Risk Management Module 4

RISK MANAGEMENT
President Ramon Magsaysay State University

(Formerly Ramon Magsaysay Technological University)
College of Accountancy and Business Administration
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683
College/Department College of Accountancy and Business Administration

Course Code Major Elec 2
Course Title RISK MANAGEMENT
Place of the Course in the
Major Subject
Program
Semester & Academic
First Semester AY 2021-2022
Year
Author JOHN REY MERCURIO
Chapter 4
RISK RESPONSE
Discussion:
Tolerate, treat, transfer and terminate
Risk Tolerance
Risk tolerance is defined in British Standard BS 31100 as the ‘organization’s
readiness to bear the risk after risk treatments in order to achieve its objectives’.
An organization may have to tolerate risks that have a current level beyond its
comfort zone and its risk appetite. On occasions, an organization may even have to
tolerate risks that are beyond its actual risk capacity. However, this situation would
not be sustainable and the organization would be vulnerable during this period.
When the hazard risk is considered to be within the risk appetite of the
organization, the organization will tolerate that risk. Risk tolerance is shown as the
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RISK MANAGEMENT
approach that will be adopted in relation to low-likelihood risks with low impact.
However, an organization may decide to tolerate risk levels that are high because
they are associated with a potentially profitable activity or relate to a process that is
fundamental to the nature of the organization.
Risk Treatment
When the level of risk exposure (likelihood) associated with a particular

hazard is high but the potential loss (impact) associated with it is low, the
organization will wish to treat the risk. Risk treatment will often be undertaken
with the risk at the inherent and/or current level, so that when the risk has been
treated, the new current level or target level may become tolerable.
Actions to improve the standard of risk control will always be under

constant review in an organization. On a personal level, wearing a seat belt when
driving a car or fitting an intruder alarm in a house are examples of risk reduction
actions. Improvements to standards of risk control in relation to physical
(insurable) risks are well known. Fitting sprinklers to buildings, providing
enhanced building security arrangements and employee security vetting are all
examples of risk improvement actions designed to better manage hazard risks.
Risk Transfer
When the likelihood of a risk materializing is low but the potential is high,
the organization will wish to transfer that risk. Insurance is a well-established
mechanism for transferring the financial consequences of losses arising from
hazard risks and (to a lesser extent) control risks.
In some cases, risk transfer is closely related to the desire to eliminate or

terminate the risk. However, many risks cannot be transferred to the insurance
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RISK MANAGEMENT
market, either because of prohibitively high insurance premiums or because the

risks under consideration have (traditionally) not been insurable.
Risk Termination
When a risk is both of high likelihood and high potential impact, the organization
will wish to terminate or eliminate the risk. It may be that the risks of trading in a
certain part of the world or the environmental risks associated with continuing to
use certain chemicals are unacceptable to the organization and/or its stakeholders.
In these circumstances, appropriate responses would be elimination of the risk by
stopping the process or activity, substituting an alternative process or outsourcing
the activity that is associated with the risk.
RISK CONTROL TECHNIQUE
1 Preventive These controls are designed to limit the possibility of an

(terminate) undesirable outcome being realized. The more important it is to
stop an undesirable outcome, then the more important it is to
implement appropriate preventive controls.
2 Corrective (treat) These controls are designed to limit the scope for loss and reduce
any undesirable outcomes that have been realized. They may also
provide a route of recourse to achieve some recovery against loss
or damage.
3 Directive (transfer) These controls are designed to ensure that a particular outcome is
achieved. They are based on giving directions to people on how
to ensure that losses do not occur. They are important, but
depend on people following established safe systems of work.
4 Detective (tolerate) These controls are designed to identify occasions of undesirable
outcomes having been realized. Their effect is, by definition,
‘after the event’ so they are only appropriate when it is possible
to accept that the loss or damage has occurred.
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RISK MANAGEMENT
Insurance and Risk Transfer
Risk transfer is one of the main risk responses available in relation to hazard risks.
This transfer normally takes place by way of insurance and it is often described as
risk financing. The fundamental principle of insurance is that the insurance
company is contracted to pay a certain sum of money in the event of defined
circumstances arising or defined events occurring.
Insurance contracts can require the insurance company to pay for losses suffered
directly by the insured. This is first-party insurance and includes property damage
insurance. Other types of insurance contract the insurance company to pay
compensation to other parties if they have been injured or suffer loss because of
the activities of the insured. This is third-party insurance and includes motor third-
party and public/general liability.
History of Insurance
Insurance has a very long history that can be traced back to Chinese and
Babylonian traders. There is evidence that marine insurance had become universal
among the maritime nations of Europe by the mid-1300s. In more recent times, the
great Fire of London in 1666 gave rise to the modern insurance industry. In the
1680s, a coffee shop (Lloyd’s) opened in London, which became the meeting place
for parties wishing to insure cargoes and ships and those willing to underwrite such
ventures.
Types of Insurance cover
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RISK MANAGEMENT
 Legal and Contractual Obligation

 Balance sheet/Profit and loss protection
 Employee benefit/protection of employee asset
Evaluation of Insurance Needs
1 Business has employees Employers’ Liability

2 Employees travel outside the country Business travel
3 Members of the public could be affected Public liability
4 Business supplies products or components Product Liability/Recall
5 Business provides professional advice Professional Indemnity
6 Theft or dishonesty by employees could occur Fidelity Guarantee
7 Business occupies business premises Premises Insurance
8 Premises has machinery or other stock Contents Cover
9 Business depends on machinery or computers Engineering Insurance
10 Business could be disrupted by fi re, flood etc. Business Interruption
11 Business is involved in transporting goods Goods and Transit
12 Business has motor vehicles on public roads Motor
13 Business provides life benefits to employees Life and Health
14 Certain staff are key to operation of business Key Person
15 Business would suffer in event of a bad debt Trade Credit
16 Business has directors and/or officers (D&O) D&O Liability
JOHNREYMERCURIO 5

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RISK MANAGEMENT

President Ramon Magsaysay State University

College/Department College of Accountancy and Business Administration

Tolerate, treat, transfer and terminate

When the level of risk exposure (likelihood) associated with a particular

Actions to improve the standard of risk control will always be under

In some cases, risk transfer is closely related to the desire to eliminate or

market, either because of prohibitively high insurance premiums or because the

RISK CONTROL TECHNIQUE

1 Preventive These controls are designed to limit the possibility of an

Insurance and Risk Transfer

Types of Insurance cover

 Legal and Contractual Obligation

Evaluation of Insurance Needs

1 Business has employees Employers’ Liability

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