Week 1 - Intro to Risk Control & Risk Control Fundamentals

Question 1

Define risk

Answer 1

Types of risk: Pure & Speculative

Definition of Risk: Uncertainty concerning loss arising out of a given set of cirmsctances.

Risk may take form of:

1. probability
2. degree of uncertainty
3. varing outcomes
4. a variance from a forecast or prediction

Question 2

ID 6 (six) general classes of risk

Answer 2

1. ** ECONOMIC** - operations, market place, financial or entrepreneurial risks (wall street melt down)
2. LEGAL - compliance or statutory liability (fines, codes, OSHA, international, etc)
3. POLITICAL - changes in LAW or POLICY
4. SOCIAL - public relations, loss of reputation, cultural problems or social direction
5. PHYSICAL -property, people or information (bridge collapse)
6. JURIDICIAL - jury or judge’s decision OR from court or jury attitudes

Question 3

Define Risk Management

Answer 3

Process of protecting an organization’s assets through Risk Management Process:

1. exposure identification
2. exposure analysis
3. control exposures
4. f_inance losses_ w/ external & internal funds
5. administration - implementation & monitoring of risk mgmt porcess

Question 4

ID 5 (five) Steps of Risk Management Process

Answer 4

1. Risk Identification - most important
2. Risk Analysis
3. Risk Control
4. Risk Financing
5. Risk Administration

Question 5

ID 4 (four) logical classifications of exposures

Answer 5

1. Property
2. Human Resource
3. Liability
4. Net Income

Question 6

Define Risk Identification

Answer 6

The process of identifying and examining exposures of an organization

Question 7

Risk Management Process - STEP 1 - Risk Identification

Identify TEN methods of exposure identification

(bit 10 List)

Answer 7

1. checklist & survey
2. flowchart
3. insurance policy review
4. physical inspections
5. compliance review
6. policies & procedures review
7. contract review
8. experts
9. financial statement analysis
10. loss data analysis

Question 8

define risk analysis

Answer 8

the assessment of the potential impact of various exposures to an organization

Question 9

Define 2 (two) types of Risk analysis methods

Answer 9

Qualitative analsis - used to ID and access loss exposures that cannot be easily measured by traditional statistical or financial methods and to understand their impact on the organization’s ultimate risks and performance. the WHAT analysis process

1. risk assessment
2. financial assessment
3. loss data assessment

Quantitative analysis - attempts to accurately measure risks using acceptable traditional methodologies which calculate relative values. The HOW MUCH analysis process.

1. projections or forecasts
2. cost benefit analyses CBA
3. cash discounting and NPV calculations
4. cost of risk calculations & analyses

Question 10

define risk control

Answer 10

Risk control - any conscious action or inaction to minimize, at optimal cost, the probability, frequency, severity or unpredictability of loss

Question 11

define general theories of risk control

Answer 11

General theories of risk control:

1. _ Human approach_ - people cause accidents (domino theory)
2. _ Engineering approach_ - things & pent-up energy cause accidents

Question 12

identify 5 (five)** risk control techniques**

Answer 12

avoidance

Prevention (less volatile fuel)

Reduction (pre & post loss (fire suppression)

Segregation, separation, duplication (build separate units/buildings)

Transfer (contractual, physical or both)

Note: most risk control efforts will use more than one risk control technique.

Question 13

define risks financing & identify risk financing methods

Answer 13

Risk Financing - acquisition of internal and external funds to pay losses at the most favorable cost

Risk Financing Methods

1. RETENTION - internal funds used to pay losses
2. TRANSFER - external funds used to pay losses
   • non-insurance transfer
   • insurance transfer (note this is a financiing technique, not risk transfer

Question 14

Define cost of risk and describe its components and use as a key risk management tool

Answer 14

Cost of Risk Definition: sum of all qualified costs and expenses associated with the risk management function of an organization

cost of risk =

** insurance costs**

+ retained losses & ALAE (active & passive)

+ risk management departmental costs

+ outside service fees (actuarial, legal)

+ indirect costs (disruption costs; goodwill)

Question 14

identify Risk Manager’s objective in the risk management process

Answer 14

Risk Manager’s Objective:

to minimize the cost of risk by identifying those factors from each components that can be more effectively controlled.

Question 15

List uses of TCOR as a risk management tool

Answer 15

Cost of Risk Uses:

1. assist making effective RM decisions
2. measure progress toward RM objectives
3. focus & promote safety/loss control
4. Provide mgmt & employee incentives
5. assist with accurate pricing of products & services
6. Assist with effective management of financial budgets

Question 16

Explain basic tenets of risk management

Answer 16

Risk Management Tenets

1. don’t retain more than you can afford to lose
2. Don’t risk a lot for a litle
3. don’t treat insurance as a substitute for risk control
4. consider likelihood of events & their potential impact
5. REMEMBER, no such thing as uninsured loss; uninsured loss = retained loss
6. use at least one risk control technique & one risk financing technique for each exposure identified

Question 17

Define Risk Control

Answer 17

definition: any conscious action or inaction to minimize loss (probability, frequency, severity, or unpredictability) at the optimal cost

Risk Control Focus: id & implement solutions that will prevent or reduce actual harm or the cost of loss

• It is not to provide for funds to be paid in compensation (funding is risk finance)

Risk Control is a people process - individuals must be involved in all aspects of an effective risk control program

Question 18

What is the role of Risk Control in the Risk Management Process?

Answer 18

identification methods (the big 10)

incident analysis

cost-benefit analsis

Question 18

Role of Risk Control - Step 1: Risk Identification Methods

ID Risk Control Identification Methods (Big 10)

Answer 18

1. Checklists and sureys (IDs phsical hazards, admin processes & procedures; best practices, etc)
2. Flowcharts (process mapping)
3. Insurance Policy review (covered/not covered)
4. Physical Inspections
5. Compliance review
6. Policies & Procedures review (IDs possible exposures)
7. Contract review (obligations & compliance assumed)
8. Experts (specialized training)
9. Financial statement analysis (revenue sources; cashflows, business & fiancial partners; assset protection needs)
10. Loss data analysis (frequence/severity; ID loss data integrity issues

Question 19

identify methods/purposes for incident analysis

Answer 19

**Incident Analysis: **Frequency & severity matrix studies

by tracking & analyzing incidents, risk control techniques can be applied:

1. more timely or proximate to the evnent
2. to preempt, avoid or minimize chance of incident
3. reinforce risk control issues involved or related to employees
4. demonstrate due diligence or reasonable investigation in defense of subsequent claiim or loss

An effective RMIS can improve incident analysis process

Question 20

Identify CBA strengths and weaknesses

Answer 20

Cost-Benefit analysis strengths & weaknesses

1. fiinancial decision making tool for risk control alternatives
2. comparison of costs/cash flows with benefits (reduction in losses and other cash inflows) over time to measure rate of return
3. Losses, probabilities, interest rates & cash flows require assumptions that may vary from expected
4. Solution with best rate of return may not be compatible with philosophy or goals of management

NOTE: NEVER use CBA when a LIFE SAFETY issue is iinvolved (ie - Ford Pinto)

Question 21

Identify 5 (five) primary risk control techniques

Answer 21

1. avoidance - risk totally elimiinated
2. ** prevention** - reduce frequency
3. reduction - reduce severity; applies both pre & post loss activities
4. segregation/separation/duplication - reduce overall severity.

• segregation - isolation of exposure from other exposures
• separation - spread exposurs over multiple locations
• duplication - DR; backups

5. transfer - reduce risk by transfering some or all; may be physical or contractual (hold harmless)

Question 22

list examples of contracts commonly containing hold harmless agreements

Answer 22

1. construction agreements
2. service contracts
3. purchase orders
4. leases & rental agreements
5. usage permits

Question 23

list contractual provisions requiring review & analysis

Answer 23

1. insurance clauses
2. assummption of risk / hold harmless clauses
3. liability clauses (in leases - random act you have no control over)
4. mutual release clauses
5. waver of subrogation clauses

need to understand risks represented in these types of clauses

Question 24

Describe the three approaches to loss control

Answer 24

1. Financial approach (measures net cost benefit & recovery of the investment in loss control programs
2. Systems approach - systems cause accidents

• risk identification & classification, training, equipment maintenance
• tracking resk exposures on flowchart
• hazard evaluation index (Stanford Hazard Matrix)

3. Practical Approach & components

• grass roots & management suppport
• incentive & reward programs
• effective safty committees
• financing safety measurs
• willingness of all to compromise & cooperate

Question 25

What are the challenges of approaches to loss control

Answer 25

1. need to compromise
2. finding funding for safety initiatives

Question 26

Risk Control Key Points/Summary

Answer 26

1. Risk control is a peoople process.
2. ** True costs of loss** to an organization extend beyond obvious “hard” or quantitative costs (ie reputation, opportunities)
3. Successful risk control programs based on careful risk identification & risk analysis
4. Successful risk control programs incorporate all five risk control techniques or a combination of the techniques

**5. contractual transfer of risk is one of most significant risk control techniques. **

6. Administration of risk control requires prioritization, implementation, coordination, follow-up/monitoring & communicatin throughout the organization.

Question 26

Stanford University hazard Evaluation Index

Describe matrix & use

Answer 26

Matrix ranks hazards of severity and probability from 1-low to 5-high/catastrophic.

scores are placed in each box (multiplication of severity/probability rank = score)

scores of

1-4 = corrective action when appropriate

5-9 = corrective actions when practical

10-15 = initiate reasonable corrective actions ASAP

16-25 = IMMEDIATE CORRECTIVE ACTION MUST BE TAKEN.

Question 27

Identify and define 4 types of contractual transfer instruments

Answer 27

1. Hold harmless or indemnification agreements
   * affirmative assumption of the financial consequences for liabilities of another through a contract - 3 types (
2. Exculpatory agreement or clause
   * pre-event exoneration of fault of one party that results in any/specified loss to another
3. Waver of subrogation
   * pre-event relinquishment of rights of one or both parties’ insurers to seek recovery from a culpable party for loss payments made to the insured.
4. Limit of liability of liquidated damages clause
   * pre-event limitation of amount, type or method of calculation of damages available by one or both parties to an agreement.

Question 27

Contractual Transfers - Statutory limitations

Answer 27

HOLD HARMLESS - may be subject to anti-indemnity statutes depending upon specific terms of agreement and the jurisdiction

EXCULPATORY -generally not subject to anti-indemnity statutes

WAIVER OF SUBROGATION - _not subjet _to anti-indemnity statutes

LIMIT OF LIABILITY - not subject to anti-indemnity statutes

Question 27

ID practical problems in a contractual review process

Answer 27

1. control of drafting the agreement
2. input of risk manager
3. reasonableness and achievability of agreements
4. attorney input is required, but attorneys are not expets in risk management
5. laws governing contractual interpretation are dynamic and may vary by jurisdiction (ie safe workplace acts, sole negligence, anti-indemnity statutes)

Question 28

Definition and Characteristics of

Hold Harmless Agreements

Answer 28

Definition: contractual arrangement where one party (iindemnitor) assumes liability inherent in a situation, thereby relieving the other party (indemnitee

Characteristics:

1. may include indemnitee’s cost of settlements or judgments paid to 3rd party and/or costs of defense or legal fees
2. may require indemnification at the conclusion of a claim/suit or require indemnitor to assume indemnitee’s actual defense obligation during claim/suit
3. Anti-indemnity statutes may limit or prohibit contractual transfers
4. may be unenforceable if found to be against public party (may occur when huge disparity in bargaining positions/unilateral contract)

Question 29

define the 3 classifications of Hold Harmless Agreements

Answer 29

1. Limited (mine) - assumes responsibility for indemnitee’s liability for indemnitor’s own, sole negligence

2. Intermediate form (mine and ours) = Limited + responsibility for indemnitee’s l\iabi]lity for indemnitor’s and indemnitee’s joint negligence

• this classification aplies to agreements rquiring indemnification for ALL occurrences arising out of the indemnitor’s operations, excluding only the liability arising from indemnitee’s sole negligence

3. Broad form (yours, mine, & ours) = Limited + Intermeiate + indemnitor agrees to be responsible for indemnitee’s sole negligence

• can include other parties’ negligence.