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
What are the two methods of transferring responsibility to pay for losses?
Contract
Insurance
What are the advantages and disadvantages of non-insurance risk transfers?
A: May not be insurable, less expensive than insurance, tailored to meet needs, exposure can be controlled by party best able to do so
D: Risk transfer may not be as complete as intended, agreements subject to litigation/reinterpretation, indemnitor may be unable to pay, strength of agreement susceptible to economy
What are the advantages and disadvantages of insurance loss transfers?
A: Known amount of premium is paid, less uncertainty, other loss control services
D: Premium paid may be more than losses, insurance coverage may not be available, loss amounts may exceed limit, may have prohibitive conditions/terms, insolvency could expose insureds to loss
What three elements must a risk management plan include?
- Plan for implementing the risk control program
- Communication plan
- Method to allocate costs
What composes the cost of risk?
Cost of loss control
Insurance premiums
Retained losses
Overhead of the risk management department
What are the four basic categories of risk?
Hazard
Operational
Financial
Strategic
What is the general definition of exposure?
A condition or situation that exposes an asset to a loss
What are the three elements of a loss exposure?
1) Assets exposed to loss
2) Cause of loss (perils)
3) Financial consequences of the loss
What 4 things can assets be broken down into?
Property
Liability
People
Net Income
Define intangible assets
Valuables such as trademarks, goodwill and copyrights owned by a business
Define real property
Land and property that is tangible and usually fixed or attached to the land
What are the two categories of property?
Real property and personal property
What are some examples of real property?
Land, buildings, damns, bridges and towers
What are some examples of personal property?
Intended for permanent placement (furniture, fixtures)
Subject to movement (photocopier, cash register)
Intended for movement (laptops, jewelry)
Who may have assets that need to be protected under a policy?
Lenders, landlords and customers
What are some types of property that is not an obvious source of loss exposure?
- Property that is owned, borrowed or held for others
- Offsite property, such as inventory & equipment
- Property under construction
- Intangible property
What are the three main areas of liability?
Negligence
Vicarious liability
Absolute liability
What is vicarious liability?
When one party is fully or partly responsible for the actions or omissions of another
What is absolute liability?
Inherently dangerous activities regardless of the degree of care can be found liabile
What two things may you need to review with people loss exposure?
1) Advise the client on dealing with the loss of a key person or persons
2) Advise the client on employee benefits necessary to maintain a stable workforce
What are the three types of net income loss exposures?
1) Business interruption
2) Extra expense exposures
3) Supply chain risk
Define extra expense insurance
Form of insurance policy covering the extra expense of an insured in carrying on a business
Define supply chain risk
Potential for disruption to a firm’s product supply (affecting ability to meet customer demand or organizational objectives)
Define contingent business interruption insurance
Insurance against loss due to interruption of business by fire or other peril at another’s premises
What are three of the financial consequences of a loss?
- The reduced value of an asset
- The decreased income derived from the asset
- The increased expenses to keep the asset operating
Risk management is an opportunity to “work with” instead of “sell to” the client. Name at least two (2) of
the three main objectives of the risk management process and three (3) of the four ways that brokers add
value to their client relationships with risk management.
Risk management process and value to client relationships
• The objectives of the risk management process
o Determine the commercial client’s key loss exposures
o Provide a plan of action to manage those risks
o Recommend insurance coverage for those risks
• How brokers add value to client relationship through risk management
o Risk identification and assessment
o Risk control
o Risk financing
o Risk monitoring
The risk management process begins with identification of loss exposures. What are the remaining five
(5) steps in the process?
- 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
A broker can use a variety of analysis techniques to determine the impact of a loss as part of the risk
management process. Name the two (2) main types of analysis and three (3) additional methods of
analysis
Two types of analysis o Qualitative analysis assesses non-numerical data o Quantitative analysis reviews numerical data or figures, such as cost, finances, or population. • Additional techniques o Root cause analysis o Fault modes and effects analysis o Gap analysis
What is a hazard, and the four main areas?
• Hazards are conditions that increase the likelihood and severity of a loss; hazards can be moral
(actions of people) or physical (conditions of object or space).
• Areas of hazard risk loss exposure:
1. Property
* Real property—land and permanent structures
* Personal property—personal, movable, and distinct from real property
2. Liability
* Negligence—failure to use reasonable care
* Vicarious liability—responsibility for the actions or omissions of another
* Absolute liability—for activities that are inherently dangerous, regardless of care
3. People
* Loss of key person
* Maintaining stable workforce
4. Net income
* Business interruption
* Extra expense exposures
* Supply chain risk
What are some potential perils that may arise?
• Human perils o Vandalism o Arson o Theft • Natural perils o Storms o Floods o Earthquakes o Tornadoes o Wildfires • Economic perils o Consumer tastes o Currency fluctuations o Depreciation o Expropriation o Stock market declines o Technological advances
What are five ways a client can plan to pay for losses?
Financing retained losses • Current expenses • Unfunded reserves • Funded reserves • Borrowing • Captive insurance company
