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Critically evaluation of the role of insurance within a wider system of risk financing and management - Essay Example

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Introduction Risk management and insurance are interrelated. A firm must practice good risk management, but also should have insurance, because they know that not all risks can be avoided. With banks, the marketplace is imperfect, therefore insurance would add value to their firm, yet they also need to be careful not to take unnecessary risks…
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Critically evaluation of the role of insurance within a wider system of risk financing and management
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Download file to see previous pages They may audit firms to make sure that their risk management practices are adequate to guard against risk. This paper will examine risk management, in general, along with examining risk management in the case of banks, cyber firms, and farming. Risk Management Risks must be identified, and this is the first part of the risk management process, according to Carter et al. (1994). The identification process of risks may be approached by a combination of methods, including intuitive management; using department experts; using standard questionnaires and checklists; using expert computer-based systems; using structured interviews; through brainstorming sessions; or using outside specialists/consultants. The second process is risk quantification, and this means that the impact and probability of a each risk is estimated for each risk. After that, the estimate is quantified by using a spreadsheet which estimates timescales and costs. The next process is risk prioritising and filtering,which means that the important risks are recognized and controlled, and risks are prioritized according to whether they care a Category 1 risk (cost effect only); Category 2 risk (contingency plans and costs affected); or Category 3 risk (programme contingency and cost affected). The Category three risks are the higher priority, and the risks are prioritized from there. ...
Mitigating strategies include avoiding the risk altogether by removing the cause of the risk; transferring the risk, which means that the risk is passed to somebody capable of handling that particular risk; reduction of the risk, which would consist of investing in insurance or some other up-front investment; management of the risk, which means that the risk is managed continuously until it is managed out; and contingency, in which funds are produced for the risks which are of low likelihood and impact, or have not been revealed. The next step after that is risk monitoring, reporting and control, which necessitates the use of a risk register, which is carried out by the risk manager. A risk audit is the step after his, which ensures that proper procedures are being followed to manage the risk. The final step is the project completion, which means that the risk manager assesses the project after completion, and assesses the adequacy of the risk management. Interplay Between Insurance and Risk Management According to MacMinn (1987), there is an interplay between insurance and risk management. Specifically, corporations purchase insurance as one way to control their risk (Arrow, 1964). While there is the theory that purchasing insurance is sometimes inefficient for a firm, because the cost of the insurance often exceeds the expected loss, so many firms who are risk averse would not want to purchase insurance because they are interested in maximizing profits, insurance still plays a large role in risk management (Godfrey et. al, 2009). This is because, according to Godfrey et al.(2009), the markets do not always behave rationally. When a corporation does not purchase insurance, that corporation is assuming that the ...Download file to see next pagesRead More
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