Chapter 6 Risk Management Flashcards
Name the 5 steps to developing a risk management program
Identify and analyze loss exposure
Examine alternative risk management techniques
Select risk management technique
Implement technique
Monitor results
Define Risk Management
The process of making and carrying out decisions that will minimize the adverse effects of accidental losses to an organization.
What are 2 dimensions of the risk management process
- A decision process
drives the most cost effective means available to deal with loss exposures
2.Management or administrative process
relies on the organizations ability to plan, organize ,lead and control
What type of results can a broker achieve if they use the risk management approach?
A more informed clientele
Increased retention
Increased referrals
Increased claim satisfaction
Reduction in errors and omissions
Identify the purpose of Identification and Analysis
Identification: Recognizing the loss that might occur
Analysis: estimating the likely significance of those possible losses
What are 3 classifications of loss exposures?
Type of value exposed to the loss
Peril causing the loss
financial consequences of the loss
Name 4 broad categories of possible values subject to a loss
Property values
Net income values
Liability loss
Personnel loss
Name 2 types of property values
Tangible property
Intangible property
Tangible Property
Property that is real, can be touched, forms a substance
Real Property
Land and what is growing on or affixed to the land
Personal Property
Includes all tangible property other then real estate
EX money, stocks , furniture
Debris removal
Removing debris after a loss to restore property
Demolition expense
Damage so severe bylaws required undamaged portion to be demolished
Undamaged property
Property undamaged when loss occurs but may decline in value or be rendered useless
Increased cost of construction
Building codes continuously being revised
cost to meet new building code standards
Pair or set value
loss to 1 item of property compromises a pair or set
value remaining item usually diminished to half its value
Intangible property
No physical substance
consists of legal rights rather then things
EX bonds, stocks
2 factors that would effect the net value of an organization
Decrease in revenue
Increase in expenses
Business interruption
Contingent business interruption
- when an organization is unable to operate after a loss
- occurs away from the premise of the business
5 increases that follow a loss
increased operating expenses
Increased rental exposures
Expediting costs
2 categories that give arise to Liability loss exposure
society
source of legal duty
Personnel loss
loss arising from
disability
resignation
retirement
death
Origins of perils causing loss
Natural perils - lightening
Human perils- theft
Economic perils - fluctuation in currency
What formula is used for financial consequences of a loss exposure
Frequency X Severity = Total costs
Name 4 categories of loss severity
Almost nil- very unlikely
Slight- could happen - hasn’t yet
Moderate- happened once in awhile
Definite - happens regularly
Name 3 categories of loss severity
Slight- business can retain the loss
Significant- organization can’t retain each loss - some needs to be transferred
Severe- needs to transfer all of loss or endangered survival
6 methods of exposure identification and analysis
Standardized surveys / questionnaires
Financial statements & underlying records
Other records and documents
Flow charts
Personal Inspections
Consult with experts outside of business
Risk control
Reduce frequency and severity of losses
Techniques considered to control risk
Exposure avoidance -
Loss prevention
Loss reduction
Pre-loss measures
2 ways segregation of exposure units
Separation - dividing single asset or operation into 2 or more separate units
Duplication- complete reproduction of standby asset or facility kept in reserve
Contractual Transfer
organization may shift legal and financial responsibility for loss of asset of activity to others
2 groups of Risk Financing
Retention
Contractual Transfer
Retention Techniques
Current expensing of losses
Unfunded reserves
Funded reserves
Borrowed funds
Captive Insurer
Reasons for retention options
Forced retention - losses from uninsurable perils, deductible
Optional retention- individual loss exposures that are within organizations capacity, unlikely to cause large number of loss in short period
Uncertainties under a non - insurance contractual transfer for risk financing
Party accepting the risk may not have insurance
Transferred exposures aren’t clearly defined
Enforceability of contract can be challenged in courts
3 uncertainties that exist with commercial insurance
Insurer may become insolvent
Disagreement between insurer and insured whether loss is covered
Inadequate limits at time of loss
Identify the 2 steps to be followed before reaching a decision as to which Risk management or Risk financing should be applied
Forecasting
Selection Criteria
3 Forecasts established priorities in threatening loss exposure
Frequency and severity of losses expected
Effects Risk control or Risk financing will have over projected losses
Cost of techniques
Name 2 selection criteria once loss exposures have been forecasted
How well chosen techniques achieve desired goals
Economy
