CAT: UNIT CODE: BAF2206 UNIT TITLE: PRINCIPLES OF RISK MANAGEMENT

AND INSURANCE

QUESTION S
a. Explain the demerits of having no insurance to the organization. (10 Marks)

Insurance is an important part of risk management for any given organization. Insurance
provides safety against unforeseen events that may lead to huge losses for the organization.
However, some organizations operate without sufficient insurance coverage, which exposes them
to different kinds of risks. Let us explore the demerits of not having insurance for an
organization.

Loss of assets

There is a particular sensitivity to an organization operating with large assets. This is because
without proper insurance to cover them, any damage or loss of physical assets translates to
gigantic losses aside from operational disruption. This can be catastrophic specifically for
businesses with large asset bases.

Financial Instability
Operating without insurance exposes the organization to financial risks. There could be incidents
that are costly such as natural disasters, theft, accidents and others. Without insurance, these
events can destabilize the financial part of the organization. For example, there could be
insurance like replacement, repair of the broken assets and others.

Loss of Income
An uninsured business can encounter an income loss from operations disruption. For instance,
natural disasters may bring about an organization stopping operating, hence having no income.
Without business insurance the organization may fail to meet current expenses or current
customers’ obligations and probably close the business permanently.
Reputation Damage
This also brings about the breakdown of an organization’s reputation. In cases where an
organization is unable to cover losses or liabilities, customers and partners may perceive the
organization as unreliable or untrustworthy. Therefore, such perception may cause the business
to lose opportunities and long-term damage the organization’s reputation.

Legal Liabilities
This is one of the disadvantages of not having insurance. If there is no insurance, it means that
the cost of legal defense or settlement if sued by a stakeholder or anyone can lead to financial
crisis or worse bankruptcy. insurance coverage is needed when such cases arise.

In a nutshell, the demerits of an organization not having insurance are great. From this,
organizations or owners may have legal liabilities, potential risks for loss of assets, financial
instability, income and reputation with disastrous consequences. Therefore, owners should take
adequate insurance to save the future from potential threats or risks.

b. Discuss in detail the techniques and tools used for risk identification. (10 Marks)

Risk identification is one of the most important steps when it comes to risk management. This
allows an organization to make early predictions with respect to possible threats and
opportunities. Below are some techniques and tools to use in identification of risks.

Techniques
Brainstorming:
This is a technique where a group of stakeholders come together with an aim of generating as
many ideas as possible regarding the potential risk. This taps into diverse perspectives of team
members that may assist in uncovering a risk that might not be immediately visible.

Delphi Method:
This is the method that uses the anonymous collection of expert opinions and organizes them
through questionnaires handles by a facilitator. This helps in identification of risks through
expert opinions.

SWOT Analysis:
This technique lists the strengths, weaknesses, opportunities and threats organization faces to
determine any presence of risk. This gives a systematic basis considering both internal and
external factors that might affect the organization concerned.

Interviewing
With experienced project managers, risks can be identified by those managers as interviewers.
This is where appropriate individuals are selected and briefed on the project. Through interviews,
risks are identified based on project information, experience, and any other useful source.

Historical Data Analysis:

Through past trends, an organization can find events that have led to certain risks and
vulnerabilities. This approach relies on statistical data and predictive modeling to predict the
future outcomes based on the past historical data.

Scenario Planning:
This involves the development and evaluation of the hypothetical situations that are based on
different factors and assumptions to predict the possible risks.

Tools

Checklist: Predefined checklists or catalogs of the possible risks for a domain or industry, help
cover comprehensively the items.

Hazard and Operability (HAZOP) Analysis: This is a systematic approach toward identifying
possible hazards and operability problems in a process.

Risk Matrix: These are tools used for prioritizing risks regarding their likelihood and impact4
It gives a pictorial way of representing risks to allow effective decision-making.

Failure Mode and Effects Analysis (FMEA): This is a tool aimed at systematically assessing
potential modes of failure and their effects in the identification of risks.

Decision Trees: These enable a mapping of different decision paths and their probable results for
easy identification of risks associated with each.

Bow-tie Model: It is a tool used in visual mapping of pathways, from possible causes through to
consequences, to help in the identification and management of risk.
Layer of Protection Analysis (LOPA): This is a method of judging the effectiveness of using
several layers of protection to prevent risks.

c. Discuss the different major categories of risk. (10 Marks)

cture is to separate the user

views of the database from it physical representation. Using a diagram to illustration,
describe the each of the three levels in this architecture. (9 Marks Pure and based on
speculation
Pure risk is when there is only the option of experiencing a loss or not. The only potential results
include negative loss and neutral or no loss.

Different categories of pure risk

Personal risks: these are risks that impact a single person directly. For instance, there are lack of
funds in old age, possibility of inadequate financial security, risk of unemployment etc.
Property risks include potential damage or loss of property from factors like fire, theft, or natural
disasters.
Risks of liability: in specific situations, an individual may face personal responsibility if they
take actions that lead to harm to someone's body or belongings in another way. For example,
careless driving, faulty merchandise, unethical behavior and similar offenses
Speculative risk involves the possibility of either gain or loss. For instance, if the price decreases.
The loss occurs when the price drops. Some additional instances of speculative risks are betting
and investing in oil. self-employment, starting a business, etc.

A fundamental risk is a risk that impacts the economy as a whole or a significant number of
individuals. For example, the fast increase in prices which accounts for rapid inflation, conflict,
and nature calamities like floods, earthquakes, and more recent incidents of terrorism.
A particular risk is a risk that impacts individuals exclusively, not the whole community. For
instance, this includes theft of cars, as well as fires that destroy a business location without
causing major damage.
Enterprise risk: in this case, we find the following categorized risks:
Financial Risk: Risks associated with financial decisions and activities like credit risk. Financial
risk results in a business not meeting its financial obligations as and when they fall due for
payment.
Operational Risk: This is derived from various day-to-day business activities and processes.
For example, failure in IT systems, errors in data entry, lack or damage in the supply chain etc.

Strategic Risk: this would be defined that it deals with high-level decisions and long-term
objectives the organization sets. For instance, Incorrect judgment for market trends att failure to
change with time to keep up with the demands of customer and poor decisions on merger and
acquisition deals.
Risk and Insurance: Insurance is a form of risk management where the purchaser pays a set fee
to minimize potential losses to be shielded from a possible significant loss. Gambling, however,
is a risk-enhancing activity. investment involves risking available funds to potentially receive a
substantial profit, yet with the possibility of losses. Strong likelihood of no profit and a slight
possibility of a significant profit. For example, putting money in a bank with a set interest rate is
a cautious move that offers a secure outcome which results in a profit and eliminates the
possibility of investing in other options that may offer a higher return.