AINS Risk Management

Question 1

Traditional Risk Management’s Role

Answer 1

traditionally, the risk management professional’s role has been associated with loss exposures related mainly to purse as opposed to speculative, risk. This view excludes from the scope of risk management all loss exposures that arise from speculative risk, also referred to as business risk. Therefore organizational risk management has focused on managing safety, purchasing insurance, and controlling financial recovery from losses generated by hazard risk.

Question 2

Enterprise-wide risk mangament

Answer 2

term commonly used to describe the broader view of risk management that encompasses all types of risk. ERM is an approach to managing all of an organization’s key risks and opportunities with the intent of maximizing the organization’s VALUE.

ERM approach allows an organization to integrate all of its risk management activities so that the risk management process occurs at the enterprise level, rather than the departmental or business unit level. how it’s implemented varies significantly among organizations, depending on their size, nature, and complexity.

Question 3

Risk Management Processes

Answer 3

all risk management processes are designed to assess, control, and finance risk.

Question 4

Individuals practice risk management to

Answer 4

protect their limited assets from losses and to help meet personal goals

Question 5

for an organization, sound risk management adds

Answer 5

value and helps to ensure that losses or missed opportunities do not prevent it from meeting its goals

Question 6

many organizations have traditionally focused their risk management efforts on ____ risks, the emerging discipline of enterprise-wide risk management is focused on managing all of an organization’s pure and _____ risk.

Answer 6

pure

speculative

Question 7

for individuals, risk management is usually an:

for smaller organizations:

for larger organizations:

Answer 7

informal series of efforts, not formalized, purchase insurance polices to cover accidental or unexpected losses, or they contribute to savings plans so that they have money available to cover unforeseen events.

not usually a dedicated function, but one of the many carried out by the owner or senior manager.

risk management function is conducted as part of a formalized risk management program which is for planning, organizing,leading, and controlling the resources and activities that an organization needs to protect itself from the adverse effects of accidental losses.

Question 8

Traditionally, the risk management professional’s role has been associated with loss exposures related mainly to pure, as opposed to _____.

Answer 8

speculative

This view excludes from the scope of risk management all loss exposures that arise from speculative risk, also referred to as business risk. thus, organizational risk management has focused on managing safety, purchasing insurance, and controlling financial recovery from losses generated by hazard risk.

Question 9

Risk Management Process: 6 Steps

Answer 9

1. identify loss exposures
2. analyze them
3. examine feasibility of risk management techniques
4. select appropriate risk management techniques
5. implement them
6. monitor the results and revise the risk management program

Question 10

Identifying Loss Exposures

Answer 10

developing a list of accidental losses starting with a physical inspection of the premises

also look at loss exposure surveys- documents listing potential loss exposures that a household or organization may face, using them as a guide in developing a comprehensive picture of the organization’s operations and loss exposures

Loss history analysis- organization’s past losses and can assist the risk manager in identifying future and accidental loss exposures, would want to use well document, complete organized loss history reports. Data quality is reduced when a loss is omitted, any item of info that would normally be collected is omitted, etc.

Question 11

Analyzing Loss Exposures

Answer 11

requires estimating how large a possible loss could be and how often it might occur, helps to determine how losses may interfere with the activities and objectives of the household or organization and what their financial effect may be.

Surveys or checklists are used to identify loss exposures. Surveys usually group questions on similar exposures together, because surveys may omit important exposures especially if the organization has unique operations not included on a standard survey form, risk managers cannot depend solely on them but rather use them as a guide.

Question 12

Analyzing Loss Exposures: Loss Frequency

Answer 12

the number of losses that occur within a specified period.

accurate measurement of the loss frequency is important because the proper treatment of the loss exposure often depends on how frequently the loss is expected to occur. if a particular type of loss occurs frequently, or it has been increasing in recent years, then the risk manager might decide that the procedures for controlling this risk is necessary. on the other hand, a risk that rarely occurs or has been decreasing may determine that it wouldn’t be cost-effective to implement corrective procedures.

Question 13

Analyzing Loss Exposures: Loss Severity

Answer 13

amount of loss, typically measures monetarily, for a loss that occurred.

easier to gauge the potential severity of property loss than it is for liability as most property loss has a finite value. But for liability loss it can almost be unlimited.

properly estimated loss severity is essential in treating the loss exposure, as the potential severity of losses is a major consideration in determining whether the household or organization should insure a particular exposure or retain all or part of the financial consequences of the loss.

Question 14

Examining Feasibility of Risk Management Techniques are grouped into two broad categories which are:

Answer 14

Risk Control and Risk Financing

Question 15

Examining Feasibility of Risk Management Techniques: Risk Control

Answer 15

attempts to decrease the frequency and/or severity of losses or make them more predictable. Avoidance, loss prevention, loss reduction, separation, duplication are some common ones.

Question 16

Examining Feasibility of Risk Management Techniques: Risk Control: Avoidance

Answer 16

eliminates a loss exposure and reduces the chance of loss to zero

for ex: a manufacturer of sports equip may decide to not sell football helmets to reduce potential lawsuits from head injuries
a family may decide to not buy a boat to avoid potential property and liability exposures that accompany owning a boat

Disadvantage: it is sometimes impractical and often difficult to accomplish. Like, deciding to not buy a car to avoid the exposures, but needing one to commute to work or other activities? But forgoing a car would mean traveling by public transportation, by bike, on foot could prove more hazardous that by car.

Question 17

Examining Feasibility of Risk Management Techniques: Risk Control: Loss Prevention

Answer 17

seeks to lower the frequency of loss from a particular loss exposure

for ex. keeping doors locked, regular vehicle maintenance

Question 18

Examining Feasibility of Risk Management Techniques: Risk Control: Loss Reduction

Answer 18

seeks to reduce the severity

for ex: sprinkler system, safe

Question 19

Inspection Report

Answer 19

one of the best sources of UW info and it supplements the application for a commercial insurance account.

an inspection report usually has two main objectives:

1) to provide a through description of the applicant’s operation so that the underwriter can make an accurate assessment when deciding whether to accept the application for insurance
2) to provide an evaluation of the applicant’s current risk control measures and recommend improvements in risk control efforts. the UW may require that the applicant implement the risk control recommendations for the application to be accepted.

Question 20

Examining Feasibility of Risk Management Techniques: Risk Control: Seperation

Answer 20

isolates loss exposures from one another to minimize the adverse affects of a single loss

for ex. using multiple warehouses to store inventory, using several suppliers

Question 21

Examining Feasibility of Risk Management Techniques: Risk Control: Duplication

Answer 21

using backups, spares, copies of critical property, information, or capabilities and keeps them in reserve

for ex. storing copies of key documents or info at another location

Question 22

Examining Feasibility of Risk Management Techniques: Risk Financing: Retention

Answer 22

for loss exposures that haven’t been avoided or transferred are then retained. this involves the acceptance of the costs associated with all or part of a particular loss exposure

used because perhaps insurance is not available or is too expense

for ex. purchasing collision coverage on a fleet of older vehicles is not worth the premium and may decide to retain the organization’s exposure by paying for any collision losses from the company’s operating funds.

unintentional retention may result from inadequate exposure identification and analysis or from incomplete evaluation of risk management techniques.

for ex. a restaurant may fail to identify its liability exposure for serving too much alcohol and therefore not purchase liquor liability insurance

can be total or partial retention (10,000 per building deductive on a commercial prop insurance policy is a partial retention; a couple opting out of flood insurance is total retention)

in the long run, retention is less expensive since paying a premium also involves paying the insurers’ overhead, taxes, expenses, etc. BUT, many people and organizations do not have the financial means to retain more than a small amount of their losses

Question 23

Examining Feasibility of Risk Management Techniques: Risk Financing: Transfer

Answer 23

businesses often treat loss exposures by noninsurance risk transfer, a risk financing technique in which one party transfer the potential financial consequences of a particular loss exposure to another party that is not an insurer.

for ex a landlord of a commercial building making the tenant sign a hold-harmless agreement which holds the tenant to an agreement that they’ll pay to indemnify the landlord of any damages the landlord becomes legally obligated to pay because of injury or damage occurring on the premises occupied by the tenant.

Getting insurance is another transfer technique

Question 24

Selection Based on Financial Criteria

Answer 24

objective of increasing profits and/or operating efficiency

Question 25

Selection of financial Based on Informal Guidelines

Answer 25

Four guidelines might be used in selecting techniques:
1) do not retain more than you can afford to lose. For example if a family has only like $500 in savings, it wouldn’t be feasible to carry a $1,000 deductible on either its homeowners or personal automobile policies.

2) do not retain large exposures to save a little premium. a risk manager should not retain a loss exposure with high potential severity such as auto liability in order to save a small amount of insurance premium. If a family’s residence burns to the ground, the severity of the loss would be great, one such loss would cost the family many times in annual insurance premium, so the family should fully insure the residence but use an appropriate deductible to desire the policy premium.
3) do not spend a lot of money for little protection. risk managers should spend insurance dollars where they will do the most good. if the exposure is almost certain to lead to a loss, the insurer must charge a premium close to the expected cost of the loss plus a portion of the insurer’s overhead, premium taxes, and profit. for loss exposures with high frequency and low severity, retention and risk control are usually the best alternatives. for example, a family may choose a higher deductible on auto physical damage coverage and use that savings to buy umbrella insurance to provide coverage for the infrequent but severe liability losses exceeding their homeowners or auto policy limits.
4) do not consider insurance a substitute for risk control.

Question 26

Implementing the Selected Risk Management Techniques: Deciding What Should Be Done

Answer 26

one the risk management has been decided, it’s time to implement them.

for ex a supermarket is getting a sprinkler system. now the risk manager needs to decide how much the market can afford, what kind to install, and which contract should install it; needs to check on the local water supply and building permitts and what’s necessary to comply with local ordinances. also will want to minimize customer disruption.Also will need to make sure that appropriate property and liability coverates are in place during and after the installation and that the insurer gives an insurance credit for the sprinkler system.

Question 27

Implementing the Selected Risk Management Techniques: Deciding Who Should Be Responsible

Answer 27

the risk manager usually does not have complete authority to implement risk management techniques, must depend on other to implement the program based on their advice

larger organizations may have manuals, guidelines, and procedures for implementing risk management techniques

smaller organizations and households, the person making the risk management decisions is often the person implementing the program

Question 28

Implementing the Selected Risk Management Techniques: Communicating Risk Management Information

Answer 28

a risk management program must include a communication plan

large organizations generally rely on a manual that informs others of new exposures, techniques in place, how to report claims, etc.

Question 29

Implementing the Selected Risk Management Techniques: Allocating Costs of the Risk Management Program

Answer 29

in large organizations, the costs of risk control, retention, noninsurance risk transfers, and insurance, expenses of the risk management dept must be spread appropriately

in smaller orgs and households, allocating costs is also feasible. for ex. an employee of a small business may be required to pay the deductible arising from damage she caused to a company car

Question 30

Monitoring Results and Revising the Risk Management Program

Answer 30

monitoring the results of the risk management program is an ongoing activity because the needs of the household and organizations change over time. these programs should not be allowed to become outdated.

monitoring the program from handling routine matters such as updating fleets of vehicles by replacing those less roadworthy to other complex decisions

a household or organization should review its insurance program with its agent/broker each year

Question 31

Benefits of Risk Management to Businesses

Answer 31

access to affordable coverage as insurers are more receptive to good risk management versus those who rely solely on insurance for protection

better loss ratios and UW results

Broader coverage at lower premiums

increases opportunities for the insured as the possibility of future losses tends to make business owners and executives reluctant to undertake activities they consider to be risky, but a business that has an effective risk management program is better prepared to seek opportunities that could increase its profits

leads to achievement of business gals through better management of large loss exposures and it helps organizations achieve their business and financial goals in a cost-effective manner

Question 32

Benefits of Risk Management to Individuals and Families

Answer 32

helps to cope more effectively with financial disasters

helps individuals and families to cope more effectively with financial disasters that may otherwise cause a greatly reduced standard of living, personal bankruptcy, or family discord

help them continue their activities following an accident or other loss, reducing inconvenience

enables families and individuals to take more chances and make more aggressive decisions on ventures with the potential for profit

Question 33

Benefits of Risk Management to Society

Answer 33

businesses and families plan for financial crises, they will need less help from charitable agencies or the government

results in fewer disruptions in the economic and social environment, not subject to the big and sudden expense of bearing the cost of a loss

economic growth can be stimulated by effective risk management, because of fewer and less costly losses, funds can be available for other uses such as investments

Question 34

Benefits of Risk Managment to Insurers

Answer 34

creates a positive effect on an insurer’s UW reults, loss ratio, overall profitability

generally more knowledgeable about handling loss exposures, more likely to combine insurance with other techniques for handling loss exposures and therefore may incur and submit fewer claims

stimulates insurers to create innovative insurance products and maintain competitive prices and services. Professional risk managers seek to get the most for their insurance dollars and are often willing to pay higher premiums in exchange for greater insurance value. they may encourage insures to be more innovative and competitive in the products and services they provide.