Risk identification is a prime function of underwriting and marketing management. The employees and agents of insurance companies are trained to identify the risk and also quantify the amount of risk.
The risk is identified on the basis of economic and financial factors, accounting system, reputation, regulation and property and liability risk. The risks are managed by providing minimum interest rates, accounting guidance, premium calculation and knowing the unknown sources of risks.
Insurer uses rigorously technique to identify, monitor and manage the risks. Some of the techniques are stochastic modeling, value at risk, tail risk, and economic capita! calculations, stress tests and more and identify negative impact.
The U.S. Enterprise, Risk Management (ERM) uses culture, currency, regulation, economic factors, geographical differences, Time Zone Language, distance from home office, credentials, loss of control etc. are used for identification of a risk. Risk management involves identification, measurement and control of risk.
Identification of Risk :
Identification of risk is determination of risk where does it lie. The risk may be relating to property, Life, Liability and Nature. Fire, theft, damage, natural calamities are the various hazards.
The factors responsible for loss are identified and evaluated for the purpose. The insured and uninsured perils are identified. Replacement possibilities and operational expenses of business, revenue loss, normal levels of production, pre-loss situation and post-loss situation are studied to identify the risk.
The book value is the minimum loss value of the property because it denotes the purchase price and depreciation of the property. But it is not economic value which is the real loss of the property. Market value is very near to economic value. If the firm does not get value of the property i.e., no benefits of use of value, it will be equal to market value.
Replacement cost is considered for insurance as it is the cost of replacement of damaged property but it exceeds the market value as the new property value increases due to inflation, Fire insurance, marine insurance, motor insurance, machine insurance, profit insurance etc. are the methodologies of loss deduction due to risk.
Human life is exposed of several risks e.g., old. age, death, health, accident and so on. Some responsibilities such as education and marriage of children, starting of their career, business responsibilities, key men employees, etc. are also attached with human life. Life insurance policies, health insurance, keyman insurance etc. are prevailing to minimise the loss of human life.
Liability mainly legal liabilities arise because of contractual relationship. Third party insurance of motor insurance, product liability and professional liability and many new liabilities are added in recent years.
There are several other risks which influence the cost and production. Profit insurance is taken for the purpose. Machine breakdown and crop insurance etc. are the recent examples of other risks which are separately insured to reduce the loss can used by such risks.
Risks are measured using probability methods. Last experiences and variance analysis with standard deviation are used for measuring risks. The probability is modified with the present situation and future expectation.