Risk Management and Types of Risks

Risk Management and
Types of Risks
By Tony Collins
Edited by Memory Reed
Georgia CTAE Resource Network 2010
Lesson Objectives
Define Risk and Risk Management
 List and Describe 3 Types of Risks
 Know and Understand 4 Basic Ways to
Handle and Control these Risks
 List 3 types of Ways to Transfer Risks
 Know the Difference Between Risk
Avoidance and Risk Acceptance
What is Risk Management?
Risk - The possibility of financial loss
Management - The business function used to
plan, organize, and control all available
resources to reach company goals
Risk Management - The systematic process of
managing an organization’s risk exposure to
achieve objectives in a manner consistent with
public interest, human safety, environmental
factors, and the law.
Kinds of Risks
3 Types
Economic Risks
– These risks occur from changes in
overall business conditions.
– This can include:
 amount or type of competitor(s)
 changing consumer lifestyle
 population changes
 government regulations
 inflation
 recession
Natural Risks
Natural risks are result from natural disasters
or disruptions
 floods
 tornadoes
 hurricanes
 fires
 droughts
 lightning
 earthquakes
 even sudden abnormal weather conditions
Human Risks
These are caused by human mistakes and errors, as
well as the unpredictability of customers, employees, or
the work environment
This could include:
injury on the job
bad checks
employee error
Ways to Handle Business Risks
There are 4 principle ways to handle risks
–Risk Prevention and Control
(Loss Prevention)
–Risk Transfer
–Risk Acceptance
–Risk Avoidance
Risk Prevention and Control
– Screening and Training Employees
– Providing Safe Conditions
– Providing Safety Instruction
– Preventing External Theft
– Deterring Employee Theft
– This is often called “Loss Prevention” in the business
Risk Transfer
3 Common
Risk Transfers
– insurance
– product/service
– transference through
business ownership
– Insurance policy - contract that covers a
business with a specific type of insurance
reducing risks
– Business liability - insurance protects a business
against damages for which it may be held legally
liable, usually up to only $1 million.
– Personal liability - covers damages by customer
and/or employees
– Product liability - protects from personal injury
caused by product manufactured or sold by the
Product/Service Warranties
Warranties are simply
promises made by the
seller or manufacturer
with respect to the
performance and
quality of a product
and protection against
Transference Through
The total amount of risk the business must
handle depends in part on the type of
business ownership
– For example, a entrepreneur who owns a
sole-proprietorship assumes all the risk as
where a stockholder in a corporation assumes
only his percentage of the risk.
Risk Acceptance
When the business assumes the loss
responsibility into the upkeep of the
 Most companies pull out a certain
percentage of their revenue for damages,
loss to theft, and unsold items.
Risk Avoidance
Risks can be avoided by advance anticipation
 Following market research can assist a business
in making the decision on whether or not to
invest in a product.
 To determine whether the product is a low risk
you must weigh the potential benefits against the
potential risks
Risk Management Plan
Develop an overall Risk Management Plan
for the business
 Develop a specific Risk Management Plan
for specific events that occur within the
 Revisit the plan regularly to update
What We Have Learned
The three types of risks: economic, natural, human
The terms important to Risk Management:
– risk - the possibility of financial loss
– risk management - the process of how a business controls the risk of
financial loss while staying consistent with the public’s interest, safety,
environmental factors, and the law
There are more ways than one to handle risks effectively.
Loss prevention
risk transfer - insurance, warranties, and transferring ownership
risk acceptance - assume responsibility of loss
risk avoidance - anticipating product failure and not investing in
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