Study 3 - Risk Management and Commercial Insurance Flashcards
Typically, what are the six steps to manage a risk?
- Identify loss exposures
- Analyze loss exposures
- Examine the feasibility of risk management techniques
- Select the appropriate risk management technique(s)
- Implement the selected risk management technique(s)
- Monitor the results
What are the four types of hazard loss exposure?
- Property
- Liability
- People
- Net income
What are the objectives of the risk management process?
- To determine the commercial client’s key loss exposures that need to be managed
- To provide a plan of action to manage those risks
- To recommend insurance coverage for those risks that are best served by insurance coverage
What are four ways you can add value through risk management?
- Risk monitoring
- Risk identification and assessment
- Risk control
- Risk financing
Define enterprise risk management (ERM)
An approach to managing all of an organization’s key business risks and opportunities with the intent to maximizing shareholder value
What are some methods commonly used to identify loss exposures?
- Risk registers and assessment questionnaires
- Financial statements and other documents
- Loss histories
- On site inspections by qualified loss control engineers or subject matter experts
What are the two things to review regarding the impact of a loss?
Frequency and severity
How are qualitative and quantitative analyses used to determine the impact of a loss?
- Qualitative assess non numerical data, such as observations
- Quantitative reviews numerical data or figures, such as cost, finances, or population
- Sometimes a combination of both techniques is used
What are some other common techniques used to assess losses?
- Root cause analysis
- Fault modes and effect analysis
- Gap analysis
What are the best techniques for dealing with exposure?
- Risk control
- Risk financing (retention & transfer)
What are some common loss control techniques?
- Avoidance
- Loss prevention
- Loss reduction
- Seperation
- Diversification
- Non insurance risk transfer
Define active decision
Conscious decision to do or not do something
Define passive retention
An exposure is retained but never identified
What are some ways to pay for the costs of retained losses?
- Current expenses
- Unfunded reserves
- Funded reserves
- Borrowing
- Captive insurance company
What are the advantages and disadvantages of using current expenses?
A: Easy to administer, no special accounting required
D: Funds may not be available, funds may be needed for business
What are the advantages and disadvantages of using unfunded reserves?
A: Losses identified in an accounting entry
D: If many losses occur, funds to pay for them must be gathered
What are the advantages and disadvantages of using funded reserves?
A: Money is available to pay for losses, fund can be built slowly
D: Control is needed to avoid spending funds, management of reserves require accounting, option has an opportunity cost
What are the advantages and disadvantages of using borrowing?
A: Easy if company has assets to cover a loan
D: Lender may believe company planned poorly, reduces the company’s line of credit
What are the advantages and disadvantages of using captive insurance companies?
A: Company can capitalize on good loss experience, direct access to reinsurance, custom policies, commitment to loss control is conscientious
D: Complex and costly to set up / administer, significant commitment from senior management
Define hold harmless agreement
Agreement that allows one party to protect another party against any future losses or claims that may result from a particular activity