer involves one party assuming the liabilities of another party.
Purchasing insurance is a common example of transferring risk from an individual or entity to an
insurance company.

How It Works

Risk transfer is a common risk management technique where the potential loss from an adverse
outcome faced by an individual or entity is shifted to a third party. To compensate the third party
for bearing the risk, the individual or entity will generally provide the third party with periodic
payments.

The most common example of risk transfer is insurance. 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 a
traffic incident to an insurance company. In exchange for bearing such risks, the insurance
company will typically require periodic payments from the individual.

Methods of Risk Transfer

There are two common methods of transferring risk:

1. Insurance policy

As outlined above, purchasing insurance is a common method of transferring risk. When an

individual or entity is purchasing insurance, they are shifting financial risks to the insurance
company. Insurance companies typically charge a fee – an insurance premium – for accepting
such risks.

2. Indemnification clause in contracts

Contracts can also be used to help an individual or entity transfer risk. Contracts can include
an indemnification clause – a clause that ensures potential losses will be compensated by the
opposing party. In simplest terms, an indemnification clause is a clause in which the parties
involved in the contract commit to compensating each other for any harm, liability, or loss
arising out of the contract.

For example, consider a client that signs a contract with an indemnification clause. The
indemnification clause states that the contract writer will indemnify the client against copyright
claims. As such, if the client receives a copyright claim, the contract writer would (1) be obliged
to cover the costs related to defending against the copyright claim, and (2) be responsible for
copyright claim damages if the client is found liable for copyright infringement.

Risk Transfer by Insurance Companies

Although risk is commonly transferred from individuals and entities to insurance companies, the
insurers are also able to transfer risk. This is done through an insurance policy with reinsurance
companies. Reinsurance companies are companies that provide insurance to insurance firms.

Similar to how individuals or entities purchase insurance from insurance companies, insurance
companies can shift risk by purchasing insurance from reinsurance companies. In exchange for
taking on this risk, reinsurance companies charge the insurance companies an insurance
premium.

Risk Transfer vs. Risk Shifting

Risk transfer is commonly confused with risk shifting. To reiterate, risk transfer is passing on
(“transferring”) risk to a third party. On the other hand, risk shifting involves changing
(“shifting”) the distribution of risky outcomes rather than passing on the risk to a third party.
For example, an insurance policy is a method of risk transfer. Purchasing derivative contracts is a
method of risk shifting

 TRADING SKILLS
 RISK MANAGEMENT

Risk Control
What Is Risk Control?

Risk control is the set of methods by which firms evaluate potential losses and take action to
reduce or eliminate such threats. It is a technique that utilizes findings from risk assessments,
which involve identifying potential risk factors in a company's operations, such as technical and
non-technical aspects of the business, financial policies and other issues that may affect the
well-being of the firm.

Risk control also implements proactive changes to reduce risk in these areas. Risk control thus
helps companies limit loss. Risk control is a key component of a company's enterprise risk
management (ERM) protocol.

KEY TAKEAWAYS

 Risk control is the set of methods by which firms evaluate potential losses and take
action to reduce or eliminate such threats. It is a technique that utilizes findings from
risk assessments.
 The goal is to identify and reduce potential risk factors in a company's operations, such
as technical and non-technical aspects of the business, financial policies and other issues
that may affect the well-being of the firm.
 Risk control methods include avoidance, loss prevention, loss reduction, separation,
duplication, and diversification.

How Risk Control Works

Modern businesses face a diverse collection of obstacles, competitors, and potential

dangers. Risk control is a plan-based business strategy that aims to identify, assess, and prepare
for any dangers, hazards, and other potentials for disaster—both physical and figurative—that
may interfere with an organization's operations and objectives. The core concepts of risk control
include:

 Avoidance is the best method of loss control. For example, after discovering that a
chemical used in manufacturing a company’s goods is dangerous for the workers, a
factory owner finds a safe substitute chemical to protect the workers’ health. Avoidance,
however, is not always possible.
 Loss prevention accepts a risk but attempts to minimize the loss rather than eliminate it.
For example, inventory stored in a warehouse is susceptible to theft. Since there is no
 way to avoid it, a loss prevention program is put in place. The program includes
patrolling security guards, video cameras and secured storage facilities. Insurance is
another example of risk prevention that is outsourced to a third party by contract.
 Loss reduction accepts the risk and seeks to limit losses when a threat occurs. For
example, a company storing flammable material in a warehouse installs state-of-the-art
water sprinklers for minimizing damage in case of fire.
 Separation involves dispersing key assets so that catastrophic events at one location
affect the business only at that location. If all assets were in the same place, the business
would face more serious issues. For example, a company utilizes a geographically
diverse workforce so that production may continue when issues arise at one warehouse.
 Duplication involves creating a backup plan, often by using technology. For example,
because information system server failure would stop a company’s operations, a backup
server is readily available in case the primary server fails.
 Diversification allocates business resources for creating multiple lines of business
offering a variety of products or services in different industries. A significant revenue
loss from one line will not result in irreparable harm to the company’s bottom line. For
example, in addition to serving food, a restaurant has grocery stores carry its line of
salad dressings, marinades, and sauces.

No one risk control technique will be a golden bullet to keep a company free from potential
harm. In practice, these techniques are used in tandem with others to varying degrees and will
change as the corporation grows, as the economy changes, and as the competitive landscape
shifts.

Utilizing a Risk and Control Matrix (RACM) for Effective Risk Management

A Risk and Control Matrix (RACM) is a valuable tool used by organizations to better
understand and optimize their risk profiles. It is a structured approach that helps companies
identify, assess, and manage risks by mapping the relationships between potential risks and the
corresponding control measures implemented to mitigate them. The RACM allows
organizations to visualize and evaluate the effectiveness of their risk control strategies and make
data-driven decisions to enhance their risk management practices.

The RACM typically includes the following components:

 Risk identification: The matrix lists all the potential risks an organization may face,
often categorized by business areas, processes, or functions.
 Risk assessment: Each identified risk is assessed based on its likelihood of occurrence
and potential impact on the organization. This assessment helps prioritize risks and focus
resources on the most critical areas.
 Control measures: For each risk, the matrix outlines the specific control measures
implemented to mitigate or reduce the likelihood and impact of the risk. These measures
can include policies, procedures, systems, or other mechanisms designed to manage the
risk.
  Control effectiveness: The RACM evaluates the effectiveness of each control measure,
taking into account factors such as the level of compliance, the adequacy of the control
design, and the control's ability to detect or prevent the risk from materializing.
 Action plans: Based on the assessment of control effectiveness, the matrix may include
action plans for improving risk control measures or addressing identified gaps in the
organization's risk management practices.

By creating and maintaining an up-to-date RACM, organizations can gain a comprehensive

understanding of their risk landscape and the effectiveness of their risk control measures. This
information can inform strategic decision-making, guide resource allocation, and support
continuous improvement in risk management practices.

RCAM Example
Example of a Hypothetical RCAM
Business Risk Likelihood Impact Risk Control Control Action
Area Description Rating Measure Effectiveness Plan
Finance Fraudulent Medium High High Implement Effective Regularly
transactions strong access review
controls access
controls
Regular audits Effective Increase
and audit
reconciliations frequency
HR Employee Low High Medium Secure storage Effective Monitor
data breach and encryption for new
of data security
threats
Employee Partially Enhance
training on data effective training
privacy program
practices
Operations Supply chain High High High Diversify Effective Expand
disruption suppliers and supplier
sources network
Maintain Effective Adjust
inventory safety
safety stock stock
levels
IT Cybersecurity High High High Regular Effective Increase
attacks security frequency
updates and of updates
patches
Employee Partially Improve
training on effective training
Example of a Hypothetical RCAM
Business Risk Likelihood Impact Risk Control Control Action
Area Description Rating Measure Effectiveness Plan
cybersecurity content
practices
This RCAM example outlines different risk categories, such as Finance, HR, Operations, and
IT, and includes specific risks within each category. The likelihood and impact of each risk are
assessed, leading to an overall risk rating. Control measures are then listed, along with an
evaluation of their effectiveness. Finally, action plans are proposed to enhance risk control
measures or address identified gaps in risk management.

Keep in mind that this is just a simplified example, and an actual RACM for an organization
would likely be more detailed and cover a broader range of risks and controls.

Examples of Risk Control

Sumitomo Electric and Disaster Resilience

As part of Sumitomo Electric’s risk management efforts, the company developed business
continuity plans (BCPs) in fiscal 2008 as a means of ensuring that core business activities could
continue in the event of a disaster. The BCPs played a role in responding to issues caused by the
Great East Japan earthquake that occurred in March 2011. Because the quake caused massive
damage on an unprecedented scale, far surpassing the damage assumed in the BCPs, some areas
of the plans did not reach their goals.

Based on lessons learned from the company’s response to the earthquake, executives continue
promoting practical drills and training programs, confirming the effectiveness of the plans and
improving them as needed

As of my last knowledge update in January 2022, I'm not aware of any specific term or concept
related to "pooling in insurance." However, I can provide information on a common practice in
insurance known as risk pooling.

Risk pooling in insurance

Risk pooling is a fundamental principle in insurance. It involves the spreading of risk among a
large group of policyholders to minimize the financial impact on any one individual or entity.
Here's how it typically works:

1. **Diversity of Risk**: Insurance companies serve a large number of policyholders who face
different types and levels of risk. For example, in health insurance, some policyholders may
remain healthy, while others may need medical care.
2. **Premiums and Claims**: Policyholders pay premiums to the insurance company. These
premiums are pooled together to create a fund. When a policyholder experiences a covered loss
or event (makes a claim), they receive compensation from this pooled fund.

3. **Financial Protection**: The idea is that not all policyholders will experience a loss at the
same time. Therefore, the premiums collected from all policyholders can cover the claims of
those who do experience losses. This spreads the financial risk across the entire pool.

4. **Actuarial Science**: Insurance companies use actuarial science to assess risk, set
appropriate premiums, and ensure that the pooled funds are sufficient to cover potential claims
while maintaining the company's financial stability.

Pooling in insurance helps provide financial protection to individuals and businesses by

spreading the risks more broadly. It's a way to ensure that the cost of unexpected events or losses
is shared collectively, making it more manageable for everyone in the pool.

If "pooling in insurance" refers to a specific term or concept that emerged after my last update in
January 2022, I recommend checking more recent sources or industry publications for the latest
information on this topic

Loss exposure
Loss exposure in insurance refers to the potential financial loss that an individual or entity may
face due to a specific peril or risk. In other words, it is the vulnerability of an insured party to the
occurrence of events that could lead to financial harm. Insurance is designed to help mitigate or
transfer these loss exposures.

Here are some key points related to loss exposure in insurance:

1. **Identification of Risks**: Insurers assess the potential risks that individuals or businesses
may face. These risks can include damage to property, liability for injuries, loss of income, or
other perils depending on the type of insurance coverage.

2. **Quantifying Loss Exposure**: Insurance companies use actuarial methods and statistical
models to quantify the potential financial impact of various risks. This involves estimating the
likelihood of an event occurring and the potential severity of the resulting loss.

3. **Insurance Coverage**: Once the loss exposures are identified and quantified, individuals or
businesses can purchase insurance coverage to transfer a portion of the financial risk to the
insurer. In exchange for the payment of premiums, the insurer agrees to provide compensation
for covered losses.

4. **Types of Loss Exposure**:

- **Property Loss Exposure**: This involves the risk of damage or loss to physical assets, such
as buildings, equipment, or inventory.

- **Liability Loss Exposure**: This pertains to the risk of being held legally responsible for
causing harm to others, resulting in liability claims and potential financial losses.

- **Income Loss Exposure**: Businesses may face the risk of interruption or loss of income
due to various factors, such as natural disasters, which can be covered by business interruption
insurance.

5. **Risk Management Strategies**: Beyond insurance, individuals and businesses can employ
risk management strategies to reduce loss exposure. This may include safety measures, loss
prevention programs, and other proactive measures to minimize the likelihood and impact of
potential losses.

Understanding and managing loss exposure is a crucial aspect of the insurance industry, as
it enables insurers and insured parties to make informed decisions about coverage and risk
mitigation. Insurers use actuarial science to analyze historical data and predict future
losses, helping them set appropriate premiums and ensure their financial stability.

Emergence of insurance
The emergence of insurance can be traced back to ancient civilizations where various
forms of risk-sharing and mutual aid arrangements existed. However, the modern concept
of insurance as a formalized industry began to take shape in the late Middle Ages and the
early Renaissance.

1. **Marine Insurance in Italy (14th Century):** The earliest known insurance contracts
were related to marine activities. In the 14th century, maritime city-states in Italy, such as
Genoa and Florence, developed contracts known as "bottomry" and "respondentia." These
contracts allowed ship owners to obtain loans for their voyages, and if the voyage was
successful, the loans were repaid with interest. If the ship encountered a mishap, the loans
were forgiven.

2. **Lloyd's of London (17th Century):** Lloyd's of London, established in the late 17th
century, is often considered the birthplace of modern insurance. It started as a coffeehouse
where shipowners, merchants, and underwriters gathered to discuss and underwrite
marine risks. This laid the foundation for the Lloyd's market, which evolved into a
prominent insurance marketplace covering various types of risks.

3. **Fire Insurance (Late 17th Century):** The Great Fire of London in 1666 prompted
the development of fire insurance. Nicholas Barbon, an economist, established the first fire
insurance company in 1680. These early policies provided coverage for fire-related
damages to buildings.

4. **Act of Parliament (18th Century):** The Bubble Act of 1720 in England prohibited
the establishment of unincorporated joint-stock companies, which impacted the insurance
sector. However, in the following decades, various Acts of Parliament facilitated the
formation of insurance companies.

5. **Life Insurance (18th Century):** The first known life insurance policy was issued in
the early 18th century. It covered a person's life and paid a sum to the beneficiaries upon
the policyholder's death. The industry expanded in the 19th century with the growth of
mutual life insurance companies.
6. **Industrialization and Global Expansion (19th Century):** The 19th century saw
significant growth in the insurance industry, driven by industrialization and global trade.
Insurance companies diversified their offerings to cover various risks associated with
industrial activities, transportation, and trade.

7. **Regulation and Standardization (20th Century):** The 20th century brought

increased regulation and standardization to the insurance industry. Governments
established regulatory bodies to oversee insurance activities, ensuring financial stability
and consumer protection.

8. **Technological Advances (Late 20th Century to Present):** In recent decades,

technological advancements have transformed the insurance industry. The use of
computers, data analytics, and the internet has streamlined processes, improved risk
assessment, and enhanced customer service.

Today, the insurance industry is a global and multifaceted sector that covers a wide range
of risks, including life, health, property, casualty, and specialty lines of insurance. The
evolution of insurance reflects society's changing needs and the industry's ability to adapt
to new challenges and opportunities.