WOLKITE UNIVERSITY COLLEGE OF BUSINESS AND ECONOMICES
DEPARTMENT OF MANAGEMNT
CHALLENGES AND PROSPECTS OF RISK MANAGEMENT PRACTICE
(THE CASE OF AWASH INSURANCE CAMPANY )
A SENIOR ESSAY PROPOSAL SUBMITTED TO COLLEGE OF BUSINESS AND
ECONOMICS, DEPARTMENT OF MANAGEMENT FOR THE PARTIAL FULFILLMENT
OF BACHELOR OF ARTS (BA) DEGREE IN MANAGEMENT
REPARED BY : TIBABU YEYIS
ADVISOR:SISAY.M (MBA)
DECEMBER, 2023
WOLKITE, ETHIOPIA
1
ABSTRACT
The main purpose of this study is to determine the challenges and prospects of risk management
practice in the Awash Insurance Company in waliso town. This study employed descriptive
research design and both qualitative and quantitative approach. The researchers will be used
both primarily and secondary source data. The primarily data will be collected from the
employees of the organization through their answers to the questionnaires. The secondary data
will also gather from internet, books and documents. A researcher will be used simple random
sampling techniques in order to gather the essential data. In line with it the collected data will be
analyzed and presented through percentage, frequency, and table.
2
Table of content
Content
Page
ABSTRACT ............................................................................................................................... ii
CHAPTER ONE ................................................................ Ошибка! Закладка не определена.
INTRODUCTION .......................................................................................................................... 5
1.1 Back ground of the study .......................................................................................................... 1
1.2 Statement of the problem ......................................................................................................... 3
1.3 Research questions .................................................................................................................... 5
1.4. Objectives of the study ..................................................................................................... …6
1.4.1. General Objective .......................................................................................................... 6
1.4.2. Specific Objectives ........................................................................................................ 6
1.5. Significance of the study ...................................................................................................... 6
1.6. Scope and limitation of the study ......................................................................................... 7
16.1 .Scope of the study........................................................................................................... 7
1.6.2. Limitations of the study ............................................................................................... 8
1.6.3.
Organization of the Study ........................................................................................... 8
CHARTER TWO:.............................................................................................................................
LITERATURE REVIEW ............................................................................................................. 10
THEORETICAL REVIEW
2.1 The Meaning of Risk ........................................................................................................... 11
2.2 Basic categories of Risk ...................................................................................................... 12
2.3. Sources of the Risk ........................................................................................................... 13
2.4. Risk Management Definition ........................................................................................... 14
3
2.5 Objective of risk management
Risk Managment Practice.......................................................................................................... 15
2.6 THE RISK MANAGENENT PROCESS ........................................................................... 16
2.7
The Range of Risk Identification Technique .................................................................. 17
2.8 Measurement of potential Risk loss .................................................................................... 19
2.8.1. Dimension to be measured .......................................................................................... 19
2.8.2. Loss frequency measures ............................................................................................. 19
2.9 Selection of risk management tools .................................................................................... 21
2.9.1.
Tools of Risk management ....................................................................................... 21
2.10 Risk Management policy Statement .................................................................................. 24
2.11 Cooperation with other department ................................................................................... 25
2.12 Periodic review Evolution ................................................................................................. 25
2.3 CHALLENGES OF RISK MANAGMENT PRACTICE ..................................................... 26
2.4 EMPIRICAL STUDY ............................................................................................................ 27
2.5 Research /Literature gap .................................................................................................. 27
CHAPTER THREE: ..................................................................................................................... 29
MATERIALS AND METHODOLOGY OF THE STUDY
3.1 Site selection and description of the study area .................................................................. 29
3.1 Research Design .................................................................................................................. 29
3.2 Research approach............................................................................................................... 29
3.3 Types and Sources of data ................................................................................................... 30
3.4 Target population ................................................................................................................ 30
3.5 Method of Sampling design and procedures ....................................................................... 30
3.6. Method of Data collection tools and procedures ................................................................ 30
3.7 Method of Data Processing and analysis and presentation ................................................. 31
3.8
WORKPLAN AND BUDGET ..................................................................................... 31
3.8.1 SCHEDULE OF ACTIVITIES .................................................................................... 31
3.8.2 FINANCIAL PLAN (BUDGET REQUIREMENT):- ................................................. 32
Reference ...................................................................................................................................... 33
4
CHAPTER ONE
INTRODUCTION
This chapter provides a general introduction to Risk Management practice on Awash insurance
company and it describes the concepts of Risk Management as well as the concept of Awash
insurance company in the background. Moreover it describes statement of the problem, objective
of study, research questions, significance of study, delimitation of the study, Organization Of the
Study.
1.1 Background of the study
Risk management refers to the identification measurements and treatment property, liability and
personal pure risk exposure. It’s the generally management functions that seeks to assess and
addressed the cause and effective uncertainty and a risk in an organization (Williams 2004).
Risk which is uncertainty regarding loss passes problem to business and individuals in nearly
every walk of life. Executives, employs, investors, students, shareholders, farmers and travelers
all confront risk and deal with it in various ways. If a loss is certain to occur :it may be planed for
in advance and treated as a definite known expense but when there is uncertainty about the
occurrence of loss that is risk became an important problem. The risk surrounding potential loss
creates significance economic burden for business, government and individuals. Therefore
special department the so called risk management is very important to handle potential accidental
exposure especially pure risk.(Trierscrtann, 1998). According to global context Risk
Management means the management of risks associated with event wagering, the setting or
changing of event wagers, cutoff times for event wagers, acceptance or rejection of event wagers,
laying off of event wagers, lines, point spreads, and odds for event wagers, and other activity
relating to event wagering.Global Risk Management means management, consultation,
instruction, or transmission of information relating to sports betting by a permit holder or sports
betting platform supplier who also holds a license to conduct sports betting in another
permissible jurisdiction. The term includes: the management of risks associated with sports
5
betting involving a sporting event for which a wager may be accepted; the setting or changing of
bets or wagers; cutoff times for bets or wagers; acceptance or rejection of bets or wagers; pooling
or laying off of bets or wagers; lines; point spreads; odds; or other activity relating to betting or
wagering.( Deloitte, Global Risk Management Survey: Sixth Edition – Risk management in the
spotlight (2009).
Risk management has been practiced informally since the down of time. Prehistoric humans
discuss together in tribes to conserve resource and share responsibilities and provide some
protection against the uncertainty of life. Even today in formal risk management is practiced by
almost every one weather they are conscious of it or not even today risk management practice
continues to specific duties and functions vary wildly among risk manager, largely because the
significance of specific categories of risk varies substantially across organizations for example
insurance related to legal liabilities are likely to be of small relatives importance for financial
service organizations such as lending institutions (Jaretal,1998).
According to developing country like Ethiopia context, Risk management is the continuing
process to identify, analyze, evaluate, and treat loss exposures and monitor risk control and
financial resources to mitigate the adverse effects of loss. Loss may result from the following:
financial risks such as cost of claims and liability judgments. Analyze, evaluate, and treat loss
exposures and monitor risk control and financial resources to mitigate the adverse effects of loss
( Marquette.edu/risk unit/I.)
Locally risk management practice is being used in every organization throughout the country. the
level of risk may be differ from one organization to the other but every organization have its own
risk managing practice according to the level of risk they usually face .for example : banks and
financing institutions use high level of risk management than small scale enterprises .In Ethiopia
Most of the pervious empirical literature reviews for the assessment of risk management in in
Insurance companies were the researchers conducted on a particular risk management
perspective like credit risk management, liquidity risk management, operational risk
management and those findings indicated that insurance risk are directly related with financial
performance ,but the actual empirical literature reviews and different international journal of
articles suggested that risk is comes form at all lines of the business activates and not only
6
includes insured risk ,but also non insurable or nontransferable risk coverage . ERM models and
tools are the best one to make insurance risk management and its final objectives accomplishing
of strategic goals for minimizing all lines of risk factors and maximizing both owners profit and
firm values. firm values increase from proper allocation of capital, efficient utilization of
recourses and minimizing of cost of capital (Hakan ,2019).
Awash Insurance Company is one of the first few pioneer private insurance companies in
Ethiopia launched following the liberalization of the financial sector in 1993. Founded on a solid
base and uniquely on cross-sectional composition, Awash Insurance Company is progressing in
renewing its commitment to excellence.
According to Kadi (2003), Awash insurance companies in developing countries cover insurable
risks without caring out proper analysis of the expected claims from clients and without putting
in place a mechanism of identifying appropriate risk reduction methods. Poor management of
risk, by Awash insurance companies, leads to accumulation of claims from the clients hence
leading to increased losses Magezi (2003).
Risk management enables Awash insurance companies to handle its exposure to a loss in the
most economic and effective way that, even it can change risks to opportunities if appropriates
techniques are used in the process of risk management.
While it would be impossible to list risks that business face, we will try to briefly outline pure
risks .we will also try to prospect the challenges related to risk management in Awash insurance
company. With this in mind the study examine the empirical understanding concerning pure risk
(personal, property, liability risks).Therefore ,this study intended to determine the challenges and
prospects of risk management practice( the case of Awash insurance company).
1.2 Statement of the problem
Currently loses in each day highly threats the survival of business. It interrupt their operation or
slow their growth. Worry about possibilities may affect the business from engaging in a certain
activities .proper risk management enable business handle its exposure to accidental loss in the
most economical way. Risk management highly contributes to survival and profitability of every
firm. Green (2003)
7
Awash Insurance Company is one of governmental organizations that gives various kind of
Insurance services in the country. Therefore because of the complexity of the organization risk
management is major concern of the organization.
Risk management practices are affected by so many factors. Such as lack of skilled manpower,
budget deficits, lack of infrastructure like electronic, material structured and conductive policies
concerned risk (Green 2003).
Main problems in Awash Insurance Company in Woliso town which hinders or affects risk
management practice are lack of employees training, inefficiency administrative staff, inadequate
knowledge, & lack of effective risk controlling policy.
In Ethiopia a few research attempted on Awash insurance risk management practice for instance
kokeb and Gemechu (2016) conduct their research on risk management technique and financial
performance of Awash companies. They aggressively investigate the existence of relationship
between risk management technique and financial performance. The variables used are loss
prevention and control, loss financing and risk avoidance. All this variables were correlated with
financial performance ROE (Return on equity) in order to find the relationship between them.
The finding of research indicate there exist a relationship and recommend the Awash insurance
companies to apply risk management techniques effectively so as to improve on their return on
equity and reducing loss ratios. Abraham Kassahun (2015) the assessment of enterprise level risk
management practices of Awash insurance companies. The study used 9 (nine) evaluative
parameters which have direct linkages with insurance companies own enterprise level risk
management functions such as board responsibility, structure and resources, strategies, policies
and programs ,communications, appraisal and reward, benefits and out comes, auditors view,
risk identification and nature of risks facing Awash insurance companies. The previously
conducted research assess practice of risk management at enterprise level that is including all
units or department with mentioned nine variable, the other research focus on the existence of
relationship between financial performance and risk management techniques the above two
researches didn’t address the assessment of risk management practice using the eight (8)
component of ERM (Enterprise risk management) Framework.
8
Therefore prospect challenges and actual application of risk management practice systematically
will be every important since the office needs to look back its risk management policy. The
reason why we choose to do research regarding to risk management in Awash Insurance
Company in Woliso town is that we have found some gaps between researches done in foreign
countries and in developing countries like ours have significant difference in the level of risk that
organizations face.in developing nations the risk is more complicated, so we will try to prospect
problems and practices in more suitable form that fits the current economical, technical,
technological form of our country. Therefore, the aim of this study is to assess the challenges and
prospects of Risk management practices in case of Awash insurance company in Woliso town.
1.3 Research questions
Based on above statement of the problem this study answers the following questions.
1. What are risk management practices applied in Awash Insurance Company?
2. What are the challenges of the risk Management faced in Awash Insurance Company?
3 .What are the steps that Awash Insurance Company apply to avoid risk?
4 .What are the controlling techniques of Risk management in Awash insurance company?
1.4. OBJECTIVES OF THE STUDY
This study has two objectives these are general and specific objectives.
1.4.1. General Objective
The general objective of this study is to determine the challenges and prospects of Risk
management practices in case of Awash insurance company in Woliso town.
1.4.2. Specific Objectives
The following are the specific objectives of the study.
 To identify risk management practices applied by Awash Insurance Company.
 To examine the challenges of the risk management faced in Awash Insurance Company.
 To determine the steps that Awash Insurance Company apply to avoid risk.
9
 To identify the controlling techniques of Risk management in Awash Insurance Company
1.5. SIGNIFICANCE of THE STUDY
For Organization:-Study on the prospects and challenges of risk management system has
advantages for Awash Insurance Company that It will help the organization to easily understand
the important of risk handling techniques and also it can help the company to survival and
continue its operation by controlling and risk. Since study is conducted on Awash insurance
companies which are found in Woliso town it will bring the following benefits to the insurance
sector .
will provide valuable information for regulatory bodies especially NBE to see the actual
practice maintained by Awash insurance companies. The recommendation and the suggested
possible solutions for the identified gaps can be used as an input for prospect the effectiveness of
risk management practice.
It can help Awash insurance companies to identify their weaknesses on practice of risk
management
For academic and professional:- It will give a general insight to the academic &professional
society regarding risk management aspects of Awash insurance companies.
The risk management policy aims to demonstrate that Gain is acting appropriately to anticipate
risks; to assess risks; to avoid excessive risk; to embrace necessary or desirable risks with
appropriate safeguards; that its response to risk, whether by Awash insurance, control measures
or avoidance.
The purpose of risk management is to identify potential problems before they occur, or, in the
case of opportunities, to try to leverage them to cause them to occur. Risk-handling activities
may be invoked throughout the life of the project.
For the other research:-The study may serve as a secondary source for future generation,
researchers.
10
For researcher:-It will be useful to relate theoretical part of the course with practical activities.
1.6. SCOPE OF THE STUDY
The study will be limiting only the challenges and prospects of risk management practices (The
case of Awash Insurance Company). Even if there were other related risk issue about different
insurance, but the researcher considers only risk issue about Awash insurance company.
Geographically, the study focuses on the risk management system of Awash Insurance Company
in Woliso town and the study will use descriptive research design. So it does not include other
regions in the country. The study was focused on practices of risk management especially on
how to minimize risks and the challenges related to risk minimization process.
The researcher chooses this framework because it provide detail information how companies
manage their risk, it discuss in detail of risk appetite, provide assurance regarding the
achievement of entity objectives, provide a basis for application cross organizations, provide a
basis for defining risk management effectiveness.
1.7 LIMITATIONS OFTHE STUDY
The main limitation of the study is it only uses one framework that is (COSO) Enterprise Risk
Management Integrated Framework, 2004 among many frameworks available to evaluate risk
management practice. The study mainly focuses on the practice of risk management rather than
different kind of risk faced by Awash insurance companies.
The other limitation of the study is it only uses primary data rather than using secondary data
which are company risk manual and also the research do not conduct interview in the process of
collecting data.
→There was some unwillingness of some respondents.
→ Lack of resources such as, Internet access.
→ Lack of experience.
→ The organization might not be willing to adopt all the risk controlling methods, therefore we
may not get available data for all techniques.
11
1.8.
Organization of the Study
The research paper is organized in five chapters, whereas the first chapter contains; background
of the study, introduces statement of the problem and the research question, elaborates the
objectives, indicates its scope and delimitations of the study.
The second chapter review relevant literature related to the concepts and theories of risk
management that are appropriate to the study. The third chapter present about the type of the
research and the methods which are employed in the study. It discusses the sources of data,
methods of data gatherings, techniques of data analyzing and presentation.
The fourth chapter offers the major findings about risk management practices of insurance
companies and actual data which is gathered from the companies. The last and the fifth chapter
will give conclusions and recommendations on the topic which includes summary of findings,
conclusions and possible recommendations.
1.9 Definition of terms
According to Risk Management Glossary of Terms (2007) and (PMI, 2017) most often used
terms are defined as follow as:
insurance objectives. Risk Management Glossary of Terms (2007)
Management
Glossary of Terms (2007)
Risk Management: The process of identification, assessment, allocation, and management of
Insurance risks. Management Glossary of Terms (2007)
be structured and performed on the project. Management Glossary of Terms (2007)
execute risk management activities for insurance. Management Glossary of Terms (2007)
rmining which risks might affect the project and
documenting their characteristics. (PMI, 2017)
12
s the probable consequences for
each event (or combination of events in the analysis), and determine possible options for
avoidance. Management Glossary of Terms (2007)
reduce
or eliminate such threats. (PMI, 2017)
unities and reduce threats to the achievement
of project objectives. (PMI, 2017)
residual
risks, identifying new risks, executing risk response plans, and evaluating their effectiveness
throughout the insurance life cycle. Management Glossary of Terms
(2007).
13
CHARTER TWO
LITERATURE REVIEW
In this chapter different theoretical aspects of risk like its definition, types, management and
others as well as empirical issues and works as to the risk management practice in the
awash
insurance company and research gap discussed.
2. THEORITCAL REVIEW
There is no single definition of risk. There for the researcher will try to give different authors
view and definition for the word risk. According to Williams Jr. Risk is a potential variation in
outcome and the exposure to a potential loss. It can also be defined as uncertainty about
economic losses due to occurrence of an event; economic losses are caused by perils such as
crimes, fire and accident. It is there possibility of an adverse deviation from a desired outcome
that is expected.
According to Trieschman, Risk can be defined as uncertainty concerning losses. The risk
surrounding a potential loss creates significant economic burden for business In addition
Vaughan and Vaughan (2007) defined Risk management as “a scientific approach to the problem
of risk that has as its objective the reduction and elimination of risks facing the business firm.”
From this definition it is understood that the theory and practice of risk management is not only
limited to the insurance business but is involved in the decision making of other business sectors
too. Although risk management is a recent thought it is argued that it actual practice date back to
the start of human civilization. Modern risk management is a recent phenomenon which started
after 1955 (Dionne, 2013). Risk management is now becoming an administrative paradigm for
all firms. Organizations have no choice but to organize in the face of uncertainty. Organizational
life is now demanding the inclusion of risk management on decision making process of their
business (Power, 2004).
2.1 The Meaning of Risk
Risk is a condition in which there is a possibility of adverse deviation from a desired
outcome that is expected or hoped, the possibility that an entity incur loss. It can also be defined
14
as is the objectified uncertainty as to the occurrence of undesired event. It varies with the
uncertainty and not with the degree of probability. (Alexander b. & et.al, 1998).
Risk is condition in which there is possibility of adverse deviation from desired out com that is
expected or hoped for .risk is uncertainty or loss. It is the possibility or threat of damage, injury,
liability, or other negative occurrence that is caused by external or internal vulnerability. That
and that maybe neutralized through preemptive action. It is the possibility of suffering harm or
loss. ( William 1998).
Risk is uncertainty concerning the occurrence of the loss and it’s the chance of loss it means they
probability an event will occur. Risk management is process that identifies. Loss exposure faced
by an organization &selects the most appropriate techniques for treating such exposures. Based
the terms risk is ambiguous and has different meanings. ( Markh’s. Dorfmon. 2009).
2.2 Basic categories of Risk
1, financial / non-financial risk
The term risk includes all situations in which there is an exposure to adversity .in some cases this
adversity involves financial loss, while in others it doesn’t .risks that cause financial loss are
known as financial risk and other that doesn’t occur financial risk are called non-financial risks.
There are some elements of risk in every aspect of human endeavor and many of these risks have
no financial consequences.
2, Static/ Dynamic risk
Dynamic risk is a risk that results from change in economy. On the other hand static risk is risk
that results from even if the three were no changes in the economy.
3, Fundamental/particular risk
Fundamental risk answers that the risk affects the entire economy or large number of persons
with the economy. Particular risk is a risk that affects only individual societies in the
environment. Examples of fundamental risk include high inflation, war and drought. An example
of particular risk includes, burning of house, robbery of bank, and damage of car etc.
15
4, Objective/ subjective risk
Objective risk is defined as the relative variation of actual from expected loss. Subjective risk is
defined as uncertainty based on persons mental condition or state of mind. Subjective risk may
affect decisions when the decision maker is interpreting objective risk.
5. Enterprise risk: - is a relative new term that encompasses all major risk faced by a business
firm. Such risks including pure risks, speculative risk, strategic, operational risk and financial
risk.
6. PURE RISK and speculative risk
Pure risk is defined as a situation in which there is only the possibility of loss or no loss
speculative can be defined as situation in which either profit or loss is possible.
Classification of pure risk
The major type of pure risk that can be create great financial insecurity includes; personal risk,
property risk, liability risk or risk occurred from others
1, personal risk
This refers to the possibility of loss to a person death, dis ability and loss of earning power.
There are three major personal risks; those are risk of pre mature death, risk of insufficient
income and risk of health.
2, property risk
Any one or organization who owns property faces property risk .Simply, because such
professions can be stolen /destroyed.
3, Liability risk
The basic thing in liability risk is that the intentional injury of other person or damage to their
property through negligence or carelessness .however, liability may also result from intentional
injury or damage.
16
2.3. Sources of the Risk
Source of the risk are the sources of factor or hazards that may contribute to positive or negative
outcomes. Source of risk can be classified in several ways .for instance, the following source of
the risk represent one list.
→ Political Environment: - with in the single country the political environment can be important
source of risk anew part can move the nation in to a policy direction that might have dramatic
effect on particular organization (new stringent regulations on toxic waste disposal).
→ Legal environment: - the expected low and direction may be issued by the government which
may render risk environmental to the business operating in the country. In the international
domain complexities increase because legal standard can vary dramatically from county to
country
→ Physical environment: - is a fundamental source of the earth quakes. Excessive rain fall or
drought can all feed to loss. The ability to fully understand our environment and the effect we
have on it as well as those it has on us it a central aspects of the sources of risk. (George
E.Redaj.2009).
→ Social environment: - changing traditions and values human behavior, socio- cultural and in
situation.
→ Operational and environmental: - process and procedures of an organization generated risk
and uncertainty. A Formal procedure for promoting hiring or firing employees may generate a
legal liability. The manufacturing process may out employees at risk of physical harm. The
international business may suffer risk or I uncertainty due to the in reliable transportation system.
(Hailuzeleke , 1991).
2.4. Risk Management Definition
Risk management is defined as a systematic process of identification and evaluation of pure loss
exposures faced by an organization or individuals and for the selection and implementation of
17
the most appropriate techniques for treating such exposures. As a general rule the risk
management is concerned only with pure risk management. [Green mark R.1977]
2.5 Objective of risk management
Risk management has several important objectives that can be classified as in two categories.
1, Pre loss objective
The firm or the organization has several risk management objectives prior to the occurrence of
loss. The most important include, reduction of anxiety, meting externally imposed obligations.
The first objective of reduction of anxiety is more complicated certain loss exposure can cause
grater worry and fear for the manager, key executives, and stock holders than other exposure.
However, the risk management wants to minimize the anxiety and fear associated with all
exposures.
2. Post loss objectives
The most important post loss objectives include survival of the company to continue operation,
stability earning, continued growth of the firm and goal of social responsibility.
2.2 Risk Management Practices
Insurance companies are in the business of taking risks, underwrite policies that deal with
specific risks. To make insurance company function well, insurance companies should be good
at managing their own risks. As a result Risk management becomes one of the main functions of
any insurance services and Risk management involves the identification, assessment,
prioritization of the risks and the application of resources to minimize, monitor and control the
probability and/or impact of the negative occurrences. By risk management it also mean any kind
of considerations which enable businesses to detect critical developments and to take
countermeasures early enough Henschel (2007). Therefore risk management is the process of
identification, analysis, assessment, control, elimination an evasion of unacceptable risks. The
insurance industry is a regulated sector as a result of the riskiness of its operation. The Solvency
II Directive framework requires risk management integration in all insurance company’s
business processes. There is no single management system that would fit for all insurance
18
companies. Therefore, NBE (National Bank of Ethiopia) requires each insurance company to
develop its own comprehensive risk management system fitted to its need and circumstances.
The NBE Licensing & Supervision directive (2014) specify the role & responsibility to ensure
the risk management process that is identifying, measuring, monitoring & controlling risk is in
place & functioning effectively. There are three forms of assurance process that may be used in
assessing a risk management process. Those are process element approach, key principles
approach and maturity model approach. Process element approach checks whether each element
of the risk management process is in place, key principles approach checks whether risk
management process satisfy a minimum set of principles and maturity model approach checks
the quality of an organization risk management process and its improvement over time ISO 3100
(2010).
2.6 THE RISK MANAGENENT PROCESS
In order to have effective risk management program, the risk management must take certain
steeps, these are
the following;
Step1, identifying potential loss
Step2, evaluating
Step3, selecting the appropriate technique to treating loss
Step4, implementing and administrating the program
1. Identify risk: There are many potential risks that control individual and business the risk
management process is concerned primary with the identification of relevant exposure to pure
risk. (William Jr.L. 5 MTh risk management and insurance 2004).
2. Evaluate risks : For each source of pure risk can be categorized to how often associated
losses are likely to occur in addition to this evaluation of loss the Quincy an analysis of size or
severity of loss is helpful consideration should be give both to the most provable size of any that
may occur end to the maximum possible losses that might happen as part of the overall risk
evaluation it may be possible to measure degree of the risk in meaningful way in some
situation(George.e.rejda 2004).
19
3.
Select the Appropriate Technique for managing Risk or Loss exposures
3.1. Risk Control tools such as: -Avoidance, Loss prevention and reduction, separation,
combination and diversification.
3.2. Risk financing tools such as; Retention, Insurance & Non-insurance transfer.
4. Implement and review decision
Following as decision about the optimal methods for handling identified risk the business or
individual must implement the techniques selected however risk management should be an
arguing process in which prigs decision are review regularly.
Some times less risk exposure arise or significant changes in the expected loss the Quincy or
severity occurs (George E.Rejda 6th.ed p.42).
2.7
The Range of Risk Identification Technique
The method for risk identification will be appropriate for all forms of risk or for simple form of
an different situation there is a range of technique available and these technique can be identified
as follows (George E.Rejda 8th.ed .p.1 2).
1. The Organizational chart
These are intended to high light broad a least of risk rather than specific and individual the risk
such as fire, security or liability. The organizations of chart encourage the risk identification to
tale abridge eye view of the organization to stand back the door to door operation and stock of
the risk this exist. This means risk identifies does some explanation in much organization there
will be a risk and insurance manager employed whose job impact Wii be the nitrification of the
risk (J.Triechmann 2003).
2. Physical inspection
Physical inspection is the most common and best understand of all technique available.
Inspection is necessary for the risk manager by observing first-hand the organization facilities
and the operation conducted this on (Williams. J.Rechard. M. Heinz 4thed).
20
The inspection of the plant process takes a difference approach and can be a time consume job
(William. Jr.RechardM.Heins 4th Ed).
It is necessary to do some preparation work do that time is in to waste during the visited itself.
This preparatory would include finding out exactly what process where caries out of the premises.
The nature of the services or product manufacturing (Grene. Mark. R and James J.Triechamann
risk and insurance 6th 1995).
3. Check list
The basic areas of the check list is that perform is sent to the site for completion by someone
there. The check list acts as a source of about of risk. If really takes the place personal visit and
so it has to be drawing up very carefully check list provide a lasting of all the various policies or
types of insurance that may be a business (J.Triechmann 6th ed 1995).
4. Flow chart
It is another systematic procedure and identifying potential lose facing a particular firm first a
flow chart is serious it systematic representation sequential process which shows all the
operation of the firm starting with raw material electricity and their inputs at supplier location
and ending with finished products in the hand of customer second, the check list of the potential
property liability and personal losses nipple to each property and operation shows in from chart
to derriere to which losses the firm focus (George. Eregda 2001).
5. Contract Analysis
Many organization exposures take a risk from the contractual relationship with other
organization an examination of these contracts may real areas of exposure that are note
responsibility to the other parties.
6. Financial statement
Another systematic method for deforming which of the potential loss in the check list applies to
a particular firm and in which way the financial statement the trade by ammonizing the balance
21
sheet operating statement and supporting record the risk manager can identify all the existing
property liability and personal exposure of the firm.
7. Incident Report
A network information source can be very useful in identifying possible loss. The information
provide through network should include not only response of accident and near injury and
damage but presumable did not frequently good fortunate and check allowed person to escape
with out to injury from an accident the posed a serious injury and damage. If the circumstance
repeated but only if the risk manager are aware of the potential loss (Williams 20004).
2.8. Measurement of potential Risk loss
Risk measurement is the process of potential loses to its size and their probability of occurance.
After the risk, manager has identified the various types of loss faced by his or her firm. This
exposure must measure in order to, Determine their relative importance and obtain information
that will help a decide upon the most durable combination of risk management tools. (Williams
FR and R.M.Heinz 4th ed.p.56).
2.8.1. Dimension to be measured
Information is needed concerning two dimension of each exposure
1 .The frequency or no of loss that will occur and
2. The severity of loss. For each of two dimensions it would be desirable to know at least the
value in an average period and variation in the value from one get period to the next.
2.8.2. Loss frequency measures
Loss frequency refers to the probable number of loss that may occur during some given time
period. It is the probability that a single unit suffered one type of loss from a single peril. Richard
prouty the risk manager of the large business suggested about 25years ago that instead of using
numerical estimates of the risk manager might be expressing this type of probability as
(1)."Almost null “meaning in the opinion of the risk manager that event would not happened. (2).
"Slight" meaning that enough possible that the event has not happened to the present time &
likely occur in the future (3). "Moderate” meaning that it has happened once in a while and can
22
be expected to occur sometime in the future. (4). "Define" meaning that it has happened regularly
and can be expected to occur regularly in the future. Through not as precise as the probabilities.
The Risk manager should also recognize that though the probability may be below more than one
unit may be involved in a single occurrence. Those causing the loss potential to increase instead
is depend upon the no of occurrence. The loss can included all types of loss from perils and
exposure unit included in the analysis. (TEKLE GEORGIES ASSEFA, 2004)
1. Loss frequency
One measure of loss frequency is the probability that a single unit suffer one type of loss from a
single peril during the coming year, the risks manager can the some estimate the probability that
the unit will suffered that types of loss from many peril, like winds form and expansion as well
as file. The probability will be higher because of the additional possible cause loss. (George
E.Rejda 20003)
2. Loss severity
In determining the loss severity the risk manager must be careful to include all types of loss that
might occur s as a result a given events as well as their ultimate financial impact upon the firms.
(George E.Regda 2002)
3. Pouty measure of severity
Measurement of severity of risk essential for ranking risk based on severity. One of the system
used to measure severity of the risk the poverty measure of severity. The two commonly measure,
the severity suggested by richer poverty 1.The maximum possible and 2.The maximum probable
loss.
2.9 Selection of risk management tools
The selection discussed some approach that may be used in selecting risk management tools.
The two model are discussed below
1. Expected unit model
23
It emphasis in the risk manager attitude towards risk. This means that the model takes into
account different in risk attitude of risk manager. Risk manager are riley assign carrying utility
point to a given mental loss. As a result their decision are particular situation are likely to differ
under this model. Therefore, the Risk manager taking a decision on the basic expected loss of
utility. (Williams 2001).
2. The worry factor model
This model tries to assign a monitoring value the mental street or worry that manager experience
because of grievance of risk. Consequently the monitor values assigned to the worry is treated as
part of the cost of managing risk. (wondewosensiyum 2004).
2.9.1.
Tools of Risk management
Risk can be handled in several ways. In generally these are two basic tools of risk management.
1. Risk control tools
2. Risk financing tools
2.9.1. 1. Risk control tools
There are designed to reduce the firm expected losses and make to annual loss experience more
predictable. The objective of risk control is to reduce frequency. Risk control efforts individuals
and organization avoid risk. Prevent loss reduced the amount of damage if the loss is occur or
reduce undesirable effect if risk on an organization. The risk control tools including the
following;
Avoidance:- Avoidance of risk exist when the individual or organization free from itself the
exposure abandon accept & refuse as to accept the risk from the very beginning to avoid
individual or the organization need to avoid poverty person or activity with which the exposure
is associated Avoidance is an effective approach to the handling of the risk the company can
avoid the uncertainty the company experience. However the company loss benefit might have
been disorder from this risk. (Williams 8th ed 1998).
Advantage of Avoidance
24
Avoidance is that the chance of loss reduced to zero it the loss exposure is not acquire in addition
is existing loss exposure is abandoned the possibility of loss is either eliminated or reduced.
Disadvantage of Avoidance
→ It is impossible to avoid loss
→ Avoidance is that if may not be practical or possible to avoid the exposure. Some characters
of avoidance.
→ Avoidance may impossible to avoid Risk
The potential benefits to be going form employing certain person owing a piece of property or
engaging in some activities. Avoiding risk may create another risk. (Williams 8th ed 1998).
Loss control
Loss control activities are intended to reduce both frequency and severity of loss. Loss control
measure effects of risk by lowering the chance by that a loss will occur by reducing its severity if
it does occur. Loss control has the unique ability to reduce for the individual or society. (Pandey
2004).
Loss reduction
Loss reduction measures try to minimize the severity of loss once the perils happened. (Williams
8th ed 1998).
Separation
It reflect to secreting or spreading the firm’s property exposed to the risk to different faces.
Separate firm of the firm exposure to loss instead of concerning of at the one location where
there might be involved in the some losses (Wondewosenseyum 2012).
Diversification
25
Diversification is another risk handling tools. Most speculative risk in the business can be deals
with diversification. However, has limited use in dealing with pure loss. (George.E.Rejda 8th Ed
1098).
2.9.1.2. Risk financing tools
This is the Asian methods of handing risk .The person of the firm consciously or unconsciously
decide to assume the risk loss to be create by the person or firm and specific measures are taken
to transfer the risk George E.Regida 8th ed 1998)
Non-insurance transfer
This is the method of transferring risk from the individual to the group. There are two types of
non-insurance transfer (Triechmann and Marks G Sandra Gaston 10th ed1998).
A) Neutralization or handling: is the process of balancing the chance loss against the change of
again.
B) Hold harmless agreement: Area contract cantered in two prior to loss in which one party agree
to as sum of second party's responsibility if a loss occurs.
Self-insurance
Is a special form of planned returned by which part undo all of a given loss exposure is retained
by the better name for self-funding which expresses more clearly the dead that loses are tended
and paid by the firm.
Insurance
Insurance represents contractual transfer of risk. Insurance is appropriate for loss exposure that
how probability of loss but the severity of loss high.
If the risk manager uses insurance to treat certain loss exposures, the risk manager emphasized
five key areas.
- Selection of insurance coverage
- Selection of an insurer
26
- Negotiation of terms
- Dissemination of information concerning insurance coverage
- Periodic review of the insurance programming.
Implanting and administrating the risk management program
At this point, steps in the risk management process have been discussed the last step is
implementation and administration of the risk management program.
Typical activities of the risk manager include
identify and evaluating loss exposure,
establishing procedures for handling insurance claims, designing and installing employee benefit
plans participating in loss, co control and safety programs and administering group insurance and
self, insurance programs. Thus, risk managers are an important parts of the management team.
2.10 Risk Management policy Statement
A risk management
policy statement is necessarily in order to have an effective risk
management program. This statement outlines the risk management objectives of the firm, as
well as company policy with respect t to treatment of loss exposures. It also educates top level
executives in reared to risk management process, gives the risk manager greater authority in the
firm, and provident provide standards for judging the risk manger’s performance
In addition, a risk management manual may be developed and used in the program. The manual
describes in some details the risk management program of the firm and can be very useful tool or
training new employees who will be participant in the program. Writing the manual also forces
the risk manager to state precisely his or her responsibilities, objectives, and available techniques.
2.11 Cooperation with other department
The risk manager does not work alone. Other functional within the form are extremely important
in identifying pure loss exposures method for treating these exposures methods for treating these
exposures. These departments can cooperate in the risk management process in the following
ways:• Accounting: - internal accounting control can reduce employees’ fraud and theft of cash.
27
• Marketing: - accurate packaging can prevent liability low suits distribution procedures can
prevent accident.
• Production: - quality control can prevent the product ion of defective good and liability low
suites. Effective safely programs in the plat can reduce injuries and accidents.
• Personnel: - this department may be responsible or employee benefit program, pension program
and safety program. This list indicates
how the risk management process involves the entire
firm. In did, without the active cooperation of the other department, the risk management
program will be a failure.
2.12 Periodic review Evolution
To be effective, the risk management must be periodically reviewed and evaluated to determine
if the objectives are being attained. In particular the risk management costs, safety programs, and
loss prevent programs must be carefully monitored loss records must also be examined to detect
any changes in frequency and severity. In handling a loss exposure must be examined. Finally
the risk manager must be determine if the firm’s overall risk management policies are being
carried at, and if the risk manager is receiving the total cooperation of the departments in
carrying out the risk management function.
2.3 Challenges of Risk Management Practices
In studies of financial and non-financial firms across the globe, it has been shown that risk
management practices are not without problems. To summarize the work of Stulz (2008) there
are five types of risk management failures:1,Failure to use appropriate risk metrics VaR is a
popular risk metric, but it can only tell us the largest loss the firm expects to incur at a given
confidence level. VaR tells us nothing about the distribution of the losses that exceed VaR. This
would suggest the application of VaR doesn’t guarantee the success of risk management.2,
Mismeasurement of known risks Risk managers sometimes make mistakes in assessing the
probability or the size of losses. Similarly they could use the wrong distribution. For a financial
institution with many positions, although they may properly estimate the distribution associated
with each position, the correlation between the different positions may be mismeasured.
Mismeasurements of known risk is a common problem in risk management practice.3,Failure to
28
take known risks into account According to Stulz, it is very difficult to consider all the risks in a
risk measurement system, or it is costly to do so. This is because nobody can forecast future
events perfectly.4,Failure in communicating risks to top management Risk managers
communicate information about the risk position of the firm to top management and the board.
The management and board use this information to determine the firm’s risk strategy. If a risk
manager is unable to communicate this information effectively, top management may make
decisions that are badly informed, or they may develop an overoptimistic perception of the risk
position of the firm.5,Failure in communicating risks to top management Risk managers
communicate information about the risk position of the firm to top management and the board.
The management and board use this information to determine the firm’s risk strategy. If a risk
manager is unable to communicate this information effectively, top management may make
decisions that are badly informed, or they may develop an overoptimistic perception of the risk
position of the firm.
29
2.4 Empirical Study
A number of studies have been conducted on risk management. This section will review the
empirical studies in view of the study. Njoroge (2013) studied the strategic risk management
practices by AAR Insurance Identified reputation risk as the most significant risk facing the
company. This study employed case study research design. The target population comprised of
40 senior management and middle level staff at AAR Insurance Kenya Limited drawn from the
department of finance, underwriting and operation. The study recommended that the Board
should continue taking ownership and driving the risk agenda across the business, the
organization should focus on new emerging risk types such as reputation, operational risks and
IT security while not losing focus on the traditional risks such as credit and market risks.AAR
should also define Risk Management framework and program which enables effective reporting
and consolidation of data. Khalid and Amjad (2012) conducted a research on the risk
management in Islamic banking in Pakistan. The results indicate that Islamic banks are
somewhat reasonably efficient in managing risk where understanding risk and risk management
risk monitoring and credit risk analysis, are the most influencing variables in risk management
practices. Yusuwan etal.,(2008) focused on identifying the level of awareness of risk
management in their study on the risk management practices on construction project companies
in Klang Valley, Malaysia. They undertook to examine the policies undertaken when dealing
with risks in aconstruction project and identifying the problems and challenges in risk
management. For this study, they employed questionnaire survey and interviews to study 27
publicand private companies operating in Klang Valley. The study found out that 44.4%, 29.6%,
14.8% and11.1% had occasionally heard, heard and attended training, practiced risk management
and never heard about risk management respectively. In addition, 51.9% of the respondents
believed that risk management was capable of adding value to daily work, 33.4% believed that
risk management was useful in times of crisis. Their studies concluded that risk management
positively contributes to the productivity and financial performance
2.5 Research gap
Most Studies focus on the risk management practice by using other frame works, strategic risk
management, management of property risk, relationship between risk management practice and
financial performance on Awash insurance companies. There are limited studies providing risk
30
management practice of Awash insurance companies. Even if the issue of risk management is
equally important for all country, it is less focused and only few studies are conducted. However,
as pert the researcher’s knowledge no study is conducted to prospect the risk management
practice of Awash insurance companies in Woliso town by using the eight component of ERM
framework. Hence, this study aims to fill the gap in the literature by focusing on the components
to prospect the practice of Awash insurance companies in Woliso town to manage risk.
31
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter outlines the rationale of research approach and methodology used in this study. It
includes research design, sampling design, data type, research method, unit of analysis, variables
of the study, research instrument, data analysis methods and cost of budget.
3.1 Site selection and description of the study area
I select Awash insurance company in Woliso town for my research. There are around 20
employees and large amount of materials in the organization that when there is large of resource
in the organization the amount of risk that insurance face will be greater.so i would like to
prospect the practices and challenges regarding to risk management in the organization.
3.2 Research Design
To contemplate the existing situations that prevail in the company accurately and timely in an
economic manner, the gathering of the necessary data to prospect the practice and challenges of
risk management the researchers found out that the best way is to use a descriptive research
design.
As stated by Kothari (2004) ‘survey and fact-finding enquiries of different kinds are included in
descriptive research. The major purpose of descriptive research is description of the state of
affairs as it exists at present and concerned with describing the benefit from the type of research.
3.3 Research approach.
This study is going to be conducted using both quantitative and qualitative approaches.
3.2 Types and Sources of data
In this study, both primary and secondary data will be used to collect information from primary
and secondary sources. The primary sources of data are employees and management bodies of
the company. Secondary sources are published books, internet and magazines of the organization.
32
3.4 Target population
The target population of my research is employees and managers of Awash insurance company
in Woliso town.
3.5 Sampling design and procedures
According to Kumar (2005, p.164) sampling can be defined as, the process of selecting a few (a
sample) from large group (the sampling population) to become the basis for estimating or
predicating the prevalence of an unknown piece of information, situation or outcome regarding
the large group.
Most of researchers use simple random sampling on this field of study. We also choose simple
random sampling because there is relatively homogeneous population in the organization.
The researcher take different factors like the nature of research, time and money in to
consideration in order to choose the right sample and use a formula by (Yemane Taro1963) to
determine the sample size. Technically, the size of the sample depends on the precision the
researcher desires in estimating the population parameter at a particular confidence level. For this
study, the researcher will select 15 respondents from the total population of 50 employees by
applying α+10% of precision.
Where n= sample
N=total population
e = level of precision
n= N/1+N (e) 2
n=349/1+349(0.1)2=15
3.6. Data collection tools and procedures
I will use different methods of data collection mainly questionaries’ but i will also use
observation as tool to collect data.
3.7 Data analysis and presentation
To analyze the data that gathered through the different data gathering tools and i will use
different techniques to data analysis. The raw data will be collected and processed in the primary
edit, code and classify so as to make further analysis. In order to analyze the data that will be
collected through questionnaires and interviews i will use to analyze and interpret descriptive
method. Then the data is interpreted and discussed to reach logical conclusion.
33
3.8
WORKPLAN AND BUDGET
3.8.1 SCHEDULE OF ACTIVITIES
Phase Activities
1
Proposal writing and submission to my Advisor.
2
Review
of
literature
and
Preparation
Time Frame
Place
December
Woliso
of January
Woliso
questionnaires and schedules for primary data.
March
Woliso
April
Woliso
Rewriting, polishing and preparing final draft May
Woliso
3
Start collection primary data through questionnaires
from Woliso area some office of small scale
enterprise.
Data classification and tabulation
4
Writing the first draft
5
finalizing and submitting research report to my
instructor.
34
3.8.2 FINANCIAL PLAN (BUDGET REQUIREMENT):-
Item
Quantity
Unit cost
Total cost
1.
Paper
100
1.50
150
2.
Pen
5
20
200
3.
Binder
2
20
40
4
Flash
1
250
250
5
Transportation
5 day
150
750
6
Printer
45 page
3
135
7
Telephone
200 min
-
50
8
Internet
200 GB
-
50
9
Question duplication
40 page
3
120
10
Other expense
-
-
500
.
Total
2245
Reference
→ Management Glossary of Terms (2007)
→ Williams, (2004) Risk and management, Boston, United States of America
→(Jaretal,1998). risk management and Insurance
→(Hakan ,2019). Risk Management and Insurance
→Kadi (2003), Risk Management and Insurance
35
→Magezi (2003). Risk Management and Insurance
→(Green 2003).(COSO) Enterprise Risk Management Integrated Framework,
→Vaughan and Vaughan (2007) Risk Management and Insurance
→(Power, 2004).. Risk Management and Insurance
→(Alexander b.& et.al, 1998). Risk Management and Insurance
→( Markh’s. Dorfmon. 2009). Risk Management and Insurance
→ (George E.Redaj.2009) Risk Management and Insurance.
→ (Hailuzeleke , 1991). Risk Management and Insurance
→ [Green mark R.1977] Risk Management and Insurance
→Henschel (2007). Risk Management and Insurance
→ISO 3100 (2010). Risk Management and Insurance
→ (William Jr.L. 5 MTh risk management and insurance 2004).
→ (George E.Rejda 6th.ed Rp.42). Risk Management and Insurance
→J.Triechmann( 2003). Risk Management and Insurance
→(William. Jr.RechardM.Heins 4th Ed). Risk Management and Insurance
→ Grene. Mark. R and James J.Triechamann risk and insurance 6th (1995).
→ Williams( 2004) Risk Management and Insurance
→George. Eregda( 2001). Risk Management and Insurance
→(TEKLE GEORGIES ASSEFA, 2004) Risk Management and Insurance
→(Williams FR and R.M.Heinz 4th ed.p.56). Risk Management and Insurance
→ George E.Rejd( 20003) Risk Management and Insurance
36
→ George E.Regda( 2002) Risk Management and Insurance
→ Williams( 2001). Risk Management and Insurance
→ wondewosensiyum( 2004). Risk Management and Insurance
→ Williams 8th ed( 1998). Risk Management and Insurance
→. Pandey( 2004). Risk Management and Insurance
→Wondewosenseyum( 2012). Risk Management and Insurance
→George.E.Rejda 8th Ed (1098). Risk Management and Insurance
→ Triechmann and Marks G Sandra Gaston 10th ed(1998) Risk Management and Insurance.
→Stulz (2008) Risk Management And Insurance
→Njoroge (2013) Risk Management Practices
→Khalid and Amjad (2012) Risk Management Practices
→Yusuwan etal.,(2008) Risk Management Practices
→ Kothari (2004) Risk Management and Insurance Research Sample
→Kumar (2005, p.164) Risk Management and Insurance survey
37
~~~~ The end~~~~
38