Steps Involved in the Risk Management Process - Essay Example

INSURANCE PLANNING Risk management is an evolving field that involves the identification, evaluation, minimization and control of uncertainties that may either contain positive or negative effects to the outcomes of an identified system (Gorrod, 2004). It is apparent that any system holds some kind of uncertainties and thus risk management tries to identify such uncertainties while devising ways that could minimize the harm caused to the system. Risks are normally divided into two broad categories, pure and speculative risks. They basically refer to bad happenings that may befall an organization. Pure risks are those that often result in harmful outcomes such as accidents, car theft, or earthquakes (Hopkin, 2010). Basically, pure risks end in some sort of loss. Speculative risks on the other hand, result in beneficial outcomes. In other words, speculative risks are considered a gain, for instance, a business venture or the risks of investing in stocks. There lays a great distinction between the two categories of risks. The most obvious distinction that illustrates the difference between the pure and speculative risks is that the former describes a situation whereby the outcome is often considered a loss while the later depicts a situation whereby the outcome can either be a gain or a loss. It is important to note that pure risks have a lesser probability of occurrence, and if they occur the impact is often instant and grave (Hopkin, 2010). For instance the probability that an earthquake will probably take place is very minimal and if by chance it occurs, then the impact is grave. On the other hand, speculative risks are a matter of choices, the outcomes to be beneficial although a loss may also be experienced. The other distinction is that pure risks are insurable. The insurance companies are often concerned with providing insurance against the pure risks, while the losses arising from the speculative risks are often disregarded by most insurance companies. However, it is important to note that not all types of pure risks are insurable. In addition, pure risks are also considered to be beyond the control of the human power, unless it is something like committing suicide. Risks such as car theft, or accidents or earthquakes cannot be prevented from occurring. Speculative risks on the other hand can be controlled since one has the option to ether venture in a certain investment or not. Steps involved in the risk management process Risk management is the recognition, evaluation, and prioritization of risks and there after, application of well coordinated and economical resources aimed at maximizing opportunities realization or minimizing, monitoring and controlling the probability of unfortunate events (Hubbard, 2009). It is apparent that risks are caused by uncertainties in project failures, credit risks, legal liabilities, accidents or in financial markets. Due to this, there has been a need to assess and manage risks especially in organizations (Hubbard, 2009). The process of risk management encompasses various steps which are employed in managing the risks strategically. These steps include: Risk identification: this is the first step of risk management. It involves identifying the risks that are likely to occur in the organization and creating data for the same (Alexander and Sheedy, 2005). Various strategies are used in risks identification, but generally, they vary from one organization to the other as different risks are likely to occur in different organizations. For instance, in a construction company, the major risks which are very likely to occur include falling objects, health risks, and falls causing fractures among others. In this case, the supervisors are supposed to identify these risks accordingly. Analysis: this is the second step of risks assessment and it involves converting the data obtained into useful information that can be employed by the authorities or decision makers. It is true that, this step shows the project managers and decision makers the fundamentals of the risks to further work on them (Hubbard, 2009). Planning: this is the process in which project managers convert information into actions. Planning entails creating actions and strategies to manage and address the risks identified (Alexander and Sheedy, 2005). It is termed as an essential step in risk management as it is the step in which data is converted into strategies to be employed. Tracking: this is the process in which the risks status and the strategies put in place to eradicate or reduce such risks are monitored clearly by the individuals concerned (Alexander and Sheedy, 2005). Such strategies to managing risks include risk transfer, risk avoidance, risk reduction, and risk acceptance (Hubbard, 2009). The monitoring is usually done by the personnel, who make sure that the actions designed to tackle the risks are employed during the risk management. Controlling: this entails controlling any deviations from the planned risk actions (Hubbard, 2009). The department of risk control is responsible for this while the monitoring of risk implementation actions and strategies is left to the workers. The overall idea is to ensure that the strategies adopted are in conformity with those put forth by the department of planning. Communication: communication is very essential in the overall process of risk management. All the departments involved must use effective communication if the entire process of risk management is to be a success (Alexander and Sheedy, 2005). This necessitates a good communication channel and ensuring that all the people involved in the process communicate all the necessary information and actions required to be taken efficiently. Taxation implications of trauma insurance Trauma insurance also referred to as critical illness insurance usually pays a lump sum which is tax free when the insured is diagnosed with a certain illness or medical condition such as stroke, cancer, or heart attack and this must be defined in the policy (Scriven, 2008). The amount paid does not depend on whether the insured will continue working and it is meant to ease the insured financial burden by offering funds to cover linked medical costs, living expenses, or debt repayments. For trauma insurance, premiums usually vary depending on sex, age, and past medical history (Scriven, 2008). Furthermore, if the insured is a smoker, he is not in any position to claim for un-deductible tax premiums for trauma insurance. Situations in which premiums for key-person insurance are not tax deductible Key-person or key-man insurance is applied in the industry to refer to the insurance on the life of the director, employer, partner of other key persons concerned with the business taxpayer (Roehrig, 2006). Some of the policies involved include endowment, accident insurance, whole of life insurance, sickness and temporary or term life assurance. Examples of the situations in which the premiums for key person insurance are not tax deductible include the insurance requested by a company with regard to the director for the aim of providing in case of death through an accident, funds for the payment of a debt unsettled by the director. The other situation is whereby a manufacturer takes out insurance with regard to the supplier of certain components, with the aim of providing in case of a supplier’s death through an accident, funds to purchase the supplier’s business. The other situation is whereby a partner of the company takes out insurance with regard to the other partner with the aim of providing in case of a partners death through an accident, funds to purchase the partner’s estate interest within the partnership. However, it is important to note that the key person insurance applies to the people who own part of the company’s shares. In addition, life assurance premiums of key personnel in the company are often considered as non-tax deductible expenses. Circumstances in which the 10-year rule for an insurance policy will be restarted Many companies usually sell ten year insurance policies but it is apparent that currently, these policies are unpopular due to their cost (Gosdin and American Bar Association, 2007). This is so because premiums for ten year insurance policies are much higher compared to premiums paid for whole life insurance policy. The ten year term insurance has no dividend eligibility or cash value (Gosdin and American Bar Association, 2007). Both the death benefits and the premiums remain level during this period. Most companies typically allow the insured to renew the ten year policy after it has expired but this goes hand in hand with an increase in premiums. Moreover, such companies necessitate an evidence of insurability while other requires a medical examination. However, the policy is not renewable in some companies after the ten year period but it has a conversion privilege whereby, the insured can convert the temporally policy into a permanent policy. There are certain circumstances nevertheless in which the ten year rule for an insurance policy will be restarted. For instance, incase individuals cannot manage to pay for a whole life insurance policy they can turn into the ten year insurance policy (Schacht and Foudree, 2007). In addition, some individuals only have a temporary requirement for the life insurance. In such a circumstance, the ten year insurance policy is applicable. Some business persons use the ten year insurance policy only to cover for outstanding loans or for the key personnel life insurance (Schacht and Foudree, 2007). Another circumstance in which the policy may be restarted is when there are many young persons who are short of funds and they are aggressively investing or saving in order to purchase an asset. Generally, the ten year rule for an insurance policy usually applies to individuals who have a short term requirement for life insurance (Gosdin and American Bar Association, 2007). Effects of arranging life insurance under superannuation plan Business analysts document that approximately 70 per cent of the total life insurance policies are attained through superannuation funds (Alexander, et al 2005). However, when such funds are calculated in terms of actual premiums that are paid in terms of dollars, then it is expected that the figure drops to about 30 per cent. The reason being people who take out their life insurance through the superannuation plan often pay lower premiums and posses less cover compared to those who have stand-alone policies. In addition, the insurance cover that is normally offered through the superannuation cover is not as far-reaching as the one offered by the stand-alone policy. For instance, a life cover in a group superannuation plan normally ranges between 100 000 to 200 000 dollars, when in actual sense such a cover may not be enough for the whole family. Moreover, life insurance through the superannuation plan is not inclusive of the trauma insurance, which is considered an essential component of any full protection plan. However, there can be some tax advantages if an individual opts to purchase the premiums through the superannuation plan since the premiums can be paid using the superannuation contributions though precaution has to be taken so that the future potential of the funds is not depleted. In addition, the plan also requires that the beneficiaries of the policy be clearly outlined since this may contain large implications on the tax. Hard and soft market conditions Hard and soft market conditions are terms describing the insurance market cycle, illustrating the functions of demand and supply, and are often aggravated by the statutory accounting procedures that occur within this industry. A soft market is a phase whereby the insurance companies have the strong urge to write new business as well as holding to the already existing business (Borodzicz, 2005). During such times, the insurance companies are more likely to provide coverage improvements and low-priced premiums. Hard market on the other hand, in a hard market, the insurance companies are likely to increase the premiums and get back some of the coverage gains they offered during the soft market period (Borodzicz, 2005). Therefore, during the soft market period, the insurance companies provide premiums at a low rate, and after they realize they are not making any gains, they tend to increase the price of the premiums, which generally describes the hard market. This is probably the reason as to why the insurance market is considered cyclical. References Alexander, Carol and Sheedy, Elizabeth 2005. The Professional Risk Managers' Handbook: A Comprehensive Guide to Current Theory and Best Practices. London: PRMIA Publications.  Borodzicz, Edward 2005. Risk, Crisis and Security Management. New York: Wiley Gorrod, Martin 2004. Risk Management Systems : Technology Trends (Finance and Capital Markets). Basingstoke: Palgrave Macmillan Gosdin, J.L. and American Bar Association. Section of Real Property, Probate, and Trust Law, 2007. Title insurance: a comprehensive overview (3rd Ed), New York: American Bar Association. Hopkin, Paul 2010. Fundamentals of Risk Management. New York: Kogan-Page Hubbard, D. 2009. The Failure of Risk Management: Why It's Broken and How to Fix It, New York: John Wiley & Sons. Roehrig, P 2006. "Bet On Governance To Manage Outsourcing Risk". Business Trends Quarterly. http://www.btquarterly.com/?mc=bet-governance&page=ss-viewresearch. Schacht, J. and Foudree, B. 2007. A Study on State Authority: Making a Case for Proper Insurance Oversight. NCOIL Scriven, D. 2008. Guide to Life Risk Protection and Planning, (2nd Ed). Sydney: CCH Australia Limited. Read More