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Risk Mangement - Research Paper Example

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Risks are spread across different environments, and the management of such risks takes differentiated approaches. Under the risk context, moral hazard and adverse selection are two common practices (Lam, 2003)…
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Risk Mangement
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Risk Management Affiliation: Encountering risks is normal in and out of the business environment. Risks are spread across different environments, and the management of such risks takes differentiated approaches. Under the risk context, moral hazard and adverse selection are two common practices (Lam, 2003). While these two practices are significantly different, they are characterized by a close link and relationship due to the manner in which they are practiced in insurance and risk management. The difference between the two practices is derived from their actual application in insurance or risk management.
Moral hazard is a situation where an insured party will tend to take risks due to the fact that any losses that could result are covered by the insurer. Under normal circumstances, the insured party could work to avoid risks or minimize them but chooses not to due to the insurance cover that this party enjoys. On the same note, moral hazard is realized when an insured party seeks to maximize the benefits offered by the cover. For instance, a person with health insurance is likely to visit a health care facility more times than he/she could in the event that the health insurance cover is not available. This same case applies in the business environment, where business enterprises can take more risks under the notion that any losses or costs are covered by another party.
On the other hand, adverse selection is the situation where decisions are made under uncertain circumstances, which primarily entail access to asymmetric information (Lam, 2003). The results realized in the process are in most cases undesired. In a buyer-seller context, the two parties could have access to different information that consequently influence one or both parties to make decisions or settle at some results that they could not choose if they initially had the same information. Moral hazard and adverse selection can actually exist independently, but their application is highly intertwined.
Risk-averse individuals outnumber risk takers. Many people go to high extents to avoid risks, with only a significantly low figure choosing to take ultimate risks. For instance, the number of highly entrepreneurial firms in the business environment is low. This is because highly entrepreneurial firms are risk takers, and risk taking raises the chance of making losses. However, when a high-risk business activity succeeds, the profits reaped are enormous.
Risk management is a fundamental practice in the organizational setting. Firms work their way to manage risks in order to enhance their continuity. The common practice of risk management for property exposure of a firm entails the actions taken at the firm level to manage risks (Marrison, 2002). According to Marrison (2002), risks can be managed through: avoiding risks, minimizing risks, transferring risks, and undertaking change management that raises the firm’s stake in risk management. Risk management measures safeguard the firm’s interests and operations.
References
Lam, J. (2003). Enterprise Risk Management: From Incentives to Controls. Hoboken. New Jersey: John Wiley and Sons.
Marrison, C. (2002). The Fundamentals of Risk Measurement. New York: McGraw Hill. Read More
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