Reading Notes Risk uncertainty regarding loss o Don t know what the outcome will be o One of the potential outcomes is unwanted bad negative loss etc Carina Tenaglia RMI 2302 Module 1 What is Risk Who risk affects o Individuals o Organization Risk uncertain future event which could adversely affect the achievement of an organization s objectives o Society Outcome could adversely affect a large population of constituents Being Careful When Using the Term Risk Jumping off 1 story building riskier than jumping off 25 story building o Probability of death on 25 story more certain 99 o Probability of injury death high off 1 story but more uncertainty If the probability of something occurring is 1 then there is no risk How Do You Measure Risk Frequency how often something occurs Probability comparing how often something happens as compared to how many times it is likely to happen Severity how bad something is when it happens often measured in terms of financial loss o Expected outcome loss Expected Frequency x Expected Severity Standard Deviation standard error of the mean how spread out numbers are from the mean or center of a bell curve o Formula StDev square root of Variance Variance measures how far a set of numbers are spread out o Formula Variance average of squared differences of the mean Risk Likelihood Risk Likelihood frequency of how often something will happen High Medium Low Event expected to occur during most circumstances Event will probably occur during many circumstances An event may occur at some time Risk Impact potential effect a loss could have if it arises Severity how bad when it happens High Medium Low Serious impact on operation reputation or funding status Significant impact on operation reputation or funding status Less significant impact on operation reputation or funding status Risk Profile Likelihood High Medium Low Med Low Low Low Impact High Med Low Medium High High Med High Categories of Risk Pure v Speculative Risk o Pure Loss or no loss o Speculative Static v Dynamic Risk May have loss no loss or a gain ex buying stocks Unchanging through time chance of earthquake Changes through time Fundamental v Particular Risk o Static o Dynamic o Fundamental o Particular Core v Secondary o Core o Secondary Affect large population given time epidemic Only affect single person small group car accident Inherent to fundamental activities of organization Not a part of core operations of organization Sources of Risk Personal Property Liability Financial o Ex harming another individual their property o Ex investments new project launches Additional Terminology Exposure person organization or property facing risk Peril immediate cause of loss Hazard condition affecting frequency severity of loss o Physical tangible conditions ex wet floor o Moral Morale attitude behavior ex dropping iPhone carelessness o Societal Legal cultural attitude ex how easy hard to sue someone Example Apartment Exposure potential for property damage Peril Fire Hazard jugs of gasoline stored next to water heater Attitudes Toward Risk Neutral indifferent Averse wishes to avoid would pay more to avoid risks Seeker prefers risk to no risk would gamble take on risks below expected value o Funds to pay for potential losses money could be used for better things o May be lost due to lack of funds funds may be reallocated to deal w loss ex o Confidence lack thereof affect consumer spending and decisions Burden of Risk Need for larger emergency funds opportunity cost Loss of needed goods and services Hurricane Katrina Fear and worry The Risk Management Process DIE CIR Identification of risk 1 Determination of Objectives 2 3 Evaluation of risk 4 Consideration of Alternatives 5 6 Review Evaluate Implementation of Decision a Program s objectives b Repeat identification process c Evaluate risks identified d Verify that each decision about how to manage each risk was appropriate e Verify that the decision was properly executed Pre Loss Objectives Economy Reduction in Anxiety Meeting Externally Imposed Obligations Social Responsibility Post Loss Objectives Survival Continuity of Obligations Earnings Stability Continued Growth Social Responsibility Identification of Risks Good risk management incorporating many different methods Evaluation of Risks Quantitative Analysis Qualitative Analysis o Statistical analysis predicting of injuries factory o Not analyzed by s ex probability that next iPhone app will be Checkers Categories of Evaluation o Frequency o Severity Risk Management Alternatives Risk Control Encompasses all techniques Techniques designed to reduce frequency of potential losses loss prevention or severity of potential losses loss reduction or both Cost benefit analysis analyzing if cost of technique is less than expected benefit from using Risk Financing All methods used to pay for risk following when control techniques applied it Risk Retention o Paying for adverse outcomes that may occur o Planned v Unplanned Creating plan of payment planned Winging payment unplanned o Funded v Unfunded Account created to pay for future losses funded Payment made from sources not earmarked for losses unfunded o Transferring risk for someone else to pay for them Insurance hedging mechanism legal forms of incorporation Risk Transfer Risk Reduction Risk Prevention Prevent from happening Risk Reduction Reduce the impact after it happens severity frequency Week 3 Readings for Module 2 A Scientific View of Risk Risk is a Probability Risk probability of someone suffering an adverse effect from some activity or exposure over a certain period of involvement o Calculations ratios percentages People who experience adverse effects People engaged in activity Most risks inaccurately depicted distorted by media or incorrectly calculated o Ex risk over entire lifetime or span of time engaged in said activity Relative Risk Index compares odds of something affecting specific group with something affecting entire population expressed in positive numbers Risk can be expressed in terms of a shortened life span ex 2 year old drowning seems more tragic than 70 year old dying of heart disease Relative Nature of Risk Most risks are relative Ex Schools removing asbestos that may not have even ended up affecting children Are We Really Living Dangerously High mortality rates for things such as smoking and cancer o Rates may be higher now because people didn t live as long before and died of other causes illnesses before they got cancers etc o
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