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Chapter 3: Risk Management

Chapter 3: Risk Management. Risk Management. What is Risk Management (RM)? Making pre-loss arrangements for post-loss resources The logical approach to financing and controlling loss exposures. The RM Function. The staff varies based on size and responsibility

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Chapter 3: Risk Management

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  1. Chapter 3:Risk Management

  2. Risk Management • What is Risk Management (RM)? • Making pre-loss arrangements for post-loss resources • The logical approach to financing and controlling loss exposures

  3. The RM Function • The staff varies based on size and responsibility • All firms and people engage in risk management • Career opportunities in profit and non-profit organizations • Occupation is professionally recognized – RIMS – Risk and Insurance Management Society

  4. RM Statement of Objectives and Principles • Distinguish between pre-loss and post-loss objectives • Pre-loss objectives • Survival and growth • Compliance with government regulations • Efficiency • Procedures and principles are implemented and followed

  5. RM Statement of Objectives and Principles • Post-loss objectives • Survive the loss • Provide a foundation to grow and prosper • Behave responsibly as a good corporate citizen • Risk Management Manual • Written to articulate goals, standards, how to measure results and provide benchmarks

  6. Steps in the Pre-loss Risk Management Process • Identify & Measure (evaluate) • Choose most efficient tool(s) for • Loss Control • Loss Financing • Implement and review

  7. Step 1 - Identify • What to identify: • Direct losses • Indirect losses • Key personnel • Operations • How to identify • Balance sheet • Income statement • Other records • Checklists • Flow charts • Questionnaires

  8. Measure (evaluation) • Maximum possible loss • The absolute maximum dollar amount of damage • Maximum probable loss • A conservative estimate of what is likely to occur in a worst case loss • Relative Frequency • An estimate (numerical or verbal) as to the number of times the loss will occur

  9. Valuing Property • Replacement value versus book value versus actual cash value versus market value • International operations and exchange rate problems • The impact of inflation on values

  10. Loss of Income • Definition • Sources of Loss • Problems • Can be seasonal in nature • Difficult to measure • Best measurement still can only be an estimate

  11. Liability Losses • Examples of loss sources • Bodily injury or personal injury • Property damage to real or personal property • Intentional damage to reputation • Wrongful hiring, firing, sexual harassment, invasion of privacy, age discrimination • Vicarious liability • Products, environmental, workers’ compensation

  12. Losses to Key or other Personnel • Death • Disability – physical (medical) or mental • Short or long term • Permanent or temporary • Loss of health • Unplanned retirement • Results in loss of income, business continuation problems, replacement and training issues

  13. Step 2 -Decide How to Handle • A ---- Avoid • R ---- Retain • T ---- Transfer • Insurance • Non-insurance

  14. Selecting the Risk ManagementTechnique • Frequency LowHigh • SLAssumeLoss Prevention • eoLoss preventionloss reduction • vwLoss reductionassume risk • e • rhInsureAvoid • iirisk transferloss prevention • tgloss reductionloss reduction • yhloss prevention

  15. Loss Control - Prevention • Loss Prevention • Take various steps to reduce the probability of losses occurring • How do you value the loss of life in the cost / benefit equation?

  16. Government and Loss Prevention • 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

  17. Loss Control - Reduction • Loss Reduction • Steps designed to reduce the severity • Take steps to reduce the damage before and after a loss

  18. Self-insurance - loss financing • What is self-insurance? • Why do companies self-insure? • Save money • Better control • Loss prevention incentives • Improved claims settlement • Profitability and investment earnings • Difference between self-insurance and risk assumption

  19. Captive Insurance Companies • A method of self-insuring • A company formed to write insurance for a parent company • Motives for starting a captive • Save the overhead and profits of the insurance company • Earn investment income on the premium • Taxadvantages

  20. Other Risk Management Tools • Risk Transfer • Hold harmless agreements - transfer of risk through a contract • Hedging - take equal but opposite position on an even based on chance • Financial risk management - techniques to deal with interest rate, currency value, and crop price changes • Leases - transfers risk of obsolescence

  21. Step 3 – Review and Update • Regularly review and update the process • New assets or disposal of assets • Valuation changes • New products and processes, materials • New personnel • Law changes • Currency fluctuations • New contractual relationships

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