1.5 Chapter Summary

This chapter introduced the concept of risk management, emphasizing that risk is often seen negatively as the chance of loss but also includes potential positive outcomes. Traditional risk management has historically focused on hazard risks—those associated with property, liability, and personnel—which are purely negative and insurable. In contrast, modern definitions, such as those from ISO 31000, consider risk as the effect of uncertainty on objectives, acknowledging that risks can have upsides and downsides. Enterprise Risk Management (ERM) emerged in the 1990s as a holistic approach that encompasses all types of risks (hazard, operational, financial, and strategic) and views them as interrelated, aiming to maximize shareholder value and manage risks to optimize the organization’s overall performance.

The chapter also discussed the evolution of risk management practices and the benefits of effective risk management for organizations and the broader economy. ERM enables organizations to manage risks comprehensively, facilitating better decision-making and improved outcomes. It helps reduce the cost and deterrence effects of hazard risks, manage the downside of risks, and take intelligent risks that maximize profitability. The practice also ensures compliance with legal and regulatory requirements. Effective risk management can minimize resource wastage, improve the allocation of productive resources, and reduce systemic risks, thereby supporting organizational stability and economic health. Basic risk measures such as exposure, volatility, likelihood, and consequences are crucial for identifying and analyzing risks, collectively forming the foundation for successful risk management.

OpenAI. (2024, May 24). ChatGPT. [Large language model]. https://chat.openai.com/chat

Prompt: Please take the chapter content in this document attached and summarize the key concepts into no more than two paragraphs. Reviewed by authors. 

• Consequences is a key term that is used to describe the impact or severity of an event that has occurred.
• Downside of Risk does not work in the organization’s favour, and the risk is a disadvantage.
• Enterprise Risk Management views risks as being interrelated and, in a sense, wraps its arms around all the organization’s risks, allowing the risks to communicate with others.
• Exposure refers to the level of risk faced by an organization that exists even in the absence of an actual loss with respect to gains or losses.
• Hazard Risk is pure risk, meaning that the outcome is one of loss, no loss, but no gains can be realized.
• Insurable Risks are hazard risks, which in turn are considered to be pure risks comprised of property, liability and personnel risks.
• Insurance Team: an individual with an insurance background who has the expertise to negotiate insurance contracts and manage claim settlements.
• Legal Team: an individual who performs legal functions as lawyers, legal experts, or legal specialists in the organization.
• Liability Risks are losses associated with the legal obligation requiring an individual to pay damages to others as a result of that person’s negligence.
• Likelihood is a key term that is used to measure the probability or frequency of an event occurring.
• Loss Control Specialist: an individual who has the expertise to perform physical risk inspections within the organization to identify risk and to make recommendations to minimize the frequency or severity of risk.
• Loss Reduction is comprised of pre-loss measures (before a loss occurs) and post-loss measures (after a loss occurs).
• Personnel Risks are losses associated with bodily injury, loss of life or income resulting from death or disability.
• Property Risks are losses arising from the destruction or damage to property.
• Risk Assessment is collectively referred to as the identification and analysis of risks.
• Risk ISO 31000 defines it as “the effect of uncertainty on objectives, whether positive or negative” (International Organization for Standardization, 2022).
• Risk Management is the process of assessing, treating, and monitoring all of an organization’s risks in order to minimize their adverse effects on the organization.
• Risk Manager: an individual who oversees the risk management process in the organization to protect its assets.
• Risk Officer: an individual with direct authority over the risk management team and reports to senior management.
• Speculative Risk, which is not the subject of insurance, involves a chance of loss, no loss but the realization of a gain.
• Traditional Risk Management places individual risks into silos.
• Upside of Risk means that the risk can be a benefit to the organization, meaning that the risk is an advantage.
• Volatility is a term applied to frequent fluctuations in the price of an asset.