ERM - Lesson 4 Flashcards
4 Categories Under Loss or Risk Control
- Avoidance
- Loss Reduction
- Loss Prevention
- Diversification
3 Risk Handling Techniques
- Loss or Risk Control
- Risk Transfer
- Loss Financing
4 Categories Under EXTERNAL Loss Financing
- Insurance
- Hedging
- Contractual Transfer
- Limited Liability
2 Categories Under INTERNAL Loss Financing
- Retention
- Self-Insurance
A risk management strategy that involves taking an offsetting position in a financial instrument to reduce the risk of loss
Hedging
3 choice of risk-handling techniques is a function of:
- Frequency and severity of loss;
- The size of the firm or economic entity; and
- The supply of insurance
6 Loss or Risk Control (All techniques designed to reduce frequency or severity of loss)
- Loss prevention
- Avoidance
- Loss reduction
- Duplication and separation
- Diversification
- Loss control and Federal Regulatory Agencies
Techniques : Frequency
Loss Prevention
Techniques : Frequency and severity both zero
Avoidance
Techniques : severity, might occur post-loss, e.g., salvage
Loss Reduction
Techniques : (frequency and severity), examples are redundant records or geographic dispersion of exposure units
Duplication and separation
Techniques : Multiple Product Lines
Diversification
Techniques : (OSHA, CPSC, EPA impose specific requirements, compliance costs may result)
Loss control and Federal Regulatory Agencies
How we pay the losses
Loss Financing
You bear the risk
Retention
Low frequency, low severity
Retain
Risk Assumption and Loss Control
Low frequency, high severity
Transfer (Don’t retain)
Insurance and Loss Control
High frequency, low severity
Retain, Control (Don’t Transfer)
Self- Insurance (for larger firms)
Loss Control
High frequency, high severity
Avoid (Don’t Retain)
Avoidance (if possible)
Loss Control
Can be seasonal in nature
Problems
Difficult to measure
Problems
Best measurement still can only be an estimate
Problems
Must be cost-efficient
Loss Prevention
Activities that prevent losses
Loss Prevention
Aim is to minimize impact when losses occur
Loss Reduction
Examples are Duplication and Seperation
Loss Reduction
An estimate (numerical or verbal) as to the number of times the loss will occur.
Relative Frequency
Always ___________ in, if ____________
Always engage in, if beneficial
Take various steps to reduce the probability of losses occurring.
Loss Prevention
Steps designed to reduce the severity
Loss Reduction
Take steps to reduce the damage before and after a loss.
Loss Reduction
6 Government and Loss Control
- Occupational Safety and Health Act of 1970 (OSHA)
- Consumer Product Safety Act of 1972 (CPSA)
- Comprehensive Environmental Response, Compensation Liability Act of 1980 (CERCLA)
(Superfund) - Food and Drug Administration (FDA)
- The Clean Air Act
- The Water Pollution Control Act
Risk-bearing financial institutions,
Risk Transfer
Hold-harmless agreements
Risk Transfer
Choosing form of business organization to transfer risk from individuals to entity
Risk Transfer
Take on financial risk for free
Risk-bearing financial institutions
Transfers risk to another party
Contractual transfer agreements
Transfer of risk through a contract
Hold harmless agreements
Provided to the owners of certain types of business organizational forms.
Limited Liability
6 Categories under Loss Financing
- Insurance
- Insurance with deductibles (and self-insured retentions [SIRs])
- Hedging
- Retention
- Self-insurance
- Captive insurers (dedicated risk-financing units)
Transfers of risk to an insurer for a premium
Insurance
Appropriate when loss-frequency is low, but potential severity is high.
Insurance
Financial advantages of insurance
Tax Issues
2 Categories under Insurance
- Moral Hazard
- Deductibles
What we pay in insurance
Insurance Premium
Not aware that there are existing risks
Risk Risk
2 Reasons Why do companies self-insure?
- Save money
- Better control
3 Categories under Better Control
- Loss Prevention Incentives
- Improved claims settlement
- Profitability and investment earnings
Is when an organization sets aside funds to cover potential losses.
Self-Insurance
This can be done for a specific type of risk, such as property damage or employee injury, or for a general pool of risks.
Self-Insurance
Is when an organization decides to bear the risk of loss without any form of financial protection.
Risk assumption
This can be a risky strategy, as it exposes the organization to the full financial impact of any losses that occur.
Risk assumption
A method of self-insuring
Captive Insurance Companies
A company formed to write insurance for a parent company
Captive Insurance Companies
3 Motives for starting a captive
- Save the overhead and profits of the insurance company.
- Earn investment income on the premium.
- Tax advantages
