Fundamentals of Risk and Insurance

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When you have finished this chapter, you should be able to
• Describe the evolution of modern risk management and identify the developments that led to the transition from insurance management to risk management
• Define and explain what is meant by the term risk management
• Identify the various reporting relationships that the risk management function may assume in an organization
• Identify the two broad approaches to dealing with risk that are recognized by modern risk management theory
• Identify the four techniques that are used in managing risk
• Describe risk management’s contribution to the organization
• Distinguish risk management from insurance management and general management

Risk management is a scientific approach to the problem of risk that has as its objective the reduction and elimination of risks facing the business firm.

Risk management evolved from the field of corporate insurance buying and is now recognized as a distinct and important function for all businesses and organizations. Many business firms have highly trained individuals who specialize in dealing with pure risk. In some cases this is a full-time job for one person, or even for an entire department within the company. Those who are responsible for the entire program of pure risk management (of which insurance buying is only a part) are risk managers.

Although the term risk management is a recent phenomenon, the actual practice of risk management is as old as civilization itself. In the broad sense of the term, risk management is the process of protecting one’s person and assets. In the narrower sense,

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