Chapter 6 - Risk Treatment Flashcards
What are the options for risk treatment?
- Eliminate
- Control
- Transfer
- Retain
Describe risk elimination
Involves closing the part of the business or activity that causes the risk
Describe risk control
Range of risk controls that seek to remove or improve the risk. i.e. monitoring complaint numbers to understand the effectiveness of training
Describe risk transfer
Passing the risk to another party by means of a contract conditions
Describe risk retention
Where a risk of low maturity and cost of controls is uneconomical, firm may decide to tolerate the risk
What are the downsides of risk elimination?
- Economic costs (ceasing profitable but risky operations)
- Unintended consequences (may increase the probability of another risk with the elimination of the current risk
When is the best time to achieve risk avoidance?
At the design/planning stage
What are the four control risk categories?
- Preventive
- Corrective
- Detective
- Directive
Examples of corrective tools
- Contract terms
- Business continuity planning
- Diversification of business risk
- Diversification of financial investment risk
Examples of directive controls
- Rules and training
- Procedural Manuals
- Job descriptions
What is a potential weakness of directive controls?
Human factor
Examples of detective controls
- Accident Investigations
- Fraud detection
- Audits and Inspections
How do we measure cost effectiveness of controls
Difference between inherent risk and residual risk. Difference must be at least greater than the cost of implementing the measure
What are the advantages of insurance as a vehicle for risk transfer?
- Economic vehicle for sharing exposures with a large number of other organisations
- Insurers have wealth of experience in risk and risk funding mechanisms
- insurers can provide additional services
- Fast access to insurance funds means organisations have more cash for long term investments
- Co-insurance
- Premiums may be tax deductible
What are the disadvantages of insurance as a vehicle for risk transfer?
- Insurers look at cause of loss whilst organisations see severity of loss
- Insurers want to contain risk acceptance and pricing to a short period
- Policies offered may not include risks that are the greatest concern to the organisation
Define CAT bonds?
Catastrophe bonds - provide returns based on insurance type events, life is 3-5 years. A trigger mechanism would be determined in the bond
Why do people invest in securitisation and securitised risk products
- Spread risk of their portfolios
- High Cat. losses have exposed the inability of the insurance market to respond adequately.
Examples of transfers by contract
- Leases and hiring agreements
- Surety agreements
- Guarantees
- Waivers
- Indemnity and ‘hold harmless’ agreements
- Disclaimers
What is a surety agreement
A contract between 3 parties where the surety takes the risk that the principal to a contract does not perform or complete, but can claim back losses from the principal
What is a guarantee?
A contract between 2 parties where the guarantor takes the risk the principal to a contract does not complete or perform
What is a waiver?
Where the contracting party gives up, for a financial consideration, its rights to sue in the event of a breach on contract.
What is an indemnity and ‘hold harmless’ agreement?
Agreements between two parties designed to release one from legal claims
How to finance risk retention
- Non replacement
- Current expense
- Contingency reserve
- Internal risk fund
- Captive Insurance company
- Borrowing
Non Replacement
Organisation absorbs the loss out of income and does not replace the asset
Current Expense
Losses as a result of certain risk are treated as current operating costs
Methods of partial retention
- Indemnity limits
- Excesses and Deductibles
- First loss cover
First loss cover is when…
the insurance company pays for losses up to an agreed limit and organisation pays above the limit (i.e. theft)
What is business continuity?
Advance planning for events which cannot be avoided or insured (expected and unexpected events)
What are core functions in BCM?
- Crisis management planning
- Continuity planning
- Recovery
What are facilitating functions in BCM?
- Leadership and support
- Evaluation and improvement
- Exercises and tests
- Survival priorities
The ability of governments, businesses and society to continue as ‘business as usual’ is called
Resilience
Benefits of BCM?
- Inspire trust to continue operations through a disruption
- Protect your reputation
- Respond to legislative requirements
- Reduce cost of disruption
- Create competitive advantage
- Contribute to resilience
Drawbacks of BCM?
Costly and may never be implemented
What barriers are in healthcare regarding controlling risks?
- Physical Barrier (most effective) - Actual physical hindrance
- Natural Barrier - Barriers of distance, time or placement
i. e. injections on different days, different colour packaging) - Human barriers
i. e. checking bath temperature, double checking with a colleague, checking details of patient.
What are Preventive Controls
Stops risk or unwanted outcome (i.e. separation of duties, physical, natural and human barriers)
What are Directive Controls
Behaving in a specific way
What are Detective Controls
Identifying unwanted occurrence after it is happened (i.e. fraud detection and audits)
What are Corrective Controls
Recovering from undesirable events that have taken place i.e. (contract terms, continuity planning, insurance, diversification)
What finance retention method is unavoidable and regular?
Current Expense
What control ensures a particular outcome is achieved?
Directive Control
What control is used AFTER loss has occurred?
Corrective
What control is used to identify when an incident has happened?
Detective
What is a permit to work system?
Formal recorded process used to control work which is identified as potentially hazardous.
Means of communication between site/plant supervisors and those who carry out hazardous work
What is the internal risk fund?
Separate fund designed to ensure the availability of liquid funds specially to pay losses
What is a Contingency fund?
Part of surplus of trading year held in a reserve which is equal to the expected cost of losses during the year.
Indemnity limits?
Potential limit to loss is open ended. Insurance companies may impose a limit on the amount of payment they will make.
What is Crisis Management?
Identifying what needs to be done and by whom to diffuse a problem or reduce a threat
What is Continuity Planning?
Ensure organisation is well prepared to handle a major disruption. Aim is to return to operations as quick as possible
What is Recovery Planning?
Documenting the process/procedures yo recover and protect IT infrastructure
Excluding a peril from a policy is what type of control?
Preventative
What does a business continuity plan show?
Resilience
What method of treating risk includes using measures that help an organisation to recover from loss/damage once it has taken place
Risk Control
