RISK MANAGEMENT AND INSURANCE

Risk management is general includes risk identification, risk estimation and risk prioritization. The same can be said about in financial world as well, the only difference being the risk involved in financial world is related to money. The two major financial risks are credit risk and market risk so financial risk management primarily focuses on these two risks. There is other kind of risk as well they are Shape risk, market volatility risk, sector risk, money liquidity risk, foreign exchange risk inflation risks etc It must be know that no business is free of risks. It is usually said that higher the risk higher the return.

Risk management deals with hedging and other method to reduce the loss. Risk management is essential because whenever the outcome of the business goes just the opposite to that of expected outcome, the investor tend to loose some amount from investment. In order to reduce these loss hedging are done. Insurance can be termed as one form of hedging.  It must be noted that the hedging too do need some investment to be made. However the investment in the hedging will negligible in comparison to the investment.

The first and foremost in any risk management is the identification of the risk and risk magnitude. The risk manager is the one who take care of these risks in any business of large magnitude. The risk manager must be in a position to identify them. The next important factor that the risk manager must know is how to over come the risk, in case of its occurrence. The handling of these risk depend to a large extend on the efficiency of the risk manager.

Some of the most commonly followed risk management techniques are investment diversification, cross hedging, market study etc. However there are some risks which cannot be predicted that includes naturally caused risk, government policy etc.

Insurance is nothing but process of transferring the risk to some other insurance company by paying premium for it. Insurance involves gathering funds from many insured entities in order to pay for relatively uncommon but severely devastating losses which can occur to these entities, thus the entities are free of risk. The loss occurred due to the risk will be bared by the insurance company. The loss may be in most of the case either accidental or naturally caused. The main advantage of the process of insuring is that the investor can invest in his/her business without worrying much about the unexpected loss.