What is Social Risk Management? Explained

What is Social Risk Management? Explained

Once more, social protection has assumed a central position in the growth agenda. The policy makers have realized how crucial it has become in the pursuit of inclusive development after previously dismissing and disregarding it. It is now at the core of plans to accomplish the Millennium Development Goals (MDGs). In order to combat poverty and lessen the degrees of vulnerability experienced by different communities in our society, social protection has emerged as a crucial measure. Social Risk Management (SRM), a conceptual framework for social protection principally created by the World Bank. It represents an effort to depart from the conventional social protection practices and procedures. It works at developing affordable tools to mitigate the danger that vulnerable groups are exposed to. The readers will be able to comprehend the following by the blog's conclusion:

  • Social Risk Management and its conceptualisation 
  • Social Risk Management’s efficacy as a policy measure 
  • Ongoing Evolution of SRM tools to reduce Vulnerability

Content

  1. Introduction
  2. Social Risk Management Framework
  3. Sources and Characteristic of Risk
  4. Risk Management Strategies
  5. Role of Social Risk Management in Public Policy
  6.  How to Operationalise Social Risk Management
  7. Relevance of Social Risk Management
  8. Conclusion

Introduction

One of the conceptual frameworks for social protection is social risk management. SRM was developed as a way to smooth out household income and consumption patterns and lessen the financial vulnerabilities that a household experiences. Shocks or crises initially impair people's wellbeing, which then further encourages them to use regressive coping strategies. For instance, a terminal disease in a family will first affect their consumption habits, driving them into poverty. Second, the family will turn to retrograde coping strategies like pulling kids out of school and putting them to work or selling off cattle or land. Such a double impact necessitates ex-ante and ex-post risk management planning to ensure the safety of vulnerable communities.

Using the three main risk management principles of avoiding, mitigating, and coping, social risk management has been designed to modernize traditional social protection measures like labor market intervention, social insurance, and social assistance laws. The formalities for putting these plans into action are unofficial, market-based, and open to participants like people, households, communities, NGOs, the government, and international organizations. Social risk management encourages people to take more risks in order to support economic growth in the economy, in addition to lowering the risk of shocks and crises for disadvantaged populations. It focuses on weaker communities that lack risk management tools to protect their interests, which deters them from engaging in risky but highly lucrative economic activities that could eventually help them escape persistent poverty. To provide better jobs, more security, and greater equity, SRM has a strong foundation in risk and vulnerability assessments. So, while offering tools for risk management to lessen the effects of economic shocks and crises, SRM also attempts to increase communities' risk appetite for taking on rewarding livelihood activities that promote economic growth. Joneson (2000)

Traditional social protection measures are expensive and have financial ramifications for governments, particularly developing ones, striving to protect the welfare of their disadvantaged citizens. As a result, SRM seeks to reexamine established social protection programs in order to produce cost-benefit risk management tools that are appropriate for developing economies and don't jeopardize the country's financial stability.

Triggers

The East Asian financial crisis served as a significant impetus for the creation of SRM as a social protection framework. Higher growth rates were realized to be an insufficient strategy for reducing poverty during this crisis. The gap between the "haves" and "have-nots" was widening dramatically even as growth rates were skyrocketing, making many communities particularly vulnerable to the new forces of the open economy. The main impetus for policymakers to develop a risk management tool to protect the interests of those at the bottom of the pyramid has been a growing need to confront the mounting dangers from globalization.

This also made it necessary to comprehend hazards and poverty more thoroughly. The conventional view of poverty as a condition brought on by a lack of assets seemed insufficient to develop pro-poor policies. The agencies were able to concentrate on both ex-ante and ex-post planning for risk management thanks to a comprehensive understanding of poverty and the vulnerability of non-poor people to falling into poverty. Second, persons are susceptible to a variety of risks that are either covariant (shared more generally) or idiosyncratic (unique to themselves). One of the main causes of people's temporary or persistent poverty in such situations is the absence of risk management tools. Additionally, a lack of exante protective mechanisms (risk management tools) makes people less willing to take risks, which makes them avoid riskier but financially successful initiatives and limits their ability to grow. This highlights the necessity for social protection programs to assist people in managing hazards. Effective risk-management tools will also increase productivity and help individuals escape poverty permanently. Thus, one of the most crucial methods to combat poverty will be to enhance the risk-management skills of the vulnerable communities both ex-ante and ex-post.

Social Risk Management Framework

Social risk management is founded on two main ideas, with the following implications for the most vulnerable:
  1. Principles
    • The poor are typically most exposed to diverse risks, ranging from natural to man-made risks and from health to political risk
    • The poor have the fewest instruments to deal with these risks
  2. Consequences
    • The poorare the most vulnerable in society because shocks arelikely to have the strongest welfare consequences forthem
    • High levels of vulnerability cause thepoor to be risk averse and thus unable or unwilling toengage in higher risk/higher return activities.
Accordingly, based on the aforementioned justification, having access to stronger exante and ex-post risk management tools will encourage people to take on more risk (for higher rewards) in order to gradually escape poverty.

The idea of asymmetric information in a world of varied hazards serves as the foundation for the entire system. This has some effects on how risk management tools are planned, including:
  • The kind of risk will determine the formality and type of risk management tool. For instance, whereas idiosyncratic hazards require informal risk management tools, covariant risks demand for state involvement. The poor are often most susceptible to a variety of dangers, including environmental and man-made risks, health risks, and political risks. The least number of tools are available to the impoverished to manage these hazards. Because shocks are likely to have the biggest welfare effects on the poor, high levels of vulnerability make the poor risk averse and prevent them from engaging in higher risk/higher return activities. Consequences The impoverished are the most susceptible in society.
  • The risk management tools must be both ex-ante and ex-post because it is not an exogenous issue. Ex-ante will assist in preventing risks and mitigating their effects, while ex-post will assist in coping with risk impacts without further deteriorating. This will cater to three tiers.
  • Three institutional procedures exist to mitigate risk: informal (family and community), market-based (private actors), and publically funded procedures (State and international organizations).
  • Finally, a variety of entities, including homes, communities, NGOs, the market, states, and international organizations, provide risk management tools.

Sources and Characteristic of Risk

The kind of risk management tool to be used will depend on the kind and type of risk. When creating the risk management tool, four components of risks—sources, correlation, frequency, and intensity—are examined.
  • Sources: Risk can come from both natural (like floods and droughts) and man-made (like inflation or recession) sources.
  • Correlation: Some hazards are uncorrelated (idiosyncratic), which are individual specific, such as the loss of a family's breadwinner, while others are correlated (covariant) where individuals as a whole are harmed.
  • Dangers may repeat themselves or group together with other risks on a regular basis.
  • Intensity: Depending on their effects on human welfare, these events may be catastrophic or not.
In accordance with these features, risk management tools can be developed, for example, in the case of idiosyncratic risks, informal and market-based risk management tools can work while they fall short in the case of covariant risks, which can be easily managed by public institutions.

Risk Management Strategies

Strategies for managing risk under SRM include definite goals like:
  • Preventive Strategies: The main goal of these strategies is to stop the danger from occurring. These regulations are meant to make the ecosystem risk-proof. for instance, sensible macroeconomic or environmental measures.
  • Mitigation strategies: These strategies are also used in advance of the risk. These steps are made to lessen how much risk can affect both people and the community. For instance, a double cropping strategy can reduce the likelihood of crop failure.
  • Coping strategies: These strategies assist individuals in surviving the effects of dangers without suffering significantly. an individual loan from friends and family, for instance, to get through a period of unemployment
There are numerous arrangements, such as informal arrangements, which typically entail family and community assistance, to carry out such strategies. These are primarily employed when taking idiosyncratic risks, such as when buying or selling real estate or borrowing money from relatives or friends. People frequently employ market-based arrangements such as money, banks, and insurance companies when faced with idiosyncratic and covariant risks. Finally, public arrangements are put in place when informal and market-based arrangements fall short of mitigating risk; these are the contemporary welfare states that guarantee to protect the wellbeing of the populace.

Role of Social Risk Management in Public Policy

It is necessary to develop synergies between social protection and other risk management tools. As soon as the various actors recognize the importance of SRM, appropriate risk management tools may be created using the appropriate institutions to combat poverty and advance economic development. Second, the right combination of ex-ante and ex-post instruments, or risk management strategies, should be in place to safeguard people's wellbeing. The focus of current strategies, which largely revolve around people's coping mechanisms, should be shifted to preventive and then mitigating measures. Thirdly, social protection should help to better match the demand for and supply of social risk management tools. While the government can offer the necessary risk management tools, a combination of unofficial and commercial tools must also be used, depending on the needs of the most vulnerable groups. Finally, official social protection must not displace risk management tools because each source of tools has a unique benefit that must be taken full use of. (Robert Holzmann, 2003)

How to Operationalise Social Risk Management

One of the key criteria for creating social risk management tools is assessing vulnerability. In order to comprehend vulnerability's nature and the sorts of risk that exacerbate it, it is important to define, formalize, and quantify it. The World Bank's definition of vulnerability is that it is equivalent to expost risk of consumption, low education, malnutrition, and health issues. Other definitions of vulnerability include the high probability of becoming poor, the volatility in a household's consumption pattern, the utility lost due to risk, and finally the utility lost due to risk. There are therefore many approaches to operationalize vulnerability's concept and comprehend it.

Once vulnerability has been identified, a risk vulnerability assessment is carried out to put social risk management into practice. This investigation of the risk-vulnerability relationship helps create appropriate tools by enabling comprehension of the relationship between the two. To accomplish this,
  • Adopting ex-ante perspective about the household or the unit of analysis and its correlation with the vulnerability 
  • Analysing the sources of household vulnerability as an outcome of exposure to shocks and level of resilience to cope up during these shocks
The following inquiries are addressed using a diagnostic instrument called a risk-vulnerability assessment (RVA):
  • What are the sources of vulnerability to poverty, what kind if shocks cause the largest damage? 
  •  Compare these risks to the available public intervention aimed at managing the social risk 
  •  List out the policy gaps i.e the list of interventions required to address the vulnerability and manage the risks, using different institutions and arrangements for the same.
In order to assist organizations in analyzing the scenarios and subsequently creating risk management tools, the World Bank has created a handbook to RVA. The following information about the parameters is contained in this handbook, which the World Bank and numerous think-tank organizations around the world have compiled:
  • a list of the risks and shocks information that can be gleaned from a normal LSMS;
  • a  list of the vulnerability-related policy queries that can be researched using the data at hand;
  • a sample module for risks, shocks, and how households react to shocks in multi-topic household surveys.

Relevance of Social Risk Management

Traditional social protection programs can benefit from the conceptualization of a Social Risk Management framework to enhance their outreach and design. The following are the few public interventions that have utilized SRM: A preventive measure to ensure the income flow in any home is labor market intervention. There are three different types of public labor market intervention: rules, active and passive labor market policies, and wage setting. Second, under this program, various social risk management arrangements are developed for the old age pension system. The first of these is the social pension arrangement, which is fully funded. The second is the mandated funded and unfunded scheme, and the third is the voluntary saving arrangements. These agreements support the person's ability to pay as well as his or her risk profiles and preferences. (Kozel, 2007)

The SRM framework has also contributed to changing the function of safety nets from one that prioritizes equity to one that emphasizes efficiency. This speaks of a combination of conditional or unconditional transfers that will support children's nutritional needs while also assisting in keeping them in school. Because of this, SRM has assisted in tackling significant risks in developing nations through new and creative policies and programs developed in cooperation with members of the humanitarian community. A concept of poverty that looks to the future and emphasizes vulnerability to poverty has been presented by the SRM framework. Given that many individuals live on the edge of poverty and that a single shock or catastrophe may easily drive them below it, risk-management tools for both these households and homes that are below the poverty line are essential necessary for the long-term reduction of poverty.

Conclusion

Social risk management is a conceptual framework that can be applied by different nations depending on their contextual realities and characteristics. This conceptual framework is constantly being updated and expanded to reflect the rapidly shifting political, social, and economic environments. Its primary goal is to dispel the idea that efficiency and equity must be sacrificed; instead, it seeks to open up a path where both objectives can be pursued concurrently. SRM offers us a fresh perspective on the conventional social safety nets and enables us to address vulnerability and advance inclusive development in novel and sophisticated ways.

References 

  • Jorgenson, R. H. (2000, February). Social Risk Management: A new conceptual framework for Social Protection and beyond. World Bank. 
  • Kozel, R. H. (2007). The Role of Social Risk Management in Development: A World Bank View. IDS Bulletin Volume 38.
  •  Robert Holzmann, L. S.-B. (2003). Social Risk Management: The World Bank’s Approach to Social Protection in a Globalizing World. Washington DC: World Bank.

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