loss prevention method

Management decision procedures

The general number of risk management procedures includes:

1) risk taking

2) risk aversion

3) transfer of part or all responsibility for the risks of other entities.

The choice of a particular risk management procedure is carried out as part of the overall strategy of the company in relation to risks.

The firm’s risk management strategies can be:

1) careful

It is characterized by procedures such as:

v risk aversion;

v transfer of risk to other entities.

This strategy is characterized by the fact that management prefers to minimize the risk of bankruptcy, loss of planned income or profit.

2) more risky

It is characterized by the fact that the amount of risks retained can be quite large and only excessively catastrophic risks are partially or completely transferred by the company to other entities.

3) more balanced

It is characterized by the equivalent use of all known risk management procedures:

v refusal;

v acceptance;

v transmission.

The quantitative criterion for choosing one or another risk selection procedure is the threshold values, either by the probability of a loss, or by the size of a possible loss.

As a rule, the threshold value for the probability of occurrence of damage and its possible size is set separately for equipment, real estate and liability.

The main condition for setting these thresholds is the presence of two indicators:

The likelihood of a loss

the amount of this loss.

Risk Management Methods

The most common risk management methods include:

1) a method of avoiding risks or refusing them:

Under the avoidance of possible risks – the rejection of any activity associated with risk, or the development of activities that completely exclude them.

Essence: creation at the enterprise of such conditions under which the appearance of risks is eliminated in advance.

Example:

refusal to produce any product;

abandonment of the business sector.

The application of this method is especially effective when the probability of risk occurrence and the amount of possible losses are high.

Taking over

Essence: covering losses at the expense of the enterprise’s own financial capabilities.

The use of this method is justified if the probability of the risk is not high and the amount of potential losses is not large. If the company has a lot of risks, then there are such alternatives for it.

– or leave the risk to himself, if the financial possibilities allow it.

– Or transfer it to other entities if financial possibilities do not allow it.

If there are few risks, the firm keeps them.

Losses: with this method, you can cover by:

– current cash flow (the time factor should be taken into account);

– means of the reserve fund.

loss prevention method

Essence: carrying out activities is aimed at reducing the onset of risk.

The use of this method is justified if the probability of risk realization is sufficiently high, and the amount of loss is small.

The use of this method is associated with the development and implementation of action programs, the implementation of which should be monitored and periodically reviewed.

The costs associated with the development and implementation of preventive measures should not exceed the size of the effect of their implementation.

4) reduction of the amount of losses – consists in carrying out measures aimed at reducing the amount of possible damage.

It is used in cases where the size of the possible loss is large, and the probability of risk is small.

As part of the application of this method, the following methods are used:

A) separation method;

B) limiting the concentration of financial risks – is applied by establishing the definition of standards in the process of economic activity.

5) insurance reducing the participation of the company itself in compensation for damage by transferring responsibility to the insurance company to bear the risk.

The use of this method is justified if:

– the probability of a possible risk is low, but the amount of possible damage is quite large;

– the probability of occurrence of risk is high, but the amount of damage is small.

6) the method of self-insurance – is used in various forms, either as a method of accepting risk on oneself, or as a form of insurance implemented within the framework of one’s own company.

Essence : this method is to create your own insurance methods designed to cover losses by the type of funds of insurance and reinsurance companies.

Unlike the insurance procedure, insurance reserves are created within one business unit, usually an industrial or industrial financial group. Self-insurance involves the creation of financial mechanisms that allow you to create funds in advance to finance emerging losses. One of the self-insurance mechanisms is the creation of CAPTION COMPANIES.

Captive insurance organizations are insurance companies that are part of a group of non-insurance organizations of industrial, financial and industrial groups, financial groups, and insure the risks of this entire group.

A captive insurance company allows you to invest the funds of insurance funds within the united business unit, keep profits within it, and receive tax benefits (the legislation of a number of countries provides for this).

Self-insurance, as a method of risk management, allows you to:

1) strengthen the system of incentives for primitive measures.

2) improve the procedure for indemnification.

3) increase the profitability of companies by investing the collected insurance reserves collected within the group.

7) method of risk transfer other than insurance.

The transfer of risk means that one party exposed to the risk of loss finds a partner who can take on its risk.

In addition, there are such transfer methods as:

– hedging;

– rent;

– conclusion of “hold-harm-less” agreements.

Hedging is the transfer of price risk aimed at minimizing it, which is a reduction in the risk of financial loss based on the use of derivative securities, such as:

1) forwards;

2) options;

3) swaps.

The essence of this method leads to the limitation of profits and losses due to changes in the market prices of goods, currencies, securities, etc. In this case, inflation, currency and interest risks are minimized.

Lease – when entering into a lease agreement, a significant part of the risk is transferred to the lessee.

For example: a lease allows the landlord to transfer the risk of obsolescence of the property being rented out. The normal price of such transfer of risk is added to the lease payments.

“Hold – harm – less” – harmless to holders. Contracts of this type are contracts under which one party agrees to accept the liability of the other party in the event of damages.

Examples of contracts of this type can serve as a guarantee agreement, in which there are 3 participants:

1) The person in relation to the fulfillment of the obligations under which the contract is concluded.

2) Benefit – the acquirer, the obligation to which the 1st participant has.

A guarantor who assumes responsibility for fulfilling the obligations of the 1st participant to the second.

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