introduction to risk management. basic areas: -defining risk management -objectives of risk...
TRANSCRIPT
Introduction Introduction to Risk to Risk
ManagemeManagementnt
Basic areas:
- defining risk management- objectives of risk management- the risk management process - personal risk management
program
Meaning of Risk Management
Definition of Risk Management
A systematic process for:
-the identification and evaluation of pure loss exposures faced by an organization or individual
-and for the selection and administration of the most appropriate technique for treating such exposures.
Not the Same as Insurance Management
Risk management is a broader concept.
Insurance is one of several methods the risk manager can use to treat loss exposures.
Risk management provides for the periodic evaluation of all techniques for meeting losses, not just insurance.
Types of Pure Risks
1- Personal Risks
2- Property Risks
3- Liability Risks
Major personal risks include the following:
Death or total disability of one or both parents and the subsequent loss of tuition support
possible injury while skiing or surfing catastrophic medical bills and loss of
income if Jennifer becomes seriously ill or totally disabled
involuntary loss of part-time job and a subsequent reduction in total income
Major property risks include the following:
Physical damage to personal property because of a fire, tornado, or other cause Theft of personal property Physical damage or theft of the sports car Theft of the trumpet which could jeopardize her position in the college band
Major liability risks include the following:
Driving an automobile while under the influence of alcohol
Legal liability arising out of injury to another skier or surfer
Legal liability arising out of activities as a student that accidentally cause property damage or bodily injury to
others
Objectives of Risk Management
A risk management policy statement offers several advantages.
Such a policy statement is necessary in order to have effective administration of the risk management program.
The policy statement states the risk management objectives of the firm and company policy with respect to treatment of the loss exposures.
In addition, a risk management statement has the advantage of educating top-level executives in the firm about the risk management process.
Also, the written policy statement enables the risk manager to have greater authority throughout the firm.
Finally, the policy statement provides a standard for judging the risk manager's performance.
Pre-loss Objectives:
- Economy goal
- Reduction of anxiety
- Meet any legal obligations
Post-loss Objectives:
-Survival of the firm
-Continued operation
-Stability of earnings
-Continued growth
-Social responsibility
Risk Management Process
Steps in the Risk Management ProcessSteps in the Risk Management Process
Identifying Potential Losses
Types of potential losses:
- Property loss exposures- Liability loss exposures- Business income loss exposures- Human resources loss exposures- Crime loss exposures- Employee benefits loss exposures- Foreign loss exposures
Major loss exposures and techniques for handling the loss exposure include the following:
Physical damage to a bus in an accident
(can be handled by a commercial auto policy, by retention of part of all of the
loss exposure, and by loss control activities to reduce the possibility of an
accident)
Suits arising out of injuries to children in a bus accident
(can be handled by a commercial auto policy, by loss control such as a defensive driving course, and by avoiding hiring drivers with poor
driving records)
Suits arising out of bodily injury or property damage to other motorists or
pedestrians
(can be handled by a commercial auto policy, by loss control such as a defensive driving course, and by
avoiding hiring drivers with poor driving records)
Physical damage losses to the three garages from natural disasters or other
perils
(can be handled by a commercial property insurance policy and by
retention of part of the exposure by a sizable deductible)
Loss of business income if the firm is unable to operate
(can be handled by business income insurance that covers the loss of
business income and extra expenses that continue during the shutdown
period and by loss control activities to reduce the possibility of a loss)
Workers compensation claims if a bus driver or other employees are injured in
a work-related accident
(can be handled by workers compensation insurance and by self-
insurance)
Death or disability of a key executive
(can be handled by loss control, such as an annual physical exam, and by
having other employees trained to take over the duties of the key executive)
Tools for recognizing loss exposures:
- Risk analysis questionnaires- Physical inspection- Flow charts- Financial statements- Historical loss data
Evaluating Potential Losses
Two concepts:
- Loss frequency- Loss severity
This is important so that the various loss exposures can be ranked according to their relative importance.
In addition, the relative frequency and severity of each loss exposure must be estimated so that the risk manager can select the most appropriate technique, or combination of techniques, for treating the loss exposure.
Guidelines for measuring severity:
- Maximum possible loss
- Maximum probable loss
The maximum possible loss is the worst loss that could possibly happen to the firm during its lifetime.
The maximum probable loss is the worst loss that is likely to happen.
Selecting the Appropriate Technique
Risk control
Risk control refers to techniques that reduce the frequency and severity of accidental losses.
- Avoidance- Loss control
Risk financing
Risk financing refers to techniques that reduce the frequency and severity of accidental losses.
-Retention (can be used if no other method of
treatment is available, the worst possible loss is not serious, and losses are highly predictable)
Sources of funds to pay losses if retention is used in a risk management program include the following:
Pay losses out of current cash flow. Establish a funded reserve. Borrow from a bank by arranging a
credit line in advance of a loss. The company may be able to join a
trade association that owns a captive insurer.
-Non-insurance transfers(contracts, leases, and hold-harmless
agreements)
-Commercial insuranceFactors to be considereda. selection of insurance coveragesb. selection of an insurer or insurersc. negotiation of terms of the insurance
contractd. dissemination of information to others in
the firm concerning the insurance coverages e. periodic review and evaluation of the insurance program
The major advantages of commercial insurance include:
- indemnification after a loss occurs, - reduction in uncertainty, - availability of valuable risk management services, -and the income-tax deductibility of the premiums.
The major disadvantages of commercial insurance include:
-the cost of insurance, -time and effort that must be spent in negotiating for insurance, -and a possible lax attitude toward loss control.
Implementing the Program
Policy statement
Cooperation with other departments
Periodic review
Personal Risk Management
