TECHNIQUES IN HANDLING RISK


TECHNIQUES IN HANDLING RISK
Risk Transfer
Risk transfer is another technique for handling risk. Risks could be transferred by several methods, among which are the following:
(a) Transfer of risk by contracts;
(b) Hedging price risks; and
(c) Conversion to Public Limited Company.
Transfer of risk by contracts
Unwanted risks could be transferred by contracts. For instance, the chance of a defective television or stereo set could be used in the retailer by purchasing a site contract, making the retailer responsible for all repairs after the warranty expires. The risk of a substantial escalation in rent could be used in the landlord by way of a long-term lease. The risk of a substantial price escalation in construction costs could be used in the builder by having a firm price in the contract rather than a cost-plus contract.
Hedging price risks
Hedging price risks is another example of risk transfer. Hedging is really a technique for transferring the chance of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange, such as NSE.
Lately, institutional investors have sold stock index futures contracts to hedge against adverse price declines in the stock market. This technique is frequently called portfolio insurance. However, it's not formal insurance but is really a risk transfer technique that provides considerable protection against a decline in stock prices.
Conversion to Public Limited Company
Incorporation is another example of risk transfer. If a strong is really a sole proprietorship, creditors for satisfaction of
debts can attach the owner's personal assets, along with the assets of the firm. If a strong incorporates, however, creditors for payment of the firm's debts cannot attach the private assets of the stockholders. In essence, by incorporation, the liability of the stockholders is limited, and the chance of the firm having insufficient assets to cover business debts is shifted to the creditors.





Comments

Post a Comment

Popular posts from this blog

PRINCIPLE OF LOSS MINIMIZATION

PRINCIPLE OF LOSS MINIMIZATION • Under this principle it is the job of the insured to take all possible steps to minimize losing to the insured property on the happening of uncertain event. According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his insured property, in case there is an uncertain event like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to manage and reduce the losses in this scenario. The insured must not neglect and behave irresponsibly during such events simply because the property is insured. Hence it is just a responsibility of the insured to protect his insured property and avoid further losses. As an example:  Assume, Mr. Arvind's house is set burning as a result of a power short-circuit. In this tragic scenario, Mr. Arvind must try his level best to stop fire by all possible means, like first calling nearest fire department o
Read more

BASIC CATEGORIES OF RISK

BASIC CATEGORIES OF RISK With regards insurability, there are basically two categories of risks; 1. Speculative or dynamic risk; and 2. Pure or static risk Speculative or Dynamic Risk Speculative (dynamic) risk is a situation in which either profit OR loss is possible. Examples of speculative risks are betting on a horse race, investing in stocks/bonds and real estate. In the business level, in the daily Lesson 1  Understanding and Managing Risk  5 conduct of its affairs, every business establishment faces decisions that entail an element of risk. The decision to venture into a new market, purchase new equipments, diversify on the existing product line, expand or contract areas of operations, commit more to advertising, borrow additional capital, etc., carry risks inherent to the business. The outcome of such speculative risk is either beneficial (profitable) or loss. Speculative risk is uninsurable. Pure or Static Risk The secon
Read more

Role of insurance in Risk Management

Role of insurance in Risk Management Insurance is an invaluable risk-financing tool. Few organizations have the reserves or funds required to take on the chance themselves and pay the sum total costs following a loss. Purchasing insurance, however, isn't risk management. A comprehensive and thoughtful risk management plan is the commitment to prevent harm. Risk management also addresses many risks which are not insurable, including brand integrity, potential lack of taxexempt status for volunteer groups, public goodwill and continuing donor support. Risk Management Process Risk Management Comprises of mainly three steps (a) Risk Analysis (b) Risk Identification (c) Risk Assessment (d) Risk Planning (e) Risk Controlling Lesson 1 Understanding and Managing Risk 9 RISK ANALYSIS Risk Analysis is the method of identifying, analyzing and communicating the major risks. Risk analysis involves Once risks have alre
Read more