Section 1 - Introduction to Risk Management Flashcards
Pure Risk vs Speculative Risk
Pure
- Incident or situation in which the only outcome can either be loss or no loss.
- Partial or whole losses
Speculative
- Can be a loss, no loss, or chance of gain
Exposure Definition
a situation, practice, or condition that may lead to an insured’s
susceptibility to adverse financial consequences or loss. Activities, resources, and assets
are also considered exposures.
Loss Definition
reduction in the value of assets. Losses include business interruption, physical property damage, and injury to an employee or customer.
Peril Definition
cause of loss or any action or event that causes a loss. Perils include fire, lightning, riots, vehicular accidents, smoke, theft, heavy snow and ice, hurricanes, tornadoes, and volcanic eruptions.
Hazard Definition
a factor that increases the likelihood that a loss will occur or the severity of a loss that occurs.
Incident Definition
an event that disrupts or interrupts normal activities and may become a loss.
Accident Definition
an unexpected and unintentional event definite as to time and place that results in injury or damage to a person or property
Occurrence Definition
goes beyond an immediate and observable accident. Instead, it is an extended situation leading to damages—such as from injury—that occurs over a period of time.
Claim Definition
a demand for payment or a company’s moral or ethical obligation to pay damages as a result of a loss or occurrence.
Frequency definition
Frequency is the number of losses that occur or that are expected to occur within a given period.
Severity Definition
dollar amount of a given loss or the aggregate dollar amount of all losses for a given period, usually the policy period
Expected Losses Definition
the projection of the frequency or severity of losses based on loss history, probability distributions, and statistics.
Risk Appetite Definition
Organizations willingness to accept or tolerate risk
Risk-Taking Ability Definition
Organizations financial capacity for accepting risk 4
5 Steps of Risk Management Process
(IACFA = I Am Control Freak Agent aka an RM)
Risk Identification: Examine Exposures, perils, hazards. Can include understanding of a company’s position and goals.
Risk analysis: Qualitative and quantitative analysis (#’s vs impacts that can’t be measured easily). Assessing potential impact of exposures on one’s business.
Risk Control: Any conscious action or inaction to minimize, at the optimal cost, the probability, frequency, severity, and unpredictability of a loss.
Risk Financing: Acquisition of external funds or allocation of internal funds to pay for losses.
Risk Administration: Ongoing implementation and monitoring of risk management programs, policies and procedures.
3 Things that Modern Risk Management Addresses
1: Uninsurable exposures such as a decrease in positive public reputation
2: Emerging Risks such as the streaming-of-entertainment model was to Blockbuster
3: The upside of risk by seeking to exploit opportunities.
4 Definitions of Risk in Risk Management
LUV D
1: Chance or probability of loss (Likeliness of loss)
2: Uncertainty concerning a loss (Uncertainty concerning Loss)
3: Possibility of a variation of outcomes from a given set of circumstances (Variation of outcomes)
4: Difference between expected losses and actual losses. (Difference between expected and Actual)
Risk Management Definition
Managing and minimizing the uncertainty of exposures that can adversely affect an organization’s assets, financial statements and objectives.
How is a risk map structured?
4 quadrants. One Axis is frequency and the other is severity. Quadrant one can be the most dangerous of exposures
3 General Theories on How a Loss is Caused
Human Approach: Accidents occur because of negligent or deliberate actions of a person.
Engineer Approach: Objects and stored potential energy cause accidents. How to improve safety of equipment?
The Systems Approach: Failure to implement correct systems or procedures and negligent supervision.
5 Techniques of Risk Control
PARTS
Prevention
Avoidance
Reduction (in severity)
Transfer of Risk
Segregation / Duplication / Separation (Spreading exposure over different areas to reduce impact)
Impacts of an Effective RM Program (6)
IB PPPP (I Be Peter Piper Picking Peppers)
Identify Exposures and Opportunities (Effective change management, risk awareness, planning and networking)
Brand and Reputation Safeguarded (Good emergency response plans, business continuity Plans, company culture, outreach, community involvement)
Profitability Increases (Maintain / Minimize costs, effective claims management and expenses)
Protect Cash Flow and Assets (Minimize cash flow spikes and disruptions, effective claims management, good loss controls)
Productivity and morale Increases (well integrated loss controls, safety, building safe guards, operating procedures)
Processes, Quality, and Technology improvements (Good safety practices, well maintained equipment, use of effective technology)
TCOR Definition
Total Cost of Risk
RM tool used to direct RM decisions, track progress in loss Reduction and establish accountability in the workplace.
Basic TCOR Calculation (5)
RROII (Return on investment calculation)
Retained Losses (deductibles / self insured retentions)
Risk Management Departmental costs (Salaries, RMIS, training, legal)
Outside service Costs (TPA’s, consultants, legal)
Insurance Cost (premiums / letters of credit, etc.
Indirect Costs (Disruption in production / sales, replacement costs, overtime)
= TCOR
Benefits of Allocating TCOR (4)
- Cost origination is determined
- Responsibility and accountability enhanced
- Employee awareness of costs related to loss and exposure increased
- Behavior of employees to be more like risk owner
How to Properly Implement TCOR (3)
- Communication
Costs consistent and equitable across org
Goals / objectives must be clearly outlined
Establishing allocation System (3 Methods)
Exposure Method: Allocate costs based on exposure units
Experience Method: Distribute costs based on loss experience of individual departments
Combination Method: Use both the exposure and experience (best)
2 Ways that Emerging Risks Manifest
1- New Exposure to loss for which a risk treatment has not yet been implemented
2- An existing exposure to loss that is evolving, difficult to quantify, and which may have major financial impact on the org
3 Common Elements of an Emerging Risks
- High Uncertainty: Lack of reliable info
- No common approach
- Regulatory involvement
6 Types of emerging Risks
GUTSEE
Geopolitical (Trade barriers, War)
Uninsurable Operations / Strategic (Supply chain weakness, worker turnover, application of emerging tech)
Technological
Societal
Economic
Environmental
