Risk Management in Hotel Business

1) Briefly explain the difference between risk control, risk finance and risk transfer.

Risk control, risk finance and risk transfer are the 3 major methods of managing risk. These can be broadly classified as: (A) loss retention (includes risk control and risk finance), and (B) loss transfer. With retention, a business retains the obligation to pay for part or all of the losses itself, while risk transfer allows business to transfer risk to another party.

Risk control is the actions that reduce the expected cost of losses by reducing the frequency or the size of the losses. The pre-loss action that reduces the frequency of losses is called loss prevention methods and the post-loss action that reduces the severity of losses that do occur is called loss reduction methods. Such as smoke-activated sprinkler systems is loss reduction method. But many types of loss control influence both the frequency and the size of losses, such as airbags installed in cars.

Methods used to obtain funds to pay for losses that occur is called risk financing, which could be classified as pre-loss and post-loss methods. Funds that are set aside prior to a loss such as retained reserves or cash flows from ongoing activities are pre-loss risk financing. The post-loss risk financing, such as arranging overdraft from bank or contingent capital, are funds that are injected after a loss, but usually with pre-loss agreed terms, so that the firm don’t have to negotiate from a position of weakness.

Risk transfer includes buying insurance or finite risk insurance before loss take place or issue equities after a loss occur and let the shareholders share the risk in order to elicit a return. Hedging is also a way of transferring risk in financial markets. Basically,...

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...s in room rates and occupancy level. Also the Group’s reputation depends on the relationships with its external stakeholders and business partners.

There are two types of tactical risks impacts upon the Group. One is the risk of losing franchise and management agreements. This is an inherent risk for hotel industry and the Group’s light-asset business model. The intensive competition within the hotel industry may reduce the number of suitable business opportunities offered to the Group and may increase the bargaining position of property owners seeking to become a franchisee or manager.

IHG’s wide geographic spread and fee based model means that it is exposed to a wide range of risks. In general, events will affect specific hotels or in all but the most significant countries are not expected to have a material impact on the Group’s results. (IHG annual report, 2012)