Risk Measurement Tools In Insurance | techniques | Method | Equity
We have in our previous articles discussed the role of insurance in risk management, here we will look at risk measurement in the financial market.
To begin with, let us look at the question what is risk management, there is Risk Measurement Tools In Insurance which could either be in finance, banks, business or even insurance.
Risk management is the process as well as the procedure applied in the reduction in the impact and also the severity of a loss. Since processes and procedures are involved, this means there are personnel engaged in the business of managing risk.
Risk Measurement Tools In Insurance And Functions
Here are some of the functions of risk manager;
- Risk identification
- Risk analysis
- Risk control
Risk Identification – in risk management the first function of the risk manager is to identify the potential risk surrounding the organisation. this is an important aspect or the best risk measurement tools in insurance, This entails the proper scouting of the risk involved in the running of such organisation.
Risk Analysis – haven identified the risk involved with the running of an organisation, the next thing to do is to analyse the risk, this is to later find a way to control the identified risks. Analysis of risk is to measure the risk to understand the severity and frequency. Example plane crash does not happen every day but once in a very long while, except for consistent mistake by the crew, the impact is often severe. On the daily basis, we witness motor accident here and there, but the impact or the magnitude of loss is not usually much when compared to plane mishap.
Risk Control – there are methods used in risk control, these methods only highlights the importance of risk measurement tools in insurance, as it better explains risk control in insurance, business, banks etc, these risk control mechanism used for risk management includes,
- Risk retention
- Risk reduction
- Risk transfer
- Risk avoidance
The above risk measurement tools in insurance will be extensively discussed in our subsequent updates.
Certainty and Uncertainty
Insurance centres on the certainty and the uncertainty of unforeseen events. From the history of insurance, the terminology certainty and uncertainty has both been used.
Certainty always goes for life assurance policies, while that of the uncertainty goes for the non life or general insurance. According to a scholar by the name Benjamin Franklin, he stated that the only certain event in human life is tax and death but not absolutely certain because tax is dependent on the profit the company makes at the end of the year in view.
Although, death is certain but not absolute since nobody knows the time he or she is going to die, though death may occur when it will occur.
In the financial system, certainty conditions can be said to prevail where potential investors has full knowledge of the ultimate outcome of an investment opportunity.
The above assertion simply implies that;
- Perfect knowledge from the onset of the exact nature and the timing of the stream or cash flow to be expected from an investment opportunity.
- The expectation that the interest outcome would not be subjected to change.
A condition is said to be uncertain when there is condition you cannot predict that the future will portray, hold or even come to pass.
Probability and Event
What is risk? Risk is defined as a chance, chances of miscalculating, chances of mishap. That is the probability. That is to say an even may happen or may not happen. Throwing a coin, it is either the head or the tail.
The investor may on the basis of the above reasoning compute with certainty the probability of an outcome. This is possible where the characteristics of all possible outcomes associated with an event are unknown, in essence the event is governed by the university of knowledged principles. The chances of throwing a coin is ½ or 0.5.
Some Businesses We Engage Into which requires risk measurement tools in insurance
- Family risk
- Business risk
- Production risk
- Purchasing power risk
- Political risk
- Risk of unplanned obsolace
- Financial risk
- Management and union risk
- Warehouse risk
Family risk – this includes risk of accident, risk of death, risk of unemployment, there are a lot of family risk.
Business risk – this type of risk requires the risk management techniques, because a business exposes himself to a lot of risk, which involves investing of money in the wrong project, other risk includes, accident, currency devaluation, risk of fire etc. These risk are referred to as insurable risk, although some of them are uninsurable like speculative risk example, the profit one make at the end of the year.
Marketing risk – market also has the risk of accident, other risk includes the risk of fake product, a risk of the product not meeting standardization, risk of perishability, risk of warehouse and risk of product being out of stock.
Production risk – A producer is exposed to a lot of risk ranging from buying the raw materials, combining both the finishing goods and raw materials which are used to produce a new product. The raw can get damaged, these risk that comes in the production. Inflation can also affect the purchasing power of the money used for production.
Political risk – this mainly occurs due to political instability or imbalance, because the investors are exposed to the risk of investment and the fear of the future because of the absolute uncertainty.
Risk of unplanned obsolescence – this occurs in the production of some certain items or dealings with certain products like the Olympia typewriter and the introduction of computer and other types of new methods of typewriting like IBM etc. Has made the market uncomfortable for those that engage in the manufacturing of old Olympia typewriter. Investors must carefully study the trend and event of development before investing.
Financial Risk – most people invest in others in different businesses with the intensions that they will make profits, however, there is the risk of failure. The money is risk for the project. In most scenario because of the dynamism in life, all expectation may not come through and it is one of the risks in business.
Management And Union Risk – human being are the most difficult to manage, because of moral hazard which requires risk management technique, nobody except the creature can understand an individual or group of individuals. Every staff do have union to press their demands. The management of the union is very difficult, because a small decision can ruin the company’s activities. It is a risk, all these hamper the activities of the organisations.
Risk of warehouse – there is risk in storing in a place. It can be damaged through suffocation or building collapse and damage the goods. Armed robbers can burgle the premises. It is a risk to warehouse and a lot of other risk surround them.