AINS Risk Management Flashcards
Traditional Risk Management’s Role
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.
Enterprise-wide risk mangament
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.
Risk Management Processes
all risk management processes are designed to assess, control, and finance risk.
Individuals practice risk management to
protect their limited assets from losses and to help meet personal goals
for an organization, sound risk management adds
value and helps to ensure that losses or missed opportunities do not prevent it from meeting its goals
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.
pure
speculative
for individuals, risk management is usually an:
for smaller organizations:
for larger organizations:
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.
Traditionally, the risk management professional’s role has been associated with loss exposures related mainly to pure, as opposed to _____.
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.
Risk Management Process: 6 Steps
- identify loss exposures
- analyze them
- examine feasibility of risk management techniques
- select appropriate risk management techniques
- implement them
- monitor the results and revise the risk management program
Identifying Loss Exposures
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.
Analyzing Loss Exposures
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.
Analyzing Loss Exposures: Loss Frequency
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.
Analyzing Loss Exposures: Loss Severity
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.
Examining Feasibility of Risk Management Techniques are grouped into two broad categories which are:
Risk Control and Risk Financing
Examining Feasibility of Risk Management Techniques: Risk Control
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.
Examining Feasibility of Risk Management Techniques: Risk Control: Avoidance
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.
Examining Feasibility of Risk Management Techniques: Risk Control: Loss Prevention
seeks to lower the frequency of loss from a particular loss exposure
for ex. keeping doors locked, regular vehicle maintenance
Examining Feasibility of Risk Management Techniques: Risk Control: Loss Reduction
seeks to reduce the severity
for ex: sprinkler system, safe
Inspection Report
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.
Examining Feasibility of Risk Management Techniques: Risk Control: Seperation
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
Examining Feasibility of Risk Management Techniques: Risk Control: Duplication
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
Examining Feasibility of Risk Management Techniques: Risk Financing: Retention
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
Examining Feasibility of Risk Management Techniques: Risk Financing: Transfer
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
Selection Based on Financial Criteria
objective of increasing profits and/or operating efficiency
