The Institutes Module 1 Section 1: Basic Purpose of Scope and Risk Management

Risk control techniques include:

Avoidance, Loss prevention, loss reduction, separation, duplication -Risk control techniques are rarely used alone and are most often effective when used in conjunction with risk financing techniques.

Benefits of risk management to a business (in combination with insurance):

-An insured that combines insurance with the risk management techniques of avoidance, risk control, retention, and non-insurance risk transfer usually has fewer and smaller losses than do other insureds. -Therefore, insurers are likely to generate better loss ratios and underwriting results by insuring policyholders having sound risk management programs. -Consequently, such insureds are often able to obtain broader coverage at lower premiums than insureds who do not practice risk management.

Pure Risk

A chance of loss, no loss, or gain.

Speculative Risk

A chance of loss, no loss, or gain.

What can identify loss exposures?

Checklists, loss exposure surveys, inspections

What could be considered the key goal of Enterprise-wide risk management?

Maximizing the organizations value by taking a holistic and cooperative approach.

Analyzing the potential frequency and severity of a loss exposure enables the risk manager to

RM's can prioritize based on these concepts what losses they should transfer, avoid, retain etc.

Why is an accurate representation important for loss frequency?

The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur.

Risk Control Technique: Loss reduction

This seeks to lower the severity of losses from a particular loss exposure. -Some common loss reduction measures include installing a sprinkler system, which does not usually prevent fires, but can limit damage should a fire occur, and installing a restrictive money safe that a store clerk cannot open. -insurers will often have risk manager professionals advise the insured on techniques to reduce loss exposures -these programs are recommended based on inspection reports ordered by the insurer. often they will have to implement them in order to be insured or to reduce prem/sir

General rmin benefits:

benefits to businesses, individuals, and families can include peace-of-mind, improved access to affordable insurance, cost-effective achievement of goals, and the ability to take on more risk and explore greater opportunities. Society and insurers also benefit when businesses and individuals practice risk management.

in order to be accurate loss histories must be:

depends on whether they are organized and consistent.

Benefits of Risk Management to Society

-Risk management can help reduce the number of persons dependent on society for support, because businesses and families plan for financial crises. For example, families who buy flood insurance need less help from charitable agencies or the government for federal flood relief after a flood event. -Risk management also results in fewer disruptions in the economic and social environment. Organizations and families that practice risk management are not subject to the big and sudden expense of bearing the cost of a loss. -In addition, economic growth can be stimulated by effective risk management. Because fewer and less costly losses result, funds are available for other uses, such as investment.

rmin benefits to a families or individuals

-Risk management helps individuals and families cope more effectively with financial disasters that may otherwise cause a greatly reduced standard of living, personal bankruptcy, or family discord. Additionally, it helps them continue their activities following an accident or other loss, reducing inconvenience. -Risk management provides individuals and families greater peace of mind because they know that their loss exposures are under control. It also reduces expenses by handling loss exposures in the most economical fashion. -Risk management enables individuals and families to take more chances and make more aggressive decisions on ventures with the potential for profit, such as investing in the stock market, changing careers, or starting a part-time business. -Though this may seem inconsistent with the purpose of risk management, such decisions can have long-term value when made with a full knowledge of costs and potential benefits.

New opportunity benefit of rmin to businesses:

-The possibility of future losses tends to make many business owners and executives reluctant to undertake activities they consider to be risky. This reluctance deprives the business of the benefits that undertaking such activities could bring. -A business that has an effective risk management program is better prepared to seek opportunities that could increase its profits. -For example, if a business is confident it has appropriately managed its present property and liability loss exposures, it may consider proposals to manufacture a new product or expand its present sales territory that it otherwise would not.

Two main objectives of an inspection report (this is related to loss reduction):

-To provide a thorough description of the applicant's operation so that the underwriter can make an accurate assessment when deciding whether to accept the application for insurance. -To provide an evaluation of the applicant's current risk control measures and recommend improvements in risk control efforts. The underwriter may require that the applicant implement the risk control recommendations for the application to be accepted.

Partial vs total retention

-a $10,000 per building deductible on a commercial property insurance policy is a partial retention. -An example of total retention would be a husband and wife choosing not to purchase flood insurance on their lakeside home because they believe it is too expensive—they are effectively retaining their entire exposure to flood losses.

Risk transfer techniques:

-contracts such as the hold harmless agreement for leases -insurance

Selecting risk management techniques: financial criteria

-criteria includes: objective of increasing profits and/or operating efficiency -it also assumes the exposures to accidental loss that are inherent in that activity. How the organization deals with those loss exposures affects the profits or output from the activity -By forecasting how selection of a particular risk management technique will affect profits or output, an organization can choose the risk management technique that is likely to be the most financially beneficial. -example, a corporation may analyze its financial position and decide that it does not want any retained loss exposures to affect annual corporate earnings by more than five cents per share of stock. If the corporation has 100 million shares outstanding, the risk management department can retain up to $5 million for all exposures in a fiscal year. The risk management department makes its retention decisions for the coming year based on this strategy of protecting corporate earnings.

achievement of goals benefit of risk management to businesses:

-leads to achievement of business goals through better management of large loss exposures, and it helps organizations achieve their business and financial goals in a cost-effective manner. -Risk management techniques help minimize the chance that a business would face a disruption or would have to absorb a large loss caused by a loss exposure. -As a result, profits could be increased because of the reduced expenses. For example, a firm may reduce its insurance costs because the risk manager chooses to retain a loss exposure instead of insuring it.

Benefits of RMIN to insurers

-risk management creates a positive effect on an insurer's underwriting results, loss ratio, and overall profitability because insureds who practice sound risk management tend to experience fewer or less severe insured losses than those who do not. -Consumers of insurance who practice risk management are generally more knowledgeable about handling loss exposures than consumers who don't practice risk management. They are likely to combine insurance with other techniques for handling loss exposures, and therefore may incur and submit fewer claims. -Risk management also stimulates insurers to create innovative insurance products and maintain competitive prices and services. -Professional risk managers seek to get the most for their insurance dollars and are often willing to pay higher premiums in exchange for greater insurance value. As a result, these risk managers may encourage insurers to be more innovative and competitive in the products and services they provide.

Selecting risk management techniques: Informal guidelines

1)do not retain more than you can afford to lose. Setting an upper limit on the proper retention level is an important guideline. -The amount that a household or an organization can afford to lose depends on its financial situation 2)do not retain large exposures to save a little premium. A risk manager should not retain a loss exposure with high potential severity, such as auto liability, to save a small amount of insurance premium. -Exposures with the potential of low frequency but high severity should generally be insured because they are highly unpredictable. 3)do not spend a lot of money for a little protection. Risk managers should spend insurance dollars where they will do the most good. If the exposure is almost certain to lead to a loss during the policy period, the insurer must charge a premium close to the expected cost of the loss plus a portion of the insurer's overhead, premium taxes, and profit. -It is better to retain exposures of this type because the household or organization could absorb the cost of a loss almost as easily as the cost of the insurance. 4)do not consider insurance a substitute for risk control. -A company's risk manager may evaluate a particular exposure, such as automobile collisions, and discover that the frequency of accidents has been increasing in recent years. If the company has a $1,000 collision deductible for each accident, the risk manager may consider reducing the company's total annual retention for auto accidents.

Loss exposure

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

Risk Control Technique: Avoidance

Eliminates a loss exposure and reduces the chance of loss to zero. -For example, a manufacturer of sports equipment may decide not to sell football helmets to avoid the possibility of large lawsuits from head injuries. Likewise, a family may decide not to purchase a motor boat to avoid the potential property and liability exposures that accompany boat ownership. -Please note it is not always possible for an individual or business to do this.

List the steps of the risk management process

Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program

What is the considered the traditional risk managers role in regards to loss exposures?

In the past risk managers only considered pure risk.

Risk Financing Technique: Transfer

In which one party transfers the potential financial consequences of a particular loss exposure to another party that is not an insurer. -For example, the landlord of a commercial building may wish to transfer the financial consequences of a liability exposure arising out of activities of a tenant. The landlord accomplishes this transfer by having the tenant sign a hold-harmless agreement. The agreement can be a separate contract, but it is usually a provision included in the lease. -In this case, the hold-harmless agreement might state that the tenant agrees to indemnify the landlord for any damages the landlord becomes legally obligated to pay because of injury or damage occurring on the premises occupied by the tenant. -purchasing insurance shifts the exposure as well to an extent

Loss severity needs to properly estimated because?

Insure or retain a particular loss exposure.

Risk Control

It is a risk management technique that attempts to decrease the frequency and/or severity of losses or make them more predictable. -A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable. - includes the implementation of several techniques

ERM's approach can be summarized as:

It is the approach to managing all of the org's key risks and opportunities.

High level explanation of selecting risk management techniques

Organizations and households select risk management techniques based on financial criteria or informal guidelines. -For example, organizations that are accustomed to reaching decisions based on expected profits or other financial criteria will probably use these same financial standards to select the most promising risk management techniques. -In contrast, organizations that are less financially oriented are more likely to apply informal guidelines in choosing risk management techniques.

In the long run what is more expensive SIR or insurance?

Retention is less expensive than insurance. While retention involves absorbing the cost of losses, insurance premiums are used to cover losses plus the insurer's overhead, taxes, expenses, and other costs of policy and claim handling. -In the short run, however, many people and organizations do not have the financial means to retain more than a small amount of their losses.

Problem with relaying too hard on loss exposures

Some losses may have not have been recorded.

Monitoring Results and Revising the Risk Management Program (step 6 of the risk control management process)

The last step in the risk management process is actually a return to the first. To monitor and modify the risk management program, the risk manager must periodically identify and analyze new and existing loss exposures and then reexamine, select, and implement appropriate risk management techniques. Thus, the process of monitoring and modifying the risk management program begins the risk management process once again.

Loss severity

The monetary amount of damage that results from a loss is known as

Retention (risk financing definition)

This involves acceptance of the costs associated with all or part of a particular loss exposure. -Retention can be intentional or unintentional. After thoroughly analyzing the alternatives, a risk manager may decide that retention is the best way to handle a given exposure, perhaps because insurance is not available or is too expensive. -For example, a risk manager may decide that purchasing collision coverage on a fleet of older vehicles is not worth the premium and may thus decide to retain the organization's exposure by paying for any collision losses from the company's operating funds.

Risk Control Technique: Separation

This is a risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss. -For example, an organization may store inventory in several warehouses for valid business reasons, as well as for risk control. Another example of separation is using several suppliers for raw material purchases, which might also provide competitive pricing -basically contingency planning around potential events

Risk Control Technique: Duplication

This is a risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve. -For example, an organization may store copies of key documents or information at another location and may maintain an inventory of spare parts for critical equipment.

Risk Financing (A risk management technique not risk control technique)

This is an effective risk management technique that includes steps to pay for or transfer the cost of losses. The most common risk financing techniques include retention and transfer (non-insurance risk transfer and insurance)

How is retention used from a risk managers perspective?

This is usually used in combination with other risk management techniques, particularly risk control and insurance. -A deductible in a business auto policy is an example of the combination of retention and insurance. If the risk manager also implements a driver safety program to lower the frequency of corporate auto accidents, the combination of risk control, retention, and insurance can handle the exposure economically.

Unintentional retention

This may result from inadequate exposure identification and analysis or from incomplete evaluation of risk management techniques. -For example, a restaurant may not identify its liability exposure for serving too much alcohol to a customer and therefore may fail to purchase liquor liability insurance to cover this exposure. -thus they eat the cost themselves

Risk Control Technique: Loss prevention

This seeks to lower the frequency of losses from a particular loss exposure. -Some common examples of loss prevention are keeping doors and windows locked to prevent burglaries, and maintaining a regular program of vehicle maintenance to prevent accidents caused by faulty equipment. -another example is security guards stationed in high theft areas of a store

implementing risk control techniques (step 5 of the risk management process)

need to make the below decisions: -What should be done -Who should be responsible -How to communicate the risk management information -How to allocate the costs of the risk management program

Enterprise-wide risk management activities occur at what level:

the enterprise level or "corporate level". It is designed to create a greater emphasis on inter department cooperation.