Risk management is the process of identifying the types of risks faced by organisations, assessment and the management of such risks. On the other hand, insurance is a component of risk management which is an option for managing risks through transferring them to insurance companies. For a better guideline, you need to go through the discussion below.
What is risk management?
This involves identifying risks and potential risks faced by organisations which are categorised into financial, corporate risk, political risks, information risk and operational risks. Several techniques can be used in the identification process and are grouped into quantitative and qualitative methods.
These risk identification techniques include physical inspection, organisation and production flow charts. After the risk has been identified, it will be assessed to determine its severity and frequency so as to come up with an appropriate mitigation plan.
Managing the risks
The risk will be managed through financing and alternative risk transfer mechanisms which are risk control, risk avoidance, prevention and transfer.
Risk control reduces the impact of the risk to the organisation when it occurs and is implemented using risk management techniques like the use of fire extinguishers for fire risk as well as use of a monitored alarm for theft risk, just a few examples.
Risk can be avoided by not engaging in risky-related activities like not opening a new branch in a flood-prone area.
Risk transfer is mainly the financing part of the risk whereby pure risks are transferred to an insurance company through buying insurance like motor insurance or by
self-insurance. Other risks can be transferred to other non-insurance institutions like security companies, thus the use of a security company to take money to and from the bank on behalf of the organisation. Ideally, speculative risks where an organisation may lose or gain can be managed through hedging whereas pure risks where the resultant outcome is only a loss can be managed through buying insurance or self-insurance. Marsh insurance is one of the insurance institutions which provide risk management services.
It is when an organisation and individuals transfer pure risks to insurance companies. It is a component of risk management which is an option for managing pure risks. Some organisations may choose not to insure these risks on the conventional insurance market but set aside some funds to cater for such risks as they may occur. Insurable risks include assets like buildings, motor, electronic equipment and contents. The risk of a fall in exchange rates cannot be insured but rather managed through hedging.