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Risk Management as a Decision Making Process

Risk management is the process by which organizations make decisions to increase value by reducing the adverse consequences of risk.  The study of risk management provides students and business practitioners with a conceptual framework for making risk and insurance decisions to increase business value and individual welfare.  While flexible in application, the decision framework incorporates the following major elements:

  1. Setting objectives for managing the variability of outcomes to achieve the overall goal of risk management;
  2. Identifying and evaluating risk exposures that may adversely affect the objectives;
  3. Identifying and analyzing alternative tools of managing risk;
  4. Implementing the chosen tools;
  5. Monitoring results of the decisions; and
  6. Taking corrective action on a cost effective basis.

Within this framework, risk pooling through traditional insurance markets is one of several methods for managing risk.  Other major methods include alternative pooling arrangements, risk retention, risk avoidance, loss control, and non-insurance risk transfer arrangements including hedging and hold harmless agreements.