Chapter 6 Flashcards
Risk management is both a decision and administrative process. Discuss how each function contributed to the overall success, or failure of any risk management program
A decision process: A five-step decision-making process in dealing with loss exposure. It attempts to arrive at the most cost effective means available to the organization in dealing with those exposures:
1. Identify and Analyze Loss Exposures
2. Examine Alternative Risk Management Techniques.
3. Select Risk Management Technique(s)
4. Implement Technique(s)
5. Monitor Results
Management or Administrative process: Once risk management decisions have been made, they must be implemented and managed. The success of the risk management process in this stage depends on the organization’s ability to plan, organize, lead and control.
In order to properly manage risks, it is important that they be identified and analyzed. What is the purpose of these two functions in the overall development of an effective risk management program?
“Identification” involves recognizing losses which might possibly occur.
“Analysis” involves estimating the significance of those possible losses.
An organization faces many exposures to loss. What is a loss exposure? What three factors are used to classify loss exposures?
A loss exposure is the chance of financial loss to the organization as a result of a particular peril striking a thing of value.
Three factors used to classify loss exposures:
1. the type of value exposed to loss
2. the peril causing loss
3. the financial consequences of the loss
Identify the four types of values exposed to loss in most organizations and give examples of each.
Property values
Net Income Values
Liability Loss
Personnel Loss
Identify the two key factors used to measure the financial consequences of a loss?
Severity: seriousness of losses
Frequency: likelihood of a loss occurring
Establishing both pre-loss and post-loss measures can help to reduce the severity of losses. Describe what is meant by the above terms and provide examples of each.
Pre-loss measures are things which can be done before a loss occurs. They involve steps taken to reduce the amount of the property, the number of persons, or other things of value that may suffer loss from a single event.
Examples:
Property Values - safe storage of flammable materials to reduce fire intensity
Net Income Values - reduce value of single shipment in a specific
conveyance.
Liability Loss - establish maximum speeds company vehicles can be driven.
Personnel Loss - limit number of executives travelling together in any one vehicle or aircraft.
Post loss measures
Examples: focus on action taken after a loss to reduce its severity.
Property Values - installing effective fire detection/suppression equipment.
Net Income Values - expediting repairs quickly so business can continue
Liability Loss - developing a procedures plan to be followed by management and employees.
Personnel Loss - returning key personnel to work by allowing them to work part-time or work at home or on a part-time basis.
Forecasting is an important step in determining what risk management techniques will provide the most cost effective means to deal with risk. Discuss the types of forecasts that need to be done before a decision can be made.
Three forecasts which are necessary, including:
(i) forecast of frequency and severity of losses that can be expected.
(ii) forecast of the effects that various risk control and risk financing techniques may have in frequency, severity and predictability of these projected losses.
(iii) forecast of the costs of these techniques. Forecasting involves gathering and organizing data on past losses. Using probability analysis and trend analysis, future losses can be predicted with some certainty.
Risk management
is the process of making and carrying out decisions that will minimize the adverse effects of accidental losses upon an organization.
Loss exposure
is the chance of a financial loss to an organization as a
result of a particular peril striking a thing of value.
Tangible property
property that is real, can be touched, and has form and substance.
Going concern value
the difference in the value of property which must be sold after a loss and its value had the business continued.
Intangible property
property that has no physical substance and consists of legal rights rather than things.
Expediting costs
the extra costs incurred in hastening the recovery of a business after a loss.
Risk control
refers to the steps taken to reduce the frequency and
severity of losses as much as possible with the resources that are available.
Risk financing
is concerned with paying those losses that inevitably occur.
