RMI- Chapter 3: Introduction to Risk Management
RMI- Chapter 3: Introduction to Risk Management RMI3011
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This 6 page Class Notes was uploaded by Cara Johnson on Tuesday September 15, 2015. The Class Notes belongs to RMI3011 at Florida State University taught by L. McChristian in Summer 2015. Since its upload, it has received 67 views. For similar materials see Risk Management and Insurance in Risk Management And Insurance at Florida State University.
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Date Created: 09/15/15
RMl 3011 Risk Management and Insurance L McChristian Chapter 3 Introduction to Risk Management What is risk management 0 The process that identi es loss exposures faced by an organization and selects techniques for treating it 0 Loss exposure is any situation in which a loss is possible Objectives Preloss objectives 0 Prepare for potential losses 0 Reduce anxiety 0 Meet legal obligations Postloss objectives 0 Business survival 0 Continue operations 0 Continue growing Operational Risks Loss of earnings Assets damaged destroyed or stolen Assets become obsolete Employeerelated risks 0 Legal liability Financial Risks 0 Input price risk 0 Output price risk 0 Interest rate risk 0 Credit counterparty risk 0 Currency or foreign exchange rate risk Strategic Risks Loss of market sharecompetition Decisions regarding products Mergeracquisition doesn t pay off Steps in the Risk Management Process 1 Identify loss exposures 2 Measure and analyze the loss exposures 3 Select the appropriate combination of techniques for treating the loss exposures a Risk control i Avoidance ii Loss prevention iii Loss reduction b Risk nancing i Retention ii Noninsurance transfers iii Insurance 4 Implement and monitor the risk management process 1 Identify Loss Exposures Property loss exposures 0 Building plants other structures Furniture equipment supplies Computers computer software data Inventory Accounts receivable valuable papers records 0 Company vehicles planes boats mobile equipment 0 Liability loss exposures o Defective products 0 Environmental pollution 0 Sexual harassment of employees discrimination wrongful termination failure to promote o Premises and general liability loss exposures o Misuse of internet and email transmissions Business income loss exposures 0 Loss of income from a covered loss 0 Continuing expenses after a loss 0 Extra expenses 0 Contingent business income losses 0 Human resource loss exposures 0 Death or disability of key employees 0 Retirement or unemployment exposures o Jobrelated injuries or disease experienced by workers 0 Crime loss exposures o Holdups robberies burglaries 0 Employee theft and dishonesty 0 Fraud and embezzlement 0 Internet and computer crime exposures 0 Theft of intellectual property 0 Employee bene t loss exposures 0 Failure to comply with government regulations 0 Violation of duciary responsibilities OOOO 0 Group life health and retirement plan exposures 0 Failure to pay promised bene ts Foreign loss exposures o Acts of terrorism 0 Plants business property inventory 0 Foreign currency and exchange rate risks 0 Kidnapping of key personnel 0 Political risks Intangible property loss exposures o Damage to company s public image 0 Loss of goodwill and market reputation 0 Loss or damage to intellectual property 0 Failure to comply with government laws and regulations Risk manager sources 0 Risk analysis questionnaires 0 Physical inspection 0 Flowcharts 0 Financial statements 0 Historical loss data Risk managers must keep up on industry trends and market changes because they can introduce new loss exposures 2 Measure and Analyze the Loss Exposures Loss frequency probable number of losses that may occur during a given time period 0 Loss severity probable size of the losses that may occur 0 Loss severity is worse than loss frequency 0 Maximum possible loss is the worst loss that could happen 0 Probable maximum loss is the worst loss likely to happen 3 Select the Appropriate Combination of Techniques for Treating the Loss Exposure 0 Risk control is the generic term for the techniques used for reducing the frequency or severity of losses 0 Avoidance a certain loss exposure is never acquired or undertaken or an existing loss exposure is abandoned 0 Loss prevention measures that reduce the frequency of a particular loss 0 Loss reduction measures that reduce the severity of a loss after it occurs 0 Risk nancing refers to techniques that provide for the payment of losses after they occur 0 Retention the rm retains parts or all of the losses that can result from a given loss Retention can be used under the following conditions No other method of treatment is available The worst possible los is not serious Losses are fairly predictable Payment methods for retention 0 Current net income Unfunded reserve bookkeeping account that is charged with actual or expected losses from a given exposure Funded reserve the setting aside of liquid funds to pay losses 0 Credit line borrowed funds from a bank interest must be paid on the loan Captive lnsurer an insurer owned by a parent rm for the purpose of insuring the parent firm s loss exposures Singleparent captive owned by one parent 0 Association Group captive owned by more than one Advantages of Retention Disadvantages of Retention 0 Save on loss costs 0 Possible higher costs 0 Save on expenses 0 Possible higher expenses 0 Encourage loss 0 Possible higher taxes prevention 0 Increase cash ow o Noninsurance Transfers methods other than insurance by which a pure risk and its potential nancial consequences are transferred to another party Advantages Disadvantages Transfer some losses that 0 Contact language may be aren t insurable ambiguous so transfer may 0 Less expensive fall 0 Transfer loss to someone 0 If other party fails to pay who is in a better position to the rm is Still FGSPOHSible control losses for loss 0 Insurers may not give credit for transfers 0 Insurance Risk manager negotiates terms of insurance contract Deductible provision by which a speci ed amount is subtracted from the loss payment otherwise payable to the insured Excess insurance a plan in which the insurer does not participate in the loss until the actual loss exceeds the amount a rm has decided to retain Manuscript Policy policy designed for a rm s speci c needs and requirements 0 Both parties must agree on contract provisions endorsements forms and premiums Advantages of Insurance Disadvantages of Insurance Indemni ed for losses Premiums may be costly Uncertainty reduced Negotiation of contracts 0 Insurance can provide takes time and effort valuable risk 0 Risk manager may management services become lax in exercising Taxdeductible loss control 0 Market Conditions 0 Hard Market pro tability is declining underwriting standards are tightened premiums increase insurance is hard to obtain 0 Soft Market pro tability is improving underwriting standards are loosened premiums decline insurance is easier to obtain 4 Implement and Monitor the Risk Management Program 0 Risk management policy statement outlines the risk management objectives of the rm 0 Risk management manual describes in some detail the risk management program of the rm and can be a useful tool for training managers supervisors and new employees Bene ts of Risk Management Enables a rm to obtain its pre and postloss objectives more easily 0 Reduce the cost of risk 0 Reduce the pure loss exposures Society bene ts since both direct and indirect losses are reduced pain and suffering are reduced Personal Risk Management 0 The identi cation and analysis of pure risks faced by an individual or family and to the selection and implementation of the most appropriate techniques for treating such risks 0 Same principles as corporate risk management
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