Chapter 3 - Intro To Risk Management Flashcards
Risk Mangement
The process that identifies loss exposures faced by an organization and selects appropriate techniques for treating such exposures.
Loss Exposure
Any situation or circumstance when a loss is possible, regardless of whether a loss actually occurs
What are the three Pre-Loss objectives?
Prepare for loss in the most economical way
Reduce anxiety around the exposure
Meet any legal obligations
What are the five post-loss objectives?
Survival of the Firm Continue operations Create a stability of earnings Continue growing the firm Minimize the affect the loss will have on other persons and society
What are the four steps of the Risk Management process?
Identify loss exposures
Measure and analyze loss exposures
Select appropriate techniques for treating the loss exposures
Implement and monitor the risk management program
What are some sources for identifying loss exposures? (5)
Risk analysis questionnaires and checklists Physical inspection Flowcharts Financial statements Historical loss data
What two measures are used to quantify the loss exposures?
Loss frequency and loss severity
Maximum possible loss
The worst loss that could happen to a firm during its lifetime
Probable maximum loss
The worst loss that is likely to happen
What are the two broad techniques for treating loss exposures?
Risk control and risk financing
What are the three techniques of risk control?
Avoidance, loss prevention, and loss reduction
Loss Prevention
Reduce the frequency of a loss before it happens
Security tags on store inventory
Loss Reduction
Measures to reduce the severity of the loss after it happens
(Taking excess cash out of a till periodically)
What are the three techniques of Risk Financing?
Risk Retention, noninsurance transfers, and commercial insurance
Risk Retention
The firm retains part or all of the losses that can result from a given loss. Active or passive retention.
The three conditions for Risk Retention are:
No other method to treat the risk available
The worst possible loss is not serious
Losses are fairly predictable
What are the two broad techniques for determining retention levels?
Calculate maximum loss it can absorb without affecting earnings
Calculate retention as a percentage of Net Working Capital
What are four ways of paying out for losses retained?
Current net income
Unfunded reserve
Funded reserve (set aside on purpose)
Credit line
Captive insurer
Insurer owned by a parent firm for the purpose of insuring the parent company’s loss exposures
Single parent captive (Pure Captive)
An insurer only owned by one parent (company)
Association captive (Group captive)
Insurer owned by several parents (companies)
Self-insurance
A special form of planned retention by which part or all of a given loss exposure is retained by the firm
Risk Retention Group (RRG)
A group captive that can write any type of liability coverage except employers’ liability, workers comp, and personal lines.
Non-insurance transfers
Methods other than insurance where a pure risk and it’s potential financial consequences are transferred to another party.
What are three common types of non-insurance transfers?
Contracts
Leases
Hold-harmless agreements
What are five key areas to consider when choosing commercial insurance?
Insurance coverage selection, the insurer themselves, term negotiation, understanding the information of the coverage, and periodic review of the program
Deductible
A provision where a specified amount is subtracted from the loss payment otherwise paid to the insured.
Excess insurance
A plan where the insurer does not participate in the loss until the actual loss exceeds the amount decided to retain.
What are the two main documents used to monitor the risk management program?
Risk management policy statement
Risk management manual
