Unit 2: Identification & evaluation of risk
Risk Management and Insurance notes · PTU syllabus (BCOP 622-18)
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Unit summary
Before a risk can be managed, it must be perceived, traced to its causes and evaluated. This unit covers tools for perceiving risk, methods for determining operative causes of peril, safety audits, risk avoidance and reduction, the role of surveyors, retention of risk and captive insurance companies.
After this unit you can
- Explain tools and techniques for risk identification
- Explain methods for determining causes of loss and conducting safety audits
- Explain risk avoidance, reduction and the role of surveyors
- Explain risk retention and captive insurance companies
PTU syllabus topics
- Tools and techniques for perceiving risk
- methods for determining operative causes of peril
- safety audits
- risk avoidance and reduction methods
- role of surveyors
- retention of risk
- captive insurance companies
- 1Identify
List possible risks
- 2Measure
Likelihood and impact
- 3Choose a method
Avoid, reduce, retain, transfer
- 4Implement
- 5Monitor and review
Topic 1
Tools and techniques for perceiving risk
Checklists and questionnaires
Standard lists of exposures
Financial statement analysis
Each asset, liability and income item reveals exposures
Flow charts
Process flows show bottlenecks and dependencies
Physical inspection
Site visits to plants and warehouses
Contract analysis
Liability assumed under contracts
Loss history analysis
Past loss records
Expert consultation and brainstorming
Insurers, engineers, staff
Risk registers and heat maps
Recording and prioritising risks
HAZOP and FMEA
Hazard and operability studies; failure mode and effects analysis
- Risk mapping / heat map: plots risks by likelihood and impact to prioritise attention.
Topic 2
Determining operative causes of peril; safety audits
- Root cause analysis: "5 Whys", fishbone (Ishikawa) diagram — people, process, equipment, materials, environment, management.
- Heinrich's domino theory: accidents result from a chain — social environment → fault of person → unsafe act or condition → accident → injury; removing the middle domino (unsafe acts/conditions) prevents the loss. Heinrich's ratio: 1 major injury : 29 minor injuries : 300 near misses.
- Energy release theory (Haddon): accidents are caused by uncontrolled release of energy; control the energy source.
- Fault tree analysis: works backwards from an undesired event to its causes.
Safety audits
- 1
Plan scope and team
- 2
Review documents
Policies, permits, past incidents
- 3
Inspect premises and processes
Fire safety, electrical, machinery, hazardous materials
- 4
Interview workers
- 5
Identify gaps against standards
Factories Act/OSH Code, NBC, IS 14489
- 6
Report and recommend
- 7
Follow up corrective actions
- Benefits: fewer accidents, legal compliance, lower premiums, safety culture.
Topic 3
Risk avoidance and reduction; role of surveyors
- Avoidance: abandoning or never undertaking a risky activity (not entering a hazardous product line). Limits: not always possible; may forgo profits.
- Loss prevention (reduce frequency): safety training, maintenance, quality control, security guards, driver training.
- Loss reduction (reduce severity): sprinklers, fire extinguishers, backups, disaster recovery plans, segregation of stocks, salvage.
- Duplication and separation: spare parts, multiple warehouses.
Role of surveyors and loss assessors
- Licensed by IRDAI (Insurance Surveyors and Loss Assessors Regulations); required for general insurance claims above ₹50,000 (₹1 lakh for some motor claims).
- Pre-insurance (risk inspection) surveys: assess hazards and recommend improvements; help underwriting and premium fixation.
- Post-loss surveys: investigate cause, assess loss, verify policy coverage, recommend settlement, detect fraud, advise on salvage.
- Must submit the report within 30 days (extendable) of appointment.
Topic 4
Retention of risk and captive insurance companies
- Retention is appropriate for low-severity, predictable losses, when insurance is unavailable or too costly, or when the firm can absorb losses.
- Methods: current net income (expense losses), unfunded reserve, funded reserve (self-insurance fund), credit lines, deductibles and excesses in policies, captive insurer.
Captive insurance companies
A captive is an insurance company owned by a non-insurance parent to insure the parent's (and affiliates') risks.
Single-parent (pure) captive
Owned by one company
Group/association captive
Owned by several firms in an industry
Benefits
Lower premiums, cover for hard-to-insure risks, direct access to reinsurance, cash-flow and investment income, better loss control
Limitations
Capital needed, regulatory requirements, adverse loss years, tax scrutiny
- In India, Budget 2024–25 and IRDAI reforms allow captive insurers in GIFT City IFSC; domestic captives are under consideration with reduced minimum capital proposals.
Exam tip
Self-insurance is a planned, funded retention; non-insurance (doing nothing) is passive retention — distinguish them clearly.
Key terms
- Risk heat map
- Chart ranking risks by likelihood and impact
- Domino theory
- Heinrich's model of accident causation
- Safety audit
- Systematic review of safety practices against standards
- Surveyor
- IRDAI-licensed professional who inspects risks and assesses losses
- Captive insurer
- Insurance company owned by a non-insurance parent to insure its risks
Quick revision
- Identification tools: checklists, statements, flow charts, inspections, HAZOP, heat maps.
- Causes: root cause, fishbone, domino theory, fault tree.
- Safety audit: plan → review → inspect → gap analysis → report → follow-up.
- Surveyors: pre-insurance and post-loss surveys (claims above ₹50,000).
- Retention: deductibles, funded reserves, captives.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is a risk heat map?
- Q2.State Heinrich's domino theory.
- Q3.What is a safety audit?
- Q4.What is the role of a surveyor in insurance?
- Q5.What is self-insurance?
- Q6.What is a captive insurance company?
Long-answer questions
- Q1.Explain tools and techniques for risk identification.
- Q2.Explain methods of determining causes of loss and the safety audit process.
- Q3.Explain risk avoidance, loss control and the role of surveyors.
- Q4.Explain risk retention and captive insurance companies.
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