This week I received an assigment from the teacher of financial planning to write a blog about risk management. Such as the task of creating a blog before, I was very happy to have the task of this blog, this is easy, not difficult. But there was something different in my blog task this week. This week I'll write a blog with the English. This first time I write a blog with the English. With a feeling of pounding and heartbeat faster, I just can say BISMILLAH yes I can do this task. and this is my blog about risk management is described in the steps of the risk management process. Check it out brother....
Risk management in theory can be viewed as the study of methods for controlling portfolio risk. A variety of risk management tools are available to modify household risk. Perhaps the biggest difficulty in doing so is the lack of a full hedge for the lifetime work-related income streams we call human assets. We cannot fully diversify human assets. There are usually only one or two wage earners who make up human assets possible per household.
Risk is the probability of an outcome different from the one expected. Outcomes above and below expectations are considered risky. In practice, we have a different definition. Therefore, we can view risk in practice as the probability of a loss or an outcome that is below expectations. Risk management in practical terms can be defined as the process by which we identify risk and control them so that we are able to achieve individual goals.
Risk management is an organized process that looks at practices in broad terms and works its way to the most specific details. The six steps of this process are :
1. Develop Objectives
Objectives determine the scope of the risk management process. Do you want to select one area or examine all household risks?
2. Establish Exposures
Each area of household assets has its own risks. We can separate them into financial and nonfinancial assets. Nonfinancial assets may, in turn, be segregated into human-related assets and real assets. For risk management purposes, we can call human-related and real assets exposures personal and property risks, respectively. A risk that we are concerned about for planning purposes is one that can significantly affect assets or cash flows.
3. Identify Available Risk Management Tools
There are many techniques available to managing the overall risk of the household. Some of them have little or no cost. Common risk management approaches are:
- Avoid Risk, under the avoid risk method, you seek to eliminate to risk. If there is risk that you will be injured if you cross the street on a red light, you may wait until the light is green.
- Reduce Risk, when you reduce risk, it is not eliminated; it is lessned. When you exercise and eat the right foods, you reduce the risk of becoming ill.
- Reduce Potential loss, when you reduce potential loss, you lessen the damage should a loss occur. Wearing a seat belt serves this function in the event an accident takes place.
- Retain Risk, you retain risk when you reject the possibility of reducing or eliminating risk but instead decide to absorb the potential loss yourself.
- Diversify, assets are diversified so that the impact of an unfavorable outcome for any one asset is reduced. You diversify when you allocate your marketable assets to many different categories. When you get married and both you and your spouse work, you are diversifying assets.
- Transfer Risk, example of transferring risk is when you purchase a homeowner’s policy that insures against the loss of your home being destroyed by a fire. You have transferred your risk to the insurance company.
- Sharing Risk, The transfer of risk is not always a full one. Example when you coinsure medical policies, sometimes 20% of the risk is retained. When you transfer some risk and retain a part of it, we call that sharing risk.
- Other Methods of Handling Risk, There are a host of other methods to aid in altering risk. Many are utilizied principally for marketable securities and in businesses. They include options, futures, and swaps.
4. Match Appropriate Risk Management Tools to ExposuresDifferent exposures call for separate risk management tools. In determining the appropriate overall risk management tool, a number of factors should be taken into account. Among them are the cost of alternative risk management techniques, the amount and likelihood of loss. Any convenience factors, and the risk tolerance of the person. Let’s look at the exposures by category and describe the risk management tools.- Human-Related Assets are generally the most significant portion of a household’s portfolio for a large portion of its life cycle. The portfolio incorporates human-assets, pension assets including social security, and gifts and bequests. The risk include the following :
Longevity-extended life, the result of a good longevity program may be living an extra-long life. An extra-long live can result in a decline in your standard of living or running out of private funds. Establishing extra funds for the possibility of an extended life, a form of precautionary savings, will help.
Health and disability are expenses for sickness and inability to perform at your job. This, of course, can reduce your income and therefore human-asset value. Diet, exercise, and stess management can help here, as can safety measures to prevent illness and becoming disabled.
Macro and micro economic risks, macroeconomic risk is the risk inherent in the general economy, and microeconomic risk is the risk associated with the individual industry or company. Each can cause you to suffer for inflation, thereby causing declines in you’re your real income. General economic, industry or company related risks such as sluggish growth, overcapacity, technological obsolescence, or inefficient operations can result in layoffs or terminations.
- Real Assets are tangible assets that the household owns. The most important one for nonrenters is the house they live in. other items are automobiles, furnishings and jewelry. Among other risks, the house is subject to fire, flood, termites, and accidents to people.
- Financial assets involve the ownership of assets that are typified by pieces of paper and are often marketable. Examples are stocks and bonds. Risk such as industry or company risk in investing can be covered by diversification strategies.
- Financial liabilities are monies owed to others, as, for example, debt. Having significant debt increases household risk. When negative events reduce cash flow individuals can become vulnerable. Reducing debt, placing caps on rates borrowed when they are available, and accumulating precautionary savings can serve to reduce this risk.
- Intangible Liabilities are less quantifiable current liabilities such as potential liabilities to third parties. Care of personal property, such as shoveling your sidewalk after a snowstorm, and safety precautions also can be employed
Implementation is taking the action step. Sometimes people have difficulty implementing a risk management strategy. Setting an implementation plan with specific dates to accomplish tasks can help.
6. Review
Risk management exposures can change. For example, a policy for household possessions may become insufficient over time because of inflation and new acquisitions. It is a good idea to review exposures at leasts once a year.
That is a brief explanation of the steps of the risk management process. hopefully useful for those of you who read this blog. Finally, I just can say ALHAMDULILLAH I can finish this blog and thank you very much... wassalamualaikum
resources : Personal Financial Planning, Lewis J. Altfest, McGrawHill 8th ed. (LA)
Picture : me123chan.wordpress.com
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