ARM 402

Risk Control Measures for Copyright Losses

1. notice 2. registration 3. restrictive covenants 4. responses to anticipated defenses 5. licensing agreements

Risk Control Measures for Trademark Loss Exposures

1. notice: register it with USPTO and get an R with a circle around it; until registered, the product name should be followed by TM 2. registration: if the mark has been registered and the R is not used, then much of the protection that would normally be gained by registration is lost -2 advantages: (1) creates a presumption that the party doing the registering is the owner; (2) registration creates a nationwide notice, not just notice in the local market -risk manager should document the 10 year renewal dates and document the use of it because someone can claim the mark was abandoned if the mark is not continuously used 3. searches and watches: before a registration is attempted and periodically after, a search should be done to determine whether someone else has a similar trademark or service mark or has applied for one 4. licensing agreements: should be carefully drafted and should address quality control issues & should limit the liability org the org that owns the mark if the licensee fails to meet quality standards 5. restrictive covenants: org can assert that the other party acknowledged the existence of the trademark right and promised not to infringe upon it; if broken, breach of agreement action is allowed 6. enforcement of rights: infringers should be dealt with in a timely manner with a cease-and-desist letter or notification of intent to sue; any apps by others for a similar mark should be handled by filing oppositions to the mark with USPTO

Ability of a Pool to meet risk financing goals

1. pay for losses: yes bc of risk sharing however the pool must pay for its own losses 2. maintain liquidity: yes if adequately funded and managed, reducing an org's necessary level of liquidity 3. manage uncertainty: yes by risk sharing 4. comply with legal and regulatory requirements: yes if organized and managed within state regulations 5. minimize the cost of risk: yes through economies of scale in administration

Ability of Self-insurance Plans to Meet Risk Financing Goals

1. pay for losses: yes if org carefully chooses retention level, purchases appropriate excess coverage, and has sufficient cash flow or liquid assets 2. maintain liquidity: yes if org carefully chooses retention level, purchases appropriate excess coverage, and has sufficient cash flow or liquid assets 3. manage uncertainty: no, the higher the retention, the higher the degree of uncertainty 4. comply with legal and regulatory requirements: a self-insurer must meet certain legal requirements 5. minimize cost of risk: must administer its own claims but can save insurer operating expenses, profits, and risk charges

Copyright Creation

a copyright is crated when a work meets these 3 criteria: 1. the work must be original 2. the work must be fixed in a tangible medium of expression that is permanently recorded (paper, video, audio, digital media) 3. the work must have some degree of creativity once these 3 criteria are met, the work automatically obtains basic copyright protection in the US and all countries honoring the Berne Convention

Special Purpose Vehicle

a facility established for the purpose of purchasing income-producing assets from an org, holding title to them, and then using those assets to collateralize securities that will be sold to investors

infringement

the unauthorized use of an individual's IP

Fleet Systems Components

-components pose risks that must be controlled to maintain fleet safety 1. vehicles 2. vehicle maintenance 3. cargoes 4. routes 5. operators 6. vehicle schedules

Patent Features

1. eligibility 2. application 3. duration

Types of noninsurance Transfer for risk control

1. leasing 2. contracting of services 3. waiver or exculpatory clause 4. disclaimer of warranties

large deductible plans ability to meet risk financing goals

1. pay for losses: yes bc insurer pays and insured reimburses them 2. maintain liquidity: yes if deductible level is carefully selected 3. manage uncertainty: yes, org can effectively manage cash flow uncertainty 4. comply with legal and regulatory requirements: yes for purchasing insurance bc an insurer issues a policy guaranteeing that all covered claims will be paid 5. minimize the cost of risk: yes bc plan avoids substantial taxes, residual market loadings, and insurer overhead and profit charges

Trademark (& service marks and trade dress) Features

categories, creation, duration

Quota Share Reinsurance

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.

risk-based capital

a method developed by the NAIC that established a minimum amount of capital than an insurer needs to support its overall ongoing business operations based on the risk-based capital formula

large-line capacity

a primary insurer's ability to provide a large amount of insurance under a single policy

experience rating

a rating plan that adjust the premium for the current policy period to recognize the loss experience of the insured org during past policy periods

surplus relief

a replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer

retrospective rating

adjust the premium for the current policy period to recognize the insured's loss experience during the current policy period

Standby Credit Facility

-when a bank or another financial institution agrees to provide a loan to an org if the org suffers a loss -the credit is prearranged, so the interest rate and principal repayment schedule are known in advance and org pays a commitment fee -similar to insurance; they are often used together -obligates the org to pay back, with interest, a loan it uses to cover losses -losses paid by insurance do not have to be paid back -therefore, a standby credit facility entails loss retention, while insurance entails loss transfer -if an org's resulting annual losses exceed the insure premium, insurance is its best option

cut-through clauses

-when an insured org is concerned about the solvency of one of its insurers, the org may seek the addition of this to the reinsurance agreement between the insurer and its reinsurer -usually requested when the insurer does not satisfy the financial standards established by the insured org's lender -clause provides that in the event of the primary insurer's insolvency, the reinsurer will pay any resinsurance proceeds directly to the designated payee, which could be the insured org, the lender, or both -reinsurers usually accommodate this because it is in their and the primary's best interest to keep the insured org's business

Basel III

-2013: Basel III introduced a global liquidity framework with goals of improving the quality, consisteny, and transparency of banks' capital base to help the commercial banking sector better absorb shocks from financial and economic stressors -offers improved risk management and governance -created a capital requirement (surcharge) for large, global, systemically important banks (too big to fail) -focuses on planning, continually monitoring risks exposures and capital needs, establishing procedures to control or mitigate banks' risk exposures and capital positions, and reporting requirements -modifies the Basel tiers to require capital distribution and to strengthen capital requirements for credit risk by type of asset -categories of capitalization: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized -- prescribes prompt corrective actions to be taken by the bank and discretionary or mandatory actions to be taken by regulators for institutions that fall under any category other than well capitalized -introduced further measures of capital stability in addition to the RBC requirements in the form of two capital surplus buffers: a capital conservation buffer and a counter-cyclical capital buffer

Individual self-insurance plans

-involves only one org -anyone can do it provided the state it operates in permits it -generally only WC, Auto, and GL are subject to state regulatory control

The Basel Accords

-Basel I was created after 1988 international bank failures and prescribed two RBC ratios for the banks in their jurisdictions -2006: Basel II expanded on Basel I's rules for minimum capital requirements and established regulator reviews and disclosure statements; modified the earlier agreements to improve financial institution's risk management and better preserve banks' solvency

IP Risk

-IP derives its value from the right of its owner to exclude others from using it -an org's risk manager is responsible for the protection of its IP; also must manage the liability loss exposure from inadvertent infringement -orgs must recognize the IP rights of others to avoid infringement lawsuits -in the US, IP is protected by a body of law that helps to define ownership of a piece of IP and ownership rights

technology's impact on risk modification

-IoT devices, sensors, wearables, and telematics allow orgs to accurately identify patterns of risk, model risk, and predict risk -in some cases, risk can be predicted so accurately that it can be modified to the point of being nearly preventable; can create significant cost savings for orgs and insurers -insurers could charge a lower premium if you have sensors or something like that in place; but they do come with their own risk -advancements in forecasting could result in minimal financing being required to retain, transfer, or modify negative risks -must factor in that there is a cost associated with forecasting technology

Use of large deductible plans

-WC deductibles can apply on a per person and/or per accident basis, auto deductibles apply on a period accident basis, GL deductibles on a per occurrence basis -such plans can also include an aggregate deductible, which caps total deductible payments over a period of time (a year) -amount that the insurer incurs to adjust losses, including legal defense costs, can be either inside or outside deductible; outside: prorated between insured and insurer based on size of loss

Single-Parent Captive (pure captive)

-a captive insurer owned by one company that insures all or part of the loss exposures of that company or its subsidiaries

Forward contract

-a contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price -enables a buyer and seller of a commodity or financial instrument to know its price before delivery -- can serve to reduce the risk of price fluctuations of the commodity or financial instrument, subject to the futures contract -simplest form of a derivative

Hold-harmless agreements

-a contractual provision that obligates one of the parties to assume the legal liability of another party -the party that uses this to transfer the financial consequences of loss to a second party is called the indemnitee; the second party, which agrees to indemnify the indemnitee, is referred to as the indemnitor -indemnitor may need to demonstrate proof of financial responsibility (through COIs) -limited form: General Contractor agrees to indemnify building owner only for claims that result from GC's own negligence, referred to as sole fault -intermediate form: GC agrees to indemnify BO only for claims that result from GC's sole fault or from both parties' joint fault -broad form: GC agrees to indemnify BO for losses that result from GC's sole fault, both parties' joint fault, or BO's sole fault -many jurisdictions have anti-indemnity statutes that don't allow broad or intermediate forms contained in construction contracts -in some jurisdictions that don't have anti-indemnity statutes, they have judicial rules that limit the use of HH agreements -purpose of statutes and rules is to prevent a party with greater bargaining power from taking advantage of another party to a contract, who is often less able to assume the other's liability -vary by state so determine legality before -handling of punitive damages varies (auto included, specified, or illegal) -in some cases, orgs use HH agreements to finance loss exposures that are not economically feasible to insure; however, in many cases, an org using a HH agreement to finance a particular loss exposure also has insurance that includes coverage for that exposure -- not using insurance for claim ultimately reduces cost of risk

Controlled Master Program

-a customized collection of admitted insurance policies and a nonadmitted master policy -admitted policies cover the foreign subsidiaries of a multinational business and are purchased in the local insurance markets of the foreign countries -nonadmitted policy covers all of the insured's international operations on a blanket basis and is often purchased in the country where the parent company is domiciled -master policy can include difference in conditions (DIC) and difference in limits (DIL) coverage to prevent a coverage gap -gap may occur if the admitted policies purchased locally provide lower limits or less coverage than the parent company requires -master policy can also provide specialty coverages

derivatives

-a financial contract that derives its value from the performance of another asset, such as a commodity, or that can derive its value from the yields on another asset or the level of an index, such as S&P 500 -3 major categories: forwards/futures contracts, options, swaps

Trade dress

-a form of protected IP focused on the visual appearance of a product or its packaging -coke bottle or heinz ketchup bottle -this protection benefits the org selling such products, but also protects consumers who might be deceived by product packaging on copycat goods designed to imitate the original product

Risk Retention Group

-a group captive formed under the requirements of the US Liability Risk Retention Act of 1986 to provide liability coverage (except personal liability, employers liability, and wc) -all of its owners must be from the same industry and must be insured by the group -all insureds must be owners -major benefit is that it needs to be licensed in only one state to provide liability coverage to group members anywhere in the US

Protected Cell Company

-a group captive in which each participant pays premiums and receives reimbursement for its losses from--as well as credit for--underwriting profits and investment income, similar to rent-a-captive -each participant is assured that other participants will not be able to access its capital and surplus in the event that the other participants become insolvent -each participant is also assured that third-party creditors can't access its assets

Common Law System

-a judge interprets the facts of the case, examines precedents (prior judicial rulings in similar cases), and makes a decision based on the facts in the current case -precedents are guides, not rigid frameworks for decisions -system tends to be fact-intensive, relying on the judge's reasons for a final decision -England and most of the former British Colonial countries, including Australia, Canada, India, and the US use this system

Public International Law

-a law that concerns the interrelation of nation states and that is governed by treaties and other international agreements -ex: GATT by the World Trade Organization -these international treaties affect member countries by requiring that they amend their national laws to comply with the agreements' requirements

Private International Law

-a law that involves disputes between individuals or corporations in different countries -involves questions about which laws apply in settling disputes and how -determines which jurisdiction's law applies to the business transaction in question, which country's court hears the dispute, and whether other countries will enforce the foreign decision -in any legal dispute between parties of two countries, these 2 issues must be considered: 1. Comity: whether a court in one country will recognize the decision of another country's court -the practice by which one country recognizes, within its own territory or in its courts, another country's institutions 2. Jurisdiction: whether a court has the right to hear the legal dispute -courts in international cases must determine whether they have jurisdiction over the person or entity and over the subject matter, and whether they have jurisdiction to render the particular judgment in the case -in international cases, personal jurisdiction is based on whether the person or entity is present in the country or has committed the act in question in that country -a significant issue is whether one country's courts have jurisdiction over either another country's citizen or a corporation with its place of business in another country

Patents

-a legal protection and a right granted by the government that gives its owner the ability to control who makes, uses, sells, or imports for sale his or her invention for a limited period -length of that time period depends on the category of patent granted -utility patent: a patent issued for an invention or a process that has some utility or usefulness (ex: machine, process, chemical compound); does not have to be marketable to qualify for a patent, but it must work -design patent: patent issued for a design that is new or innovative or that is ornamental or aesthetic in nature -plant patent: issued for an asexually reproducing plant that is new

Regulatory Capital

-a level of owner's equity banks must hold to ensure that they have enough capital to manage operating losses and honor customers' cash demands -financial institutions: provide credit and liquidity and hold funds of both individuals and public and private orgs; they invest these funds to earn profits, exposing their operations to varying levels of risk -allowing depository banks and insurers to take unreasonable risks with their customers' money would go against the public interest; so regulations dictate the amount of capital these institutions must hold to guard against such risks -risk capital is the level of capital required to provide a financial institution with a sufficient cushion against an unexpected reduction in the value of its capital

the bow-tie diagram method

-a process of communication and collaboration that identifies a risk and then lists its possible causes and possible consequences on either side -allows board of directors to see how the possible causes of a risk could create specific consequences -structure allows the risk professional to add in barriers to the left and right of the identified risk, illustrating how it can be either controlled (if barrier is placed to its left) or dealt with (barrier placed to the right) -the visual nature lends itself to use in group activities designed to assess and discuss risks and their treatments, such as risk workshops

feedback loop

-a process that allows constant, consistent monitoring of a holistic process -results of the program can be weighed and measured; if the results don't meet expectations, the program can be adjusted to produce more favorable results

Treaty Reinsurance

-a reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty and automatically reinsured -obligatory reinsurance -used as the foundation of primary insurer's reinsurance programs -provides primaries with the certainty they need to develop underwriting policy and guidelines -primaries often used this to cover many loss exposures over a period of time

retrocession

-a reinsurance agreement whereby one reinsurer (retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (retrocessionaire) -allows a risk that is too big to be reinsured by one reinsurer can be shared by many

risk financing

-a risk management technique that includes steps to pay for or transfer the cost of losses -must be a part of every org's holistic risk management strategy -the more risk an org retains to pursue opportunities, the more funds it must allocate to finance those risks -these funds are then used to apply risk treatments

Credit Risk

-a specific form of asset risk -reflects the possibility that the insurer will not be able to collect money owed to it -ex: receivables, interest, dividends,e etc. -for each asset, the value shown in the NAIC Annual Statement is multiplied by the appropriate RBC factor to determine the required RBC component for credit risk

Contingent Capital Arrangements Diadvantages

-a standby credit facility or contingent surplus note for losses pays funds in the form of loans, not equity, and must be paid back to the lender with interest -ownership dilution: reduces existing shareholders' % of ownership -the additional owners introduced by a contingent capital arrangement, who may be unfamiliar with the issues and causes of the triggering event, may adversely affect the ability of the org to recover, despite the injection of additional capital

Captive Insurance Plans

-a subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates -primary purpose is usually to reduce the parent org's cost of risk -most captives purchase reinsurance, usually on an excess of loss basis, to transfer some of their exposures to another insurer -generally are used for paying the first layer of losses, where there is a relatively high loss frequency and low-to-medium loss severity, with excess insurance to cover the higher-severity losses -normally involve both retention and transfer -administrative requirements are substantial

Duration

-a trademark entered on the USPTO Principal Register is protected for ten years -registration can last indefinitely, provided it is renewed every 10 years

Vehicle Fleet systems

-key element is system safety -four common features: components, purpose, environment, life cycle

Surplus Share Reinsurance

-a type of prop rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated monetary amount, or line -when an underlying policy's total amount of insurance exceeds the line, the reinsurer assumes the surplus share of the amount of insurance, calculated as the total amount of insurance minus the primary insurer's line -primary's share of premiums and losses is the proportion that the line bears to the total amount of insurance -ex: if line is $50,000 and the amount ceded is $200,00, primary insurer would receive 20% (50,000/250,000) of premium and pay 20% of all losses; reinsurer would receive 80% and pay 80% (200,000/250,000)

Pro Rata Reinsurance

-a type of reinsurance in which the primary and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) -ex: if reinsurer covers 60% of the liability for each loss exposure, then reinsurer would be entitled to 60% of policy premiums and responsible for 60% of each loss -the amount of ceding commission paid to primary is usually negotiated and is taken from the reinsurance premium remitted to the reinsurer -may also include a profit-sharing commission, which is negotiated and paid to the primary insurer after the end of the treaty year if the reinsurer earns greater-than-expected profits on the reinsurance agreement -pro rata is generally chosen by newly incorporated insurers or insurers with limited capital bc it is effective in providing surplus relief (through payment of ceding commissions) -pro rata reinsurance can be identified as either quote share or surplus share

Controlled master program advantages

-a uniformly consistent insurance program that is centralized yet captures the benefits of local policies -company's purchasing power is consolidated and duplicate coverage is eliminated -the global nature of the program allows a company to negotiate worldwide rates, terms, and conditions that reflect its global size and experience -centralized global approach makes a company's risk management goals more likely to be realized and gives a risk manager more opportunities to implement a consistent global risk management strategy -multinational reach reduces accumulation of risk and diversifies the risk across a company's subsidiaries -gathers a lot of info that can contribute to best practices -primary advantage is prevention of coverage gaps

the Prouty Approach

-a way to select a risk treatment -analyzes a risk's loss likelihood and impact to determine a proper treatment -when a risk's likelihood and impact could be accurately estimated, risk managers could use a matrix to determine which treatment method would be best -four categories of loss likelihood: almost nil, slight, moderate, definite -three categories of loss impact: slight, significant, severe -matrix communicates and justifies priority of a risk -similar concept to a heat map -activities with losses that have a slight change of occurring and are of low impact tend to be retained and accounted for in the budget -activity with high likelihood and intolerable impact is typically avoided -in the middle: typically call for modification

Torts

-a wrongful act or an omission, other than a crime or a breach of contract that invades a legally protected right -remedy is usually monetary damages -an org is liable for any tort it commits through its agents -3 categories: 1. negligence: tortfeasor exposed others to unreasonable danger by failing to exercise the duty of care the law requires under the circumstances (unintentional); the legal responsibility and standard of care established by the law are what a reasonably prudent person would do in similar circumstances -negligence can be a result of ignorance, carelessness, or accidents 2. intentional torts: actions or omissions that the tortfeasor intended, although the consequences of such actions may not be intended (ex: libel, invasion of privacy, assault, false imprisonment, trespassing) 3. strict liability: arise when an org engages in certain activities that are considered ultrahazaradous (ex: blasting, harboring dangerous animals); does not require negligence or intent to harm

Retrospective Rating Plans

-adjusts the premium for guaranteed-cost insurance to reflect the insured org's current losses, rather than industry-wide loss experience -for orgs that want to retain risk in connection with their insurance programs -a risk transfer plan -commonly used for WC, Auto, and GL: a single plan can be used for more than one type of policy -orgs use these plans to fiance their low to medium-severity losses -an org must have a substantial insurance premium to benefit from this -insured pays a deposit premium at the beginning of the policy period, and the insurer (using a rating formula agreed on before policy period) adjust the premium after the end of the policy period to include a portion of the insured org's covered losses that occurred during that period -bc the premium is adjusted upward or downward based directly on a portion of covered losses, the insured org is retaining a portion of its own losses -as long as the insured has a sufficiently large premium, the plan can be designed to cap losses and therefore minimize the insured's retention by using a loss limit -ex: if loss limit is $100,000 per occurrence, only the first $100,000 of each covered occurrence will be included in the retrospective rating premium; the amount of each occurrence that exceeds $100,000 and is less than the policy limit will be transferred to the insurer -max and min premiums

Role-Based Collaborative Dashboard Reporting

-aims to share info as succinctly as possible, with the goal of providing all the info internal stakeholders need about a particular subject within a very brief period of time -provides execs with the basic info necessary to keep the org running smoothly from a risk perspective -to be most effective, it needs to be designed with its audience in mind -risk professionals who establish the board will need to know what their audience's objectives are, what types of decisions they make, and what info is needed to inform those decisions

Asset Risk

-all assets are exposed to the risk that their value will decease -the change in an asset's value is reflected in the policyholders' surplus -the amount of RBC needed to support an insurer's asset risk can be determined by multiplying the asset's NAIC annual statement value by a factor provided by the NAIC -addition RBC charges are imposed if the insurer's investments are not sufficiently diversified

Swaps

-an agreement between two orgs to exchange payments based on changes in the value of an asset, yield, or index over a specific period -commonly used to manage interest rate and currency rate of exchange risk -two parties will swap interest payment streams on a bond; one has fixed rate, one has variable rate -variable (floating) rate is typically tied to an index of interest rates that banks charge each other for loans -ex: a company will make payments on a variable rate, but receive payments on a fixed rate -swaps are frequently structured sot that no money is paid up front between couterparties for the contract -instead, cash flows are exchanged back and forth between the orgs through the term of the swap

Contingent Capital Arrangements

-an agreement, entered into before any losses occur, that enables an org to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold -org does not transfer the risk of loss to investors, but simply receives a capital injection in the form of debt or equity to help it pay for the loss -org generally receives more favorable terms than it would if forced to raise capital after a large loss -org agreeing to provide the contingent capital receives a committment fee in exchange for its promise to provide funds to the org after a loss; fee is influenced by several factors, including likelihood of loss, interest rates of alternative investments, credit risk of org -after a loss, investors in a contingent capital arrangement become creditors of, or equity investors in, the org -usually set up as an option so org who purchases the agreement is not obligated to exercise the option, even if its losses exceed the threshold specified in the agreement -3 types of arrangements: standby credit facility, catastrophe equity put option, contingent surplus note

holistic risk treatment

-an approach to treating all of an org's risks and opportunities in a way that uses available resources as efficiently as possible to maximize outcomes -sometimes there is resistance from department heads and decision makers when it comes to sharing info -knowing how one risk treatment can affect another can be particularly valuable to decision makers -in a holistic approach, gains in one area of an org can be used to offset losses from another (could eliminate the need to treat the risk resulting in a loss) -siloed approach: org would dedicate resources to treat the risk resulting in a loss without considering the possible gains in another area, potentially resulting in the org's treating the negative risk unnecessarily -a way to picture this is with a chart that compares a pure risk with a speculative risk. on their own, each risk only has two possible outcomes; together, the two risks can have four possible outcomes -when an org analyzes its risk financing holistically across the enterprise, it may find inconsistencies in its approach to treating risk

Rent-a-captive

-an arrangement under which an org rents capital from a captive insurer, to which it pays premiums and receives reimbursement for its losses -org receives credit for underwriting profits and investment income, so the org benefits from captive but is not required to invest its own capital -each insured keeps its own premium and loss account, so no risk shifting or distribution occurs among the members of a rent-a-captive -rent-a-captive org charges a fee for its services -provide a means for an org to form a captive insurer quickly without tying up capital

Following Form Excess Liability Policies

-an excess liability policy that covers a claim in excess of the underlying limits only if the loss is covered by the underlying insurance -"true" would state that except for policy limits, all of the provisions and conditions of the designated underlying policy are incorporated into and adopted by the excess liability policy, and it would contain no provisions conflicting with underlying policy; called "concurrent" -a lot of policies are called following form but not actually concurrent; ex: they have some exclusions

Self-Contained Excess Liability policies

-an excess liability policy that is subject to its own provisions only and does not depends on the provisions of the underlying policies for determining the scope of its coverage -coverage gaps between excess and underlying can occur -an exception occurs when the excess liability policy provides coverage in excess of aggregate limits in the underlying policy that have been reduced or exhausted by prior claims

aggregate excess liability policy

-an excess liability policy that requires the insured to retain a specified amount of loss from the first dollar during a specified period of time, usually one year -the insurer then pays all loss for that period that exceeds the retention, up to the policy limit -can be combined with specific excess policy

Specific Excess Liability Policy

-an excess liability policy that requires the insured to retain a stipulated amount of liability loss from the first dollar for all losses resulting from each single occurrence or accident -the insurer then pays losses from occurrence in excess of the retention, up to the policy limit -can be combined with aggregate excess policy

Working Cover

-an excess of loss reinsurance agreement with a low attachment point -enables primary to spread its losses over several years; both parties anticipate that profitable years will offset unprofitable ones -primary insurers selling a type of insurance they're not experienced with may choose to purchase a working cover until they better understand the loss frequency and severity -reinsurers typically require a working cover to contain an occurrence limitation of two or three times the reinsurance limit; keeps working cover from being exposed to catastrophic events

Futures Contract

-an exchange-traded agreement to buy or sell a commodity or security at a future date at a price that is fixed at the time of the agreement -enable orgs to plan and budget activities with less concern regarding price changes

Contracting for Services

-an individual or org that performs a particular activity is generally held primarily responsibly for any losses caused by that activity -- this can be transferred by contracting with another org to perform the activity -contractor is liable for his work but injured party could sue the property owner -because courts want to compensate the injured, they favor restricting the rule exempting the person who hires a contractor from liability for the contractor's torts; so they have established some exceptions to this rule: 1. the principal is directly liable for negligence in selecting the contractor, giving directions, or failing to stop any unnecessary dangerous practices of which the principle was aware 2. the principal's (person who hired contractor) responsibility for certain duties to be performed safely can't be delegated to another party 3. if the subcontracted work is inherently dangerous to others (blasting example), the principal that hired the contractor can be held liable for a third-party injury caused by the contractor's negligence

Copyright Ownership

-copyrights are generally owned by the person who created the work; however, three exceptions apply: 1. when the work was created in the course of the author's employment. in that case, the employer owns the copyright 2. when the work was created on commission. if the author acted as an independent contractor when creating the work under a written agreement with the commissioning party, the commissioning part owns the copyright 3. when the author sells the copyright 1 & 2 are often referred to as work for hire

Large Deductible Plans

-an insurance policy with a significant per occurrence or per accident deductible -typically used to treat WC, auto, and GL loss exposures -allow an org to pay a reduced premium for retaining losses below the deductible level; org transfers the financial consequences of losses that exceed the deductible to the insurer -as losses occur, insurer settles each claim and then periodically bills the insured org for the amount of the loss up to the deductible -org benefits from deferring cash outflows for its retained losses compared with paying a premium up front -insured usually must provide the insurer with a form of financial security, or collateral, such as a letter of credit, to guarantee payment of covered losses up to the deductible level

Underwriting Risk

-an insurer is at risk if it collects insufficient premiums and/or significantly underestimates its loss reserves -the RBC formula applies different factors for each type of insurance to reflect its industry experience -the RBC formula also recognizes excessive premium growth (if the 3 year average growth rate is greater than 10%): concern is that the insurer may be achieving this by price cutting

Reinsurance intermediary

-an intermediary that works with primary insurers to develop reinsurance programs and the negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered

Fleet Systems' systems and relationships

-an org's fleet system is a subsystem of several larger systems, such as its overall transportation system and government road systems -each component is an individual system made up of multiple systems -cargoes, routes, schedules, and maintenance activities are individual systems consisting of numerous subsystems -the hierarchy of subsystems within larger systems has two implications for risk control and fleet safety management: 1. when a subsystem fails, it increases the probability that the larger systems that the subsystem is related to will fail 2. system failures degrade the subsystem environment, increasing the strain on subsystems and leading to a higher likelihood of failures and accidents the systems concept provides a framework of relationships, highlighting that the failure of any system component may have a widespread impact

Catastrophe Put Option

-an org's right to sell equity (stock) at a predetermined price in the event of a catastrophic loss -the buyer of a catastrophe equity put option pays a commitment fee to the seller

Trade Secret Loss Exposures

-another entity might honesty recreate an org's secret invention, process, or method and get it patented: org relying on trade secret protection alone would lose that protection -trade secret is stolen or simply disclosed as result of negligence: court decides if its a trade secret

Operational Risk

-any possibility of loss arising from people, processes, systems, or external events -includes most events that could affect an org's ability to reach its goals -integrated into every activity of an org, therefore it needs to be evaluated based on each org's strategic objectives, risk appetite, and risk tolerance -four key classifications: 1. people 2. process 3. systems 4. external events

Copyright - Restrictive Covenenats

-any provision, clause, or agreement that, on termination of employment or contract, restricts post-termination activities of the employee or contracting party -legally binding contract -provides an additional claim that an org can assert when its copyrights are infringed upon -helps reduce likelihood of infringement

Criminal Law

-applies to acts that society deems so harmful to the public welfare that government is responsible for prosecuting and punishing the perps -used to prescribe a standard of conduct to which all citizens must adhere -a crime can be major or minor -felony: major crime involving long term punishment -a minor crime (misdemeanor) is punishable by a monetary fine or short term imprisonment -summary offenses are crimes that are not felonies or misdemeanors under state law and that usually result in monetary fines rather than imprisonment

Copyrights

-applies to all types of original expression, whether in words, musical notes, sculpture, video, or lines of source code in a computer program -essential elements are creation, ownership, duration

Civil Law

-applies to legal matters not governed by criminal law -protects rights and provides remedies for breaches of duties owed to others and applies to all legal matters that are not crimes and involve private rights -injured party usually request reimbursement for harm -written laws, such as statutes and ordinances, specify the nature of crimes and their punishments -an individual files charges -sometimes a single act can constitute both a civil wrong and a crime

Indirect Losses

-as a consequence of the direct liability losses that occur when a claim is filed against an org, several other net income losses are possible -reputational harm

Strategic Risk

-assessing strategic risks effectively can ensure the org protects its assets and reputation by making strategic decisions that avoid or mitigate the consequences of negative risks and/or improve its financial position by maximizing gains from opportunities -strategic risks are any factors that could affect the business -include the upside and downside associated not only with a business strategy itself but also with the implementation of a strategy -best for orgs to approach strategic risks with an eye toward both preventing problems and exploiting opportunities -the goal of strategic risk assessment is to accurately determine whether a particular business decision is worth the risk -with operation risks, the focus is often on making sure that things are done right; with strategic risks, the focus on doing the right things and making the right decisions to ensure the org achieve its strategic goals

1. Developing Goals (Strategic Management)

-before determining goals, senior level execs must establish org's vision statement and mission statement -the vision statement describes what the org wants to become, and the mission statement describes the process that will achieve that vision -after that, exec team must identify the products, services, values, and people that will be used to reach the org's goals in both the short and long term

Risk Appetite

-how much risk the org wants to take on (it is a target) -can be defined quantitatively or qualitatively -can be described as risk averse or aggressive -shouldn't be static; it should shift over time as internal and external factors change

correlation and covariance in holistic risk management

-both assess how one risk factor affects another and are useful for selecting risks or opportunities to offset other risks -covariance: measures how two variables will change in relation to each other; used when there are two sets of data and he or she wants to see if they are connected to each other -correlation: scaled version of covariance expressed as a number from -1 to +1; measures the degree to which two variables are related; indicates the strength of their relationship -when a risk professional considers how a risk interacts with other risks, correlation is typically reported in the form of a matrix, which shows the correlation for pairs of risks -matrix always has a value of +1 along the diagonal because a risk sources is always perfectly correlated with itself -only one side of matrix is filled in because the other side would be a mirror image of the completed side -sources of risk that have a low positive correlation, no correlation, or negative correlation with other risk sources in a portfolio are generally good risk sources to add to the portfolio bc they tend to improve the org's risk-return position by increasing the portfolio's risk diversification

Waiver or Exculpatory Clause

-both can transfer responsibility for liability loss exposures -an individual or org can give up its right to sue another party through a waiver -exculpatory clause: a contractual provision purporting to excuse a party from liability resulting from negligence or an otherwise wrongful act

Group Captive

-captive insurer owned by a group of companies, usually operating similar businesses -association captive: a group captive that is sponsored by an association -many orgs consider the opportunity to obtain insurance through an association captive as one of the benefits of being a member of the association

Leasing

-certain losses that can arise from property ownership don't exist for a lessee occupying the property; losses include accidental damage and liability to third parties resulting from hazards on the property -two important exceptions apply: lease obligates the lessee to return the property to the lessor in the same condition in which it was received or the lessee is at fault in causing harm to others -an org that leases property instead of owning it practices risk control by allowing the property owner to retain the risks related to property ownership

Pools

-commonly used for financing WC losses, and the pool will process and pay WC claims on behalf of its members -made up of member orgs who each contribute premium based on its loss exposures, and in exchange, the pool pays for each insured's covered losses -structure is less formal than a group captive -operates like a insurer by collecting premiums, paying losses, purchasing excess insurance or reinsurance, and providing other services such as risk control consulting -well-suited for orgs that are too small to form a captive -achieve savings through economies of scale in administration, claims handling, and the purchase of excess insurance or reinsurance -a suitably designed pool can reduce an org's cost of risk and keep cost uncertainty associated with retained losses at a tolerable level

COBIT

-conceived as a framework that would enable orgs to communicate about their IT related needs, strategies and governance -identifies gaps between the actions of operations and the controls put in place by risk management, and also helps identify opportunities for improvement in these two areas -can take both a governance and management approach: gov approach ensures that IT endeavors don't create more risk than the org can tolerate; management approach focuses on balancing costs of IT related risks with their benefits -main method to help control operational risks is to provide an organizational structure that ensures IT initiatives are aligned with the org's overall goals

Risk Control Measures for Routes

-consider safety and distance -reasonably safe, cost-effective, reliable travel routes pose acceptable risk levels to vehicles, drivers, and cargoes; are a reasonable distance; and include alternate paths if the main route is blocked or closed -shorter routes reduce the likelihood of accidents and increase on-time deliveries without delays

Reinsurance agreement

-contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured -normally requires the primary insurer to retain part of the loss exposures covered by the reinsurance agreement -retention can either be a % of original amount of insurance or a dollar amount of loss -primary pays a reinsurance premium for protection provided -reinsurer usually pays ceding commission for the expenses incurred by primary for issuing policy (commissions paid to producers, premium taxes, and underwriting expenses)

How to deliver your message

-convey the right nonverbal message: tone of voice, level of eye contact, body language -lead effective meetings: define specific objectives, determine who will come, visual aids, strong opening, succinct supporting material, powerful conclusion -apply the modes of persuasion: ethos or "character" refers to the need to establish credibility; logos or "reason" refers to the need to support your message, claim, or argument with evidence; pathos or "emotion" refers to the need to make an emotional appeal to your audience -resolve common problems: hidden agendas, status differences

Copyright - Licensing Agreements

-copyright owners can grant permission to others to use their copyrighted material in a licensing agreement -because the copyright owner usually specifies the exact material to be used, the type of use allowed, and the duration of the license, the owner controls the loss exposure -an honest difference in opinion can exist about the extent of a license granted so carefully draft the agreement to prevent this defense

Copyright - Registration

-copyright protection begins the moment the work is expressed in a tangible medium but it's only basic protection -to obtain the fill protection under the law and more significant monetary damages under the applicable statute, a copyright should register the work with the US copyright office -registration is simple but must be filed within 3 months of the date the work is first published or before an infringement occurs -registration provides reasonable, if not indisputable, evidence of ownership rights -registration allows the copyright owner to collect statutory damages (up to $100,000 plus attorneys' fees) without having to prove actual monetary harm

Specific Performance or Injunction

-in a breach of contract claim, a court might order an org to take a particular action or refrain from a particular action -specific performance: requirement to act; order construction firm to finish their project -injunction: a court order to refrain from engaging in a particular activity; prohibiting burning waste at a construction site

Trademark Creation

-created when the mark is first used on a product or in product marketing; business that first uses it is the mark's owner -two requirements for creation: must be distinctive and trademark's owner must be the first to use the trademark -distinctive if its memorable; considered memorable if it is either unique or unusual or has gained a well-known association with certain brands -examples of distinctive trademarks: unique symbol or logo, fabricated word, word that is unexpected in the context it is used, word that creates a fanciful image, word that describes a product's qualities -exception is when the org has used the word for so long that a substantial % of general public associates the word with the product (ex: mcdonalds hamburger) -trademarks with a secondary meaning qualify as being distinctive: common words that the general public has come to associate with a product because of long term usage -2nd req: accomplished by attaching the trademark to the product being sold or by using it in product marketing -exception occurs when another party files an intent-to-use trademark application with the US patent and trademark office; date application is filed becomes the date of first use

Operational Risks presented by IT

-cyber risk: data breach -operational risk: failing hardware, buggy software, critical infrastructure failures, phishing -op risks can arise from upgrading an org's virus protection software -members of senior management are responsible for managing IT risks -identifying IT risks creates a risk in itself bc the process requires skills and familiarity and if either are lacked, things could be missed or prioritized in the wrong order -IT operational risks can be sorted into these risk classifications according to the impact they have on the org: 1. security: data breach could result in unauthorized access to, use of, or alteration of an org's info 2. availability: systems could be inaccessible 3. performance: the risk that systems, applications, or personnel won't perform at the level required 4. compliance: the processes for handling data could fail to meet certain regulatory or business insurance policy requirements -one major IT risk is project backlog: reducing budget for IT and it creating a snowball effect of postponing projects, etc. -a way to minimize project backlog is by using frameworks

Copyright Duration

-depends on when the work was originally created -a work created on or after Jan 1, 1978 is automatically protected from the moment of creation and is originally given a term that lasts for the author's life plus an addition 70 years after author's death -in the case of a joint work prepared by two or more authors, the term lasts for 70 years after the last surviving author's death -for works made for hire and anonymous works, the duration of copyright is 95 years from publication or 120 years from creation, whichever is shorter

Patent Application

-doesn't automatically receive a US patent; must file an application with the USPTO -app explains how to make and use the invention and why it is different -perform search before filing app and the results must be disclosed in the app -examiner can accept entire app, allow only parts, or reject entire app -if app is allowed, inventor receives what is called a ribbon copy of the document bestowing the patent; have to pay regular maintenance fees until patent expires -if patent is rejected or expired, invention enters the public domain -app must be filed in inventor's name

Insurance as a Risk Management Technique

-enables an org to transfer some of its loss exposures to an insurer through a legal contract called an insurance policy -insurer pools the premiums paid by its insureds, and insures who experience covered losses are paid from the pooled funds -- the total costs of losses is shared by all the insureds whose premiums were pooled -most insurance policies can be characterized as guaranteed cost insurance, in which the premium is specified at policy inception

Capital Buffer

-ensures that banks build up capital surplus in a buffer account when they are not financially stressed, which can be used to bolster losses the bank incurs when it is financially stressed -Basel II incorporates incentives to encourage this

3. Formulating Strategies (Strategic Management)

-exec team develops long-term strategies to improve performance and/or create a competitive advantage based on org's goals and internal/external analysis -factors team should consider when developing long-term strategy include changes needed to implement strategy, cost, overall return on investment, risks involved, and risk appetite -next step in this phase is developing short-term strategies that come together to achieve long-term strategies: involves formulating the "Who", "what", and "when" responsibilities of each dept.

Controlled master program Disadvantages

-generate a large amount of info that must be reviewed and analyzed - consumes considerable resources to stay current -local risk managers may resist relinquishing their responsibility of purchasing all of the coverage for a foreign subsidiary -if the same insurer and its foreign local subsidiaries are used to provide the master policy and the local policies, a counterparty risk may be a concern

Assessing Strategic Risk

-goal isn't to eliminate negative risks and their consequences, it's to use info about strategic risks to make holistically informed decisions that optimize the risk-reward ratio -more difficult to put a dollar value on strategic risk than the other 3 risks -metrics to quantify strategic risk: *economic capital *RAROC *shareholder valued added: measure of profitability after funding costs are considered; often used to measure a corp's worth to shareholders -two metrics that play a big role in strategic risk assessment are risk appetite and risk threshold

Trade Secrets

-good risk control measures can protect a trade secret indefinitely -trade secret status is bestowed without a registration process -when an org takes reasonable steps to ensure the confidentiality of info about the invention -a trade secret can be anything that gives its owners an advantage over competitors and that is treated as a secret -created automatically - there is no mechanism to officially designate it as a trade secret -defined under international law based on 3 factors recognized by the WTO: 1. it is secret from the public; 2. it has economic value to the holder because of it secrecy; 3. holder is deliberate in its attempt to maintain the secret

Technology's impact on Risk Transfer

-growing access to big data, machine learning and AI have made it easier for insurers to predict, plan for risk, and to develop products that specifically address certain risks -insurers can price policies more precisely -insurers have the ability to create alternative products: parametric insurance was too costly for such small events, but now it can all be processed electronically making it worth it

Noninsurance Transfers for Risk Financing

-hold-harmless agreements

International Law

-in any legal dispute arising between parties from different countries, public and private international law must be considered -those resolving international disputes between individuals or corporations first apply any applicable public international law that governs the dispute; if no international treaty applies, then any relevant laws of the involved countries are applied to the dispute in accordance with the principles of private international law

Copyright - Responses to Anticipated Defenses

-in some situations, alleged infringers do not deny that they copied the works, only that copyright owners waited too long to claim infringement (called laches) -if infringement was hidden or difficult to discover, some courts allow more time to bring claim -copyright owner has no duty to actively search for infringement but does need to bring infringement to light in a timely manner once discovered -some infringers claim purpose was for teaching, research, scholarship, criticism, or journalism - uncertain on how court would decide on this -most infringers don't want to take the risk and cease their activities voluntarily when asked -innocent infringers just need to pay economic value of material that they used but this defense is probably not successful if notice has been provided -innocent infringement often arises when the copyrighted material's used has been authorized

admitted insurance

-insurance provided in a jurisdiction by an insurer that is licensed to do business in that jurisdiction -a multinational company that relies heavily on this for its coverage in foreign countries is likely following a decentralized approach to cover its international exposures -advantages: *policy will be serviced locally, increasing likelihood that service will be aligned with local practices *premiums and claims will be paid in local currency, eliminating exchange rate risk *local agents/brokers may be able to understand local coverage nuances and advise better *complying with local laws and doing business locally helps integrate company into local community/economy -disadvantages: *policy written in foreign language - could have gaps, nonuniform conditions *local policy may be more expensive if competition among insurers locally is not robust; assessing financial strength of insurer could be hard *effective solvency regulation, financial statements, and rating agencies of insurers may be lacking locally *purchasing locally lessens company's purchasing power and decentralizes risk management strategy, which can weaken implementation of enterprise risk management program

nonadmitted insurance

-insurance provided in a jurisdiction by an insurer that is not licensed to do business within that jurisdiction -advantages: *admin control can be centralized (more efficient) *financial strength of insurer is more easily determined *policy written with same language as parent company *payments made in domestic country's currency -disadvantages: *claims adjusting can be really complicated with local coverage and local insurer reps *local management may not have confidence in nonadmitted coverage provided by parent company's insurer and may decide to buy its own coverage locally

Benefits of Retrospective Rating Plans

-insurer saves on risk charges: extra charges that an insurer includes as part of its guaranteed-cost premium to cover the chance that losses will be higher than expected -encourages risk control: the direct link between losses and premiums is a major incentive for an insured to control loss -if designed correctly, the plan provide financial stability -can help an org meet its risk financing goals by providing an appropriate balance between risk retention and risk transfer while retaining some of the benefits of insurance

Types of Controls for Operational Risk

-internal control systems are often designed by the managers of the areas in which they will be put to use -preventive or detective: *approvals and authorizations (preventive) *reconciliations (detective) *segregation of duties (preventive) *safeguarding of assets (preventive and detective)

Role of Internal Control

-internal controls help ensure that an org's methods, processes, and systems support organizational objectives and limit operational risks where possible; often work in tandem with management controls -as internal control took a more enterprise-wide approach, it assumed a prominent role in preventing losses that are uninsurable or otherwise ineligible for risk transfer -need to be in a strong control environment to be effective; requires strong governance and active management that sets an appropriate tone regarding expected standards of conduct -accountability for IC always started with policies and procedures that define employees' responsibilities -internal control creates a life cycle where operational risks are constantly identified, assessed, controlled, ad monitored in an endless loop

Patent Eligibility

-inventors can apply to each individual country in which they want a patent or file an international application that covers many countries -need permission from USPTO to file for a patent in another country or could result in having to forfeit their US patent protection -invention must be new, useful, and nonobvious to be considered a patent -nonobvious means that the invention displays a level of innovation or produces results that are unexpected when compared with previous developments in that area -must be nonobvious to someone with ordinary skill in the applicable field, not just to the layperson

Defense Costs

-investigation and defense costs can be an org's most expensive liability loss -expert witness charge high fees -beyond the substantial legal fees, the defendant is usually responsible for paying all costs imposed by the court, including jury fees, filing fees, and premiums on court bonds -even if the org has not committed a legal wrong, it can suffer liability loss in the form of defense costs

The Parametric Trigger

-investors that supply risk capital for products in the capital markets may be concerned with morale hazard (the degree to which an org can influence the level of its insurable losses; if an org has insurance sometimes they are less likely to try and control the risk) -to reduce this hazard, some capital market products are based on an objective trigger, which is a measurement that determines the value of an insurance-related capital market product based on a parameter that is not within the control of the org transferring the risk -parametric triggers used blockchain to link a contract to a parametric trigger, allowing indemnification to occur almost immediately -ex: contract set up that automatically orders more ice cream on a day that is over 90 degrees according to the National Weather Service -allow coverage for events that may otherwise not be insurable -reduce admin costs, allowing for smaller transactions -apps on phone allow people in far away geographic locations to get insurance -disadvantages: basis risk, if the parameters that trigger a contract are barely missed, they won't get anything but suffer damage

Modifying Legal and Regulatory Risk

-legal and reg risk is categorized as hazard risk arising from liability risk exposures -can be treated with risk avoidance, modifying the likelihood of an event, modifying the consequences of an event

Contracts

-legally enforceable agreement between two or more parties -establish the responsibilities for each party involved; any party that fails to comply with the terms has breached the contract -four basic requirements to be enforceable: 1. agreement: one party makes an offer that the other part understands and accepts 2. consideration: each part gives up something of value 3. capacity to contract: need to be of legal age, sober, sane 4. legal purpose: must have a legal purpose and must not be opposed to public policy -implied contract: terms and intentions are indicated by the actions of the parties to the contract and surround circumstances; ex: no price for repair work listed -express contract: terms and intentions are explicitly stated -valid contract: enforceable -void contract: does not have all four requirements -voidable contract: involving fraud or material misrepresentations -unenforceable contract: has all 4 elements but can't be enforced; ex: oral contract to sell land

Legal and Regulatory Risk Consequences

-monetary damages -defense costs -indirect losses -specific performance or injunction

Benefits of large deductible plans

-motive for this plan is to reduce cost of risk -reducing the premium helps for two main reasons: states impose various charges, such as premium amounts and residual market loadings; an insurance premium includes charges for the insurer's overhead costs and profit -plan can significantly reduce cost of risk by helping orgs avoid substantial premium taxes, residual market loadings, and insurer overhead and profit charges -allow insured to benefit from cash flow available on their reserves for retained losses -enhances insured's cash flow because these claims are paid out months/years after they occur and insured only reimburses insurer after they pay

2. Analyzing Environments (Strategic Management)

-need to find internal and external issues that could positively or negatively affect the org's ability to achieve its goals -internal: strengths and weaknesses of a business -external: opportunities and threats -can use SWOT analysis to view an org's capabilities objectively, to determine how receptive the market would be to products and services, and to evaluate its competitive position within the market -in SWOT, strenghs can be paired with opportunities to identify areas of competitive advantage, and weaknesses with threats to identify risks that should be avoided -PESTLE can be used to analyze an org's external environment to identify opps and threats; SWOT can be used to take a deeper dive into each of the six PESTLE categories -porter's 5 forces focuses on five forces within an org's competitive environment to analyze how successful an org, product, or service might be used; often used to identify opps and threats within a SWOT

Meeting killers

-no stated purpose -no agenda -wrong people attending -bad timing -lateness -wandering -lack of conclusion

Exporters package Policy

-nonadmitted package policy tailored to orgs with incidental exposures in countries other than their home country -insurers with the ability to provide worldwide services offer policies that are designed for orgs that have growing international exposures but have not yet acquired permanent offices or other places of business in the foreign countries in which they operate -can provide GL, FVWC, auto, crime and fidelity (also personal property, K&R, BTA, ocean cargo)

Excess of Loss Reinsurance

-nonproportional reinsurance -the reinsurer responds only to losses that exceed the primary insurer's retention (attachment point) -primary insurer fully retains losses below the attachment point, and the reinsurer may require the primary insurer to also retain responsibility for a % of the losses that exceed the attachment point -reinsurance premiums are negotiated based on the likelihood that losses will exceed the attachment point; usually a predetermined % of the policy premium charged by the primary insurer -reinsurers don't usually pay a ceding commission but they can reward primaries for favorable loss experience by paying a profit commission or reducing rate to calculate premium -primary insurer's attachment point is usually high enough that expected claims are retained -- however if the primary expects a significant volume of losses, an excess of loss reinsurance agreement may have a low attachment point (working cover)

Countercyclical Buffer

-offers an option for banks in countries that experience excess aggregate credit growth -enables such banks to preserve a maximum amount of capital as a buffer during these expansionary phases of the financial cycle that can later be used during a downturn, when credit conditions weaken -aim is to give banks a capital buffer that can absorb losses, enabling them to remain financially healthy and to meet their obligations, even when capital markets decline

risk treatment plan

-once or selects a risk treatment technique, it needs to develop a risk treatment plan to outline how the org will implement and monitor the technique -to be effective, plan needs each of these elements: *explanation of treatment technique *proposed actions: document proposed actions and how they will be prioritized *resource requirements: identify resources required *roles and responsibilities: determine involvement and accountability *timeline *monitoring requirements: indicate how performance will be measured, monitored, and reported to upper management

Noninsurance Contractual risk transfer

-one party (transferee), which is not an insurance company, accepts another party's (transferor's) loss exposures or financial consequences of the transferor's loss exposures as an incidental aspect of another business transaction -two types: 1. a noninsurance transfer for risk control shifts loss exposures to the transferee to reduce the frequency and/or severity of the transferor's losses arising from the loss exposures: a bankrupt or uncooperative transferee may continue to be responsible for losses arising from the transferred loss exposures, preserving the transferor's protection 2. a noninsurance transfer for risk financing transfers only the financial consequences of the transferor's loss exposures: an insolvent transferee provides no protection to the transferor, who must then pay for its own accidental loss

Captive Disadvantages

-requires a substantial amount of initial capital and start-up costs -requires a significant amount of time and resources to administer -triggers the need for additional capital if loss reserves are inadequate -involves a number of outside service providers -creates potential taxation problems resulting from Internal Revenue Code tax and accounting treatment of losses, premiums, loss reserves, and investment income

RBC Requirements for Insurers

-one purpose of insurer's capital is to enable it to meet its obligations to policyholders and claimants int he event of unexpectedly poor investment or underwriting results -bc holding capital has associated costs, insurers seek to generate the highest return on their equity from the least amount of capital -RBC requirements consider asset risk, underwriting risk, and other risks applicable to the type of insurance -bc an insurer is unlikely to suffer from all risks at the same time, the RBC formula adjust the sum of the values assigned to each risk using a statistical covariance technique: accounts for dependencies among the applicable risk factors and avoids unrealistically high capital requirements -RBC for Insurers Model Act: enables insurance regulators to act before an insurer becomes too financially weak to be rehabilitated -the non-discretionary operation of the RBC system allows insurers to self-regulate by performing the calculations themselves and then reducing risk or increasing capital before regulatory action is required -also forces state regulators to take immediate action under a clear mandate to determine whether an insurer can resolve its own financial problems

Securitization Model

-org sells the income-producing assets to an SPV in exchange for cash; the income-producing assets are no longer owned by the org but by the SPV to sell to investors -the investors purchase the securities for cash and receive a return on their investment commensurate with the risk inherent in the income-producing assets that back the securities, free of the org's credit risk

Risk Control Measures for Patent Loss Exposures

-patent must be maintained with periodic payments -owners must diligently look for infringers and must be diligent in ensuring they do not infringe either -owners must be willing to defend against infringement claims 1. notice: must say pending if pending, must be marked with a patent number when issued to avoid infringers claiming unintentional infringement 2. licensing agreements: patents are often sold or licensed to others who can manufacture the invention; agreement should include language that addresses the risk of liability for infringement claims 3. restrictive covenants: work-for-hire, hire-to-invent, and confidentiality agreements with employees; should define the IP, require full disclosure of any discoveries, inventions, improvements, etc. that employee makes during work hours using employer property/money -agreements should be used for all new hires with access to IP and current employees if their position warrants it 4. freedom-to-operate search: orgs need to make sure they don't infringe on other patents; this is a review of prior art and current patent apps to ensure that an invention currently under development doesn't infringe on an existing patent

Fleet System Environment

-physical environments: include highways, weather conditions, terrain, communities, and other tangible objects and forces that fleet vehicles encounter when deployed -legal environment: consists of the laws governing fleet operations; fleet operation regulations increase the level of fleet safety; fleet vehicles traveling outside the local area of operations need to comply with other laws which poses a challenge so managers need to maintain awareness of existing and new laws -economic environment: economic prosperity: fleet safety measures are more likely to receive adequate funding; in a downturn, fleet budget allocations may be reduced caused important steps to be skipped in safety process; labor union strikes and civil unrest also threaten safe delivery of cargoes -competitive environment: directly correlates with economic environment; normal competition, high priority is placed on fleet safety; intense competition, fleet safety spending may be reduced as a short-term attempt to save money

capacity ratio

-premium to surplus ratio -leverage ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus

Types of Reinsurance

-primary often use several reinsurance agreements to meet its particular needs -two broad categories: treaty and facultative -both can be further classified as either pro rata or excess of loss reinsurance

Fleet Systems Purpose

-primary purpose of a fleet system is to transport cargo or people; to do this, system should possess these characteristics: 1. reliable: complete all scheduled trips without injury to passengers or cargoes at high dependability rates 2. safe and well maintained: incurs minimal losses 3. efficient: operations are within acceptable cost parameters 4. environmentally neutral: don't pollute or negatively affect environment 5. lawful: comply with applicable local, state, and federal laws -increased used of safety measures reduces the frequency and severity of losses that may damage internal fleet operations or external fleet services an org employs, making fleets more reliable and efficient -emphasizing liability risk control ensures that a fleet's operations are legally compliant

Captive Advantages

-reduces cost of insurance -improves cash flow and provides opportunity to capture investment income on loss reserves and underwriting profit -offers broader coverage and ability to obtain insurance not otherwise available or unacceptably priced -provides greater control over claims and other areas -offers potential tax advantages

Securitization/SPV Regulatory Requirements

-regulators, auditors, and potential investors scrutinize the use of SPVs bc they have been used to manipulate org's income statements and balance sheets -therefore, firm must take utmost care to meet all reg. requirements and maintain a high level of disclosure

Facultative Reinsurance

-reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted -negotiates a separate agreement for each loss experience it reinsures -primary insurer is not obligated to purchase reinsurance, and the reinsurer is not obligated to provide it (non-obligatory reinsurance) -written for a specified time period and can't be canceled by either party unless contractual obligations, such as payment of premiums, are not met -reinsurer issues a facultative certificate of reinsurance -purchased mainly to reinsure loss exposures that they do not typically insure or that involve high levels of underwriting risk -primary insurers cover fewer loss exposures with facultative than with treaty -may be expensive for primary and reinsurer

portfolio reinsurance

-reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies -minimizes possible reputational harm if primary were to just cancel all its policies -reinsurer typically agrees to indemnify the primary insurer for all losses incurred as of, and following, the date of the portfolio reinsurance agreement -however, primary continues to pay claims to or on behalf of its insured covered by the reinsured policies

self-insured retention

-requires insured org to retain a relatively large amount of loss -insured org is responsible for adjusting and paying its own losses up to the SIR amount -orgs with SIRs frequently outsource these tasks to independent claims adjusting orgs

Costs included in Retrospective Plans Premium

-retained losses, insurer overhead and profits, loss adjustment expenses, residual market loadings, and premium taxes -includes a risk transfer premium, which compensates insurer for accepting the risk of either or both of these results: 1. an individual loss will fall between the loss limit and the policy limit (premium component that covers this risk is called an excess loss premium) 2. the total amount of losses subject to the loss limit during the policy period will exceed the aggregate amount that causes the retrospective rating plan premium to reach the maximum premium (premium component that covers this risk is called an insurance charge) -the purpose of the risk transfer portion of a retrospective rating premium is to compensate the insurer for limiting the amount of an insured's covered losses included in the retrospective rating insurance premium adjustments

risk treatment applications

-risk management professionals will likely treat risks differently depending on the quadrants they fall into

IT Scenario Analysis

-scenario analyses provide an opportunity for an org to simulate IT-related scenarios, such as a data breach or software failure, and gauge how prepared the org is to deal with the related risks -should be designed to help risk professionals ask questions that will lead to the identification and assessment of operational risks facing an org -input should be sought from all corners of the org -as risks are discovered by scenario analysis, they should be prioritized according to their effect on IT factors -this prioritization should then be considered alongside the org's risk appetite and risk tolerance to direct appropriate resources toward the management of each

Risk Control measures for Vehicle Maintenance

-scheduling routine preventive maintenance is crucial for safe, reliable vehicle performance -being diligent helps minimize operating losses by improving fleet safety and preventing vehicle losses

Advantages of Self-Insurance Plans

-self-insured orgs have direct control over claim settlement -emphasis on loss control - when an org directly pays the cost of its own losses, it has an incentive to prevent and reduce losses to avoid the expense of loss payments and settling claims -in the long-run, the cost tends to be lower than insurance (no risk charge; but self insurance is subject to various other taxes, assessments, and fees)

Disclaimer of Warranties

-sellers of property often assert disclaimers of warranties -a disclaimer in a sales contract may deny any express warranties during the property's sale -may also deny implied warranties -implied warranty of fitness for a particular purpose: that the seller is aware of the particular purpose for which the buyer will use the property and that the property is suitable for that purpose -implied warranty of merchantability: that the property is suitable for the purpose for which most buyers use it

separation & duplication

-separation: a type of modification that disperses a particular asset or activity over several locations; can reduce an org's dependence on a single asset, activity, or person, making individual losses smaller -duplication: a type of modification that duplicates exposure units; can reduce dependence and making losses smaller also -drawback with both is that separation and duplication create an additional risk: the second server could be breached

Group Self-Insurance Plans

-several similar employers form a not-for-profit association or corporation to which they pay premiums to manage their self-insurance -can be used only for WC loss exposures and healthcare benefits -operates like an insurer in that it pools the loss exposures of its members -plan's administrator issues member agreements, collects premiums, and manages claims; admin also purchased excess liability insurance and makes required state regulatory filings -can benefit an org that is too small to self-insure its loss exposures on its own -plan offers savings through economies of scale in administration, claims handling, and the purchase of excess liability insurance

Insurable Risks and Loss Exposures

-significant limitation is that insurance is not available for some types of risks -insurable risks are mainly confined to hazard risks and operational risks, while financial risk and strategic risk are general uninsurable -insurers are willing to insure a loss exposure that has all or most of these characteristics: *it's associated with pure risk *it's accidental from the insured's standpoint *it's definite and measurable *it's one of a large number of similar exposure units: loss exposure must be common enough that the insurer can pool a large number of similar exposure units, which enables the insurer to predict losses accurately and determine appropriate premiums *it's not catastrophic *it's economically feasible to insure

Technology's impact on Financial Transactions

-smart contracts and blockchain -technology is constantly speeding up the recovery process of orgs of recouping financial losses and regaining the position it was in before the loss occurred -smart insurance contracts can dramatically increase the speed of loss payments, as well as reduce administrative costs for insurers -ex: if the blockchain receives a signal that a flood has occurred in your area (could come from sensors), the blockchain could instantly determine whether your business is covered for a flood loss. having detected that your business has coverage, a loss payment could be deposited directly into your org's bank account. the claim, verification of coverage, and payment could be completed within seconds rather than days or weeks

Statutes and Regulations

-statutes are created by federal, state, provincial, or territorial governments and often modify the duties owed to others -violating the duties imposed by a statute may be used as evidence that the org breached the duty of care owed to another -violating a statute also imposes legal liability on an org regardless of whether the org committed any tort or assumed any liability under a contract -statutes are the basis for most criminal laws -ex: tax law, antitrust laws, Sarbanes Oxley -Statutes don't include all the details necessary for an individual or org to abide by the law; to provide these details, governments authorize certain agencies to create regulations

Agency Captive

-type of group captive that is owned by agents or brokers rather than by the org insured -formed in response to hard markets to insure select accounts for which there is a limited or nonexistent market -provides a way for agents/brokers to assume a portion of their customers' loss exposures and, in turn, generate underwriting and investment income

5. Evaluating Strategies (Strategic Management)

-strategic evaluation (strategic control) involves monitoring progress toward goals and follows these 3 steps: 1. establish performance standards and measurements 2. compare actual results with established standards 3. identify and implement corrective actions when goals are not being met -some orgs use a balanced scorecard which balances specific goals and actions with both long- and short-term and both financial and non-financial goals -strategic management process is cyclical so when internal or external circumstances change, or when corrective actions are needed to meet goals, the strategic management process may need to be revisited

Strategic risk factors

-strategic risks are often associated with external factors that are beyond a single org's control -can also arise from internal factors & and can be created or affected by factors associated with the other risk quadrants

Contingent Surplus Note

-surplus notes that have been designed so that an insurer, at its option, can immediately obtain funds by issuing the notes at a pre-agreed rate of interest -available only to insurers -US statutory accounting rules allow insurers to issue surplus notes, which are sold to investors and are counted as policyholders' surplus rather than as a liability on an insurer's statutory balance sheet -benefit of surplus notes is that they increase an insurer's assets without increasing its liabilities -although surplus notes have many of the characteristics of debt, their treatment as equity on an insurer's statutory balance sheet allows an insurer to increase its capacity to sell business

Technology to improve safety in Fleet systems

-telematics -onboard computers that collect data on drivers -leveraging vehicle operating data is vital to control an org's accident risk and reduce liability exposure -stability control systems: automatically engage the brake system -rear-mounted video cameras: help a driver see behind them -Antilock braking systems: prevent vehicle's wheels from locking up when the brakes are engaged -direct tire pressure monitoring systems: generate real-time alerts warning drivers of improperly inflated tires, which pose a safety risk -onboard tire inflation systems: automatically maintain proper air pressure levels and also adjust levels when driving over different types of surfaces -satellite communication with global positioning system: collects real-time vehicle location data, allowing fleet managers and owners to monitor a vehicles current location and movements -onboard scales: calculate the combined weight of the vehicle and its load to ensure that the vehicle's max payload capacity is not exceeded -dash-mounted cameras: create surveillance in the event of an accident can serve as evidence -lane departure warning systems: alert drivers of situations that could lead to accident -forward collision warning systems: alert drivers to maintain safe distances from vehicles in front of them tech-driven safety systems are recommended by FMCSA & NHTSA

Max and Min Premiums for Retrospective Plans

-the adjusted premium is subject to a max and min amount agreed to in the policy -max: the most that the insured will be required to pay under a retrospective rating plan, regardless of incurred losses *doing this, insurer accepts the risk that total losses during the policy period could exceed a maximum amount

Disadvantages of Self-insurance plans

-the associated uncertainty of retained loss outcomes, which can reduce an org's earnings, net worth, and cash flow -faces the possibility that losses will be much more frequent and severe than expected: orgs should limit retention to a level that fits within its risk criteria -administrative requirements: lots of work -tax deductions are delayed when compared with the timing of deductions under many other types of risk-financing plans: more significant for liability losses than property losses, which tend to paid soon after they occur

Controlling losses associated with motor vehicle safety systems

-the components of a fleet system generate loss exposures that may lead to accidents -the environment each component functions in can put one or more systems at risk and cause them to fail -a comprehensive fleet-safety program addresses each component and its environment

Contingent Capital Arrangements Advantages

-the funds made available to an org cost less than funds made available by insurance -capital commitment fee is much lower than insurance premiums -it's a lower initial cost, which lowers the org's opportunity cost bc, instead of using the funds the maintain a reserve fund for losses that may or may not occur, it can use them in production or in another investment opportunity that can earn a higher rate of return -allow an org to obtain a capital infusion at a predetermined price

Options

-the holder of an option has the right (the option) to buy or sell the associated asset for a specific price, or strike price -call option: option that gives the holder the right to buy an asset -put option: option that gives the holder the right to sell an asset -when the value of a call option's underlying asset exceeds the strike price, the buyer can exercise the option and realize a gain -the seller is the party that issues the option and receives an up-front payment from the buyer; payment compensates the seller for accepting the risk that it will have to pay cash to the buyer if the buyer exercises the option

working layers

-the layers of coverage in an org's insurance program that are most often called on to pay claims -primary, umbrella, liability, and the first layer of excess policies above primary policies not covered by the umbrella

Trademarks

-the legal right granted by a government entity to an org to exclusively own and control a distinctive design or set of words that legally identifies a product or service as belonging to that org -when one org copies another's trademark, it is taking advantage of the reputation that the trademarked org has earned -a trademark represents an org's products, while a service mark represents an org's services -trademark: nike swoosh

service mark

-the legal right granted by the US government to an org to exclusively own and control a distinctive word, phrase, symbol, and/or design that identifies and distinguishes the source of the services of one party from those of others -represents a org's services -ex: fedex logo

loss limit

-the level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium -ex: if loss limit is $100,000 per occurrence, only the first $100,000 of each covered occurrence will be included in the retrospective rating premium; the amount of each occurrence that exceeds $100,000 and is less than the policy limit will be transferred to the insurer

Securitization

-the process of creating marketable investment securities based on a financial transaction's cash flows -can allow an org to exchange income-producing assets for cash from the purchaser of the security -- allows the org to convert the asset to cash on its balance sheet -when an org uses an intermediary to securitize, it allows investors to decide whether to invest in a security based solely on the risk presented by the income-producing asset and not the credit risk of the org who owned the asset before transferring it to the intermediary -cash is more desirable because of its versatility and it does not carry credit risk -the intermediary that enables the bank to convert its mortgage receivables asset into a cash asset is called SPV -SPV securitizes the mortgage receivables by using them as collateral for securities it sells to investors; it then uses the interest and principal repayments on the mortgage receivables to fund the interest and principal repayments to the security investors -the securities carry the risks of the mortgage receivables held by the SPV: possibility of default and risk that the mortgagors might cancel their mortgages in order to refinance them -securitization transfers the risk inherent in the mortgage receivables from the bank to the security investors -when an SPV is involved, investors can based decisions solely on the risk presented by the income-producing assets held as collateral by the SPV; if an org directly securitized without an SPV, investors would also need to consider the overall credit risk of the org -an SPV reduces credit risk

Strategic Management

-the process of identifying, describing, and continually reviewing business decisions in a way that will propel an org to perform better -define the org's strategies -establishes and creates a means to evaluate the decisions and actions that ultimately determine how the org performs -an effective strategic management process drives an org to make decisions that have an optimal risk-reward ratio -the responsibility of senior-level executives, who make strategic decisions based on input from the board of directors -five interdependent stages: (1) developing short and long term goals; (2) analyzing internal and external environments; (3) formulating strategies; (4) implementing the strategies; (5) evaluating the strategies

4. Implementing Strategies (Strategic Management)

-the process of making strategies work -this stage is more difficult to complete and requires more time than strategy formulation -5 steps that are usually carried out by mid-level or dept. managers: 1. identify and document the specific processes, tasks, and responsibilities necessary to execute the strategic plan throughout the org or dept 2. frequently communicate info regarding the strategic plan throughout the org 3. assign specific responsibilities, tasks, authority, and accountability through the org or dept. 4. allocate adequate resources for successful implementation 5. make necessary adjustments to remain on track for achievement of goals

Action Levels for RBC for insurers

-the results of the RBC formula determine the action to be taken -no action needed if RBC is 200%+ -at the lowest RBC computed minimum level (between 70 and 100%), the insurer is placed under regulatory control

Basis Risk

-the risk that the amount the org receives to offset its losses may be greater than or less than its actual losses -inherent in insurance contracts that are based on specific payouts rather than adjusted losses

risk treatment

-the selection and implementation of actions to help manage or mitigate a risk -a continual process that entails examining each option in terms of whether it leads to a tolerable level or residual risk or helps the org maximize the potential benefits of an opportunity -treatments are not mutually exclusive -cost of each treatment option should be weighed against its potential benefits (cost-benefit analysis)

Risk Tolerance

-the total amount of risk an org is able to accept -broader than appetite -always stated in quantitative terms -risk tolerance levels have high-end thresholds, low-end thresholds, or both -an org's risk appetite rests between the high-end and low-end risk tolerance thresholds; this area also contains high-end and low-end appetite thresholds as well as treatment trigger levels to indicate when a corrective action must be taken -to achieve a balance of risk, an org that's taking on a lot of risk in one venture may select lower tolerance thresholds in other areas

Reinsurance

-the transfer from one insurer (primary) to another (reinsurer) of some or all of the financial consequences of certain loss exposures covered by the primary insurer's policies -mostly provided by professional reinsurers, but primary insurers also band together in pools, syndicates, or associations to provide reinsurance to their members

Copyrights - Notice

-to control copyright infringement exposures, many copyright owners place a copyright notice on their published works - c with circle around it, date published, author's name -once notice in on a published work, any party that copies it without permission can't claim lack of knowledge of copyright, which makes it easy for owner to collect damages -if innocent in infringing, they only have to pay reasonable economic value of the work's use -internet makes it hard because anyone could copy the work and risk management would have no idea -one way to provide notice for work on the internet is with digital watermarking - embeds info about the owner in an org's video, audio, or graphics files -watermarks can't be removed or altered from works published on the internet -risk professionals should also asses possible copyright infringements by their own companies

Excess Liability Insurance

-to cover claims that exceed their primary insurance limits or their retention amount for self-insured liability claims -approach can be complicated by the fact that the various primary and excess policies can be subject to different terms of coverage -types: follow form excess liability policies, self-contained excess liability policies, umbrella liability policies -two additional types of excess liability insurance: specific excess and aggregate excess (often used in connection with self-insured WC obligations)

Risk and Strategy

-to maximize performance, execs need to understand how to account for strategic risks as they formulate strategies -an org can deal with them either after consequences have occurred (downstream) or before, as the org develops its business strategies (upstream) -tackling strategic risks upstream by incorporating them into the strategic management process helps prevent negative consequences -it also helps senior execs make business decisions that offer the greatest potential risk-reward trade-off and best help the org meet its goals

Frameworks

-used to analyze IT Operational Risks -an approach to project planning and execution in which portions of the project are divided by requirements or problem statements and addressed separately, but in a way that will integrate

Civil Law System

-uses comprehensive codes and statutes to form the backbone of a legal system -relies heavily on legal scholars to develop and interpret the law -the most influential system in the world -the dominant legal system of western Europe, almost all of Latin American, and parts of Africa and Asia -in this system, a judge is a civil servant whose function is to find the correct legislative provision within a written code of statutes and apply it to the facts presented in a case -judge perform little interpretation of a code, and their opinions do not determine their thought processes on legal issues -does not have the common law system's jury trial: they have a series of isolated meetings, written communications, motions, and rulings help decide the case

umbrella liability policies

-usually applies in excess of an org's primary GL, auto, and EL coverages (can be excess of EBL, PI, watercraft liab) -umbrella policies perform these basic functions: *provide excess limits above the each occurrence limits of the insured's underlying policies *take the place of the underlying insurance when underlying aggregate limits are reduced or exhausted *cover some claims are not covered by the insured's underlying policies, in excess of the SIR specified in the policy

Risk Control Measures fro Vehicle Schedules

-vehicle schedules should prioritize safety, providing drivers a sufficient amount of time to work at a reasonable pace without rushing, avoid scheduling conflicts, and accommodate unforeseen events, allowing them to complete assigned tasks on schedule -incentive-pay systems can lead to unsafe driving

Self-Insurance Plans

-when an org is able to forecast their accidental losses with enough accuracy to determine whether they can be retained through a formalized plan to fund possible losses -formal plan require orgs to have sufficient financial resources and risk tolerance to retain potentially significant losses -orgs with self-insurance plans usually also embrace risk control as part of their corporate culture -purpose is to enable an org to lower its long-term cost of risk by allowing it to pay for its own losses without incurring the transaction costs associated with insurance -an org records its losses and maintains a formal system to pay for them -best for losses that are of both high frequency and low severity (somewhat predictable) -usually coupled with excess insurance to cover severe or accumulated losses and limit the org's retention to an acceptable level -well-suited to losses that can be budgeted and paid out over time, bc org saves the money it would be paying toward insurance premiums -orgs start to consider this when annual premium exceeds $500,000 for any one type of insurance coverage

Monetary Damages

-wrongdoer in a civil suit has to pay both compensatory and noncompensatory monetary damages awarded by a court -noncompensatory: meant to punish wrongdoer and deter others from doing the same; some times called punitive damages -compensatory: a payment awarded by a court to reimburse a victim for actual harm; special damages and general damages -special damages: awards money for specific, identifiable expenses associated with injured person's loss, such as medical expenses or lost wages -general damages: monetary award to compensate victim for losses, such as pain and suffering, that does not involve specific measurable expenses -punitive damages: a payment awarded by a court to punish a reckless, malicious, or deceitful act to deter similar conduct; award need not bear any relation to a party's actual damages -wrongdoer and claimant may reach an out-of-court settlement before court reaches a verdict

Risk Control measures for Drivers

1. Driver Selection: analyzing tasks to determine job function, recruiting (involves advertising), screening and reviewing apps, screening applicants, background checks and physical exams, hiring and on-boarding, creating files for each driver 2. Driver Training: internally or outsourced; proof goes in driver's file 3. Driver Supervision: may use incentives to reward and encourage safe driving 4. Driver Licensing: drivers need driver's license, appropriate license classifications to operate fleet vehicles, and clean driving record; can decrease the org' liability in the event of an accident 5. Driver Dismissal: keep safety constant after dismissal & hire someone new; for risk management: protecting the terminated driver's rights and structuring termination meetings to minimize possible retaliation reduces the risk of injury to workers and property damage, which lowers the org's liability

Modifying the Likelihood of an event from Legal and Regulatory Risk

1. Modifying the Likelihood of Tort Liability: several different clauses can be added to contracts to remove or limit liability: *waivers: a known right can be voluntarily relinquished through a waiver *hold-harmless agreement *exculpatory agreement *unilateral notices: liability can be limited if they are physically apparent, expressed in a language other party understands, and reasonable in extent; lac of mutual consent or absence of freely bargained exchange of values also limits the legal effectiveness -hazard control involves implementing risk control measures that eliminate or reduce hazards; a key aspect of risk control for tort liability is hazard control for the risk exposures covered under an insurance policy 2. Modifying the Likelihood of Contractual Liability: primary measure to reduce likelihood is to have counsel review contracts; also have written contracts instead of oral and relying on memory 3. Modifying the Likelihood of Statutory Liability: risk management can help prevent this by understanding statutory compliance requirements applicable to their orgs (with internal/external experts, legal libraries, trade associations -corporate code of conduct is an important tool to modify likelihood

Risk Control Measures for Cargoes

1. Suitability to Vehicle: variations in cargo characteristics require orgs to use vehicles equipped with specialized features that enable safe transport with minimal risk to the cargo and vehicle (ex: frozen foods); as vehicles age, their capacity to transport cargo may decrease (do regular vehicle inspections) 2. Proper Loading: to lower transport costs and save time, drivers may try to maximize pay-load and minimize downtime by overloading or improperly securing cargo 3. Safeguards Against Inherent Vice: vehicles used to transport must provide an environment that will prevent inherent vice in the cargo, which is any condition causing freight to deteriorate or destroy itself (ex: using refrigerators for shipping ice cream)

Modifying the Consequences of an Event from Legal and Regulatory Risk

1. Tort Liability: two methods are development of defenses and participation in settlement negotiations; keep in mind the advantages and implications of these 5 widely uses defenses: *Legal Privilege: in some situations, an org's actions invade others' legally protected interests and cause harm, but those actions are legally excused bc the org has the right to invade another's interests to promote or protect other, greater interests *Immunity: certain entities, such as governments and governmental officials, charities, young children, and the insane, have traditionally not been subject to lawsuits arising out of contract and tort law *Comparative Negligence: requires both parties to a loss to share the financial burden of the bodily injury or property damage according to their respective degrees of fault *Last Clear Chance Doctrine: sometimes an injured party had the ability to avoid loss or injury but chose to act in a manner that did not avoid risk; ex: person crossing street on red light and gets hit, driver could be relieved of some if not all fault *Assumption of Risk: if a plaintiff had a sufficient understanding of a risk and, as a reasonably prudent person, voluntarily accepted the risk, the plaintiff is considered to be in complete control of his or her actions; the defendant should be not be held liable for the plaintiff's damages another way to modify is a settlement 2. Contractual Liability: -select a favorable jurisdiction -include limits of liability -include a liquidated damages provision: limits the amount for which one party might otherwise be liable -include a valuation clause -evaluate duty to mitigate: a party that claims another party breched a contract still have a duty to mitigate or use good faith efforts to reduce the severity of its own losses; as a defense, the breaching party can claim that the nonbreaching party failed to fulfill its duty to mitigate and therefore suffered greater loss than was necessary 3. Statutory Liability: few defenses so important for orgs to work diligently to prevent violations

Major Bases of Legal and Regulatory Risk

1. Torts 2. Contracts 3. Statutes and Regulations

How IP protection methods overlap

1. Trade secret and copyright: -an original work of expression can be protected as a trade secret and also as a copyright up until the time it is published -once a work is published, it's no longer a secret but copyright protection continues 2. Trade Secret and Patent: -an owner can pursue a patent application and at the same time assert that the invention is a trade secret -when patent is published, it can no longer be a trade secret; BUT patent has a limited life span 3. Copyright and Patent: -copyright law protects the expression of an idea but not the idea itself. a patent is intended to protect the idea itself but not how the idea is expressed -bc patent protection is not restricted to how the program is expressed, it provides broader protection than a copyright, but it is also harder to obtain and has a shorter lifespan

risk treatment techniques

1. avoid the risk: stopping or canceling the activity 2. modify the risk: increasing or decreasing an event's likelihood and/or consequences that will result in positive or negative outcomes; loss prevention or loss reduction 3. transfer the risk: sharing the risk with, or moving it entirely to, another party; insurance or outsourcing 4. retain the risk: accepting and absorbing some or all of the consequences of the risk; used when potential negative consequences are low 5. exploit the risk: taking actions to maximize the expected gains of opportunities; actions to exploit risks can create more risks

Fleet System life cycle

1. conceptual phase: determining the specific vehicle type to meet org's requirements 2. engineering phase: selecting types of vehicles, operators, routes, roads, schedules, and maintenance that satisfy org requirements 3. production phase: procuring vehicles selected in prior phases 4. operational phase: using and maintaining the chosen vehicles 5. disposal phase: eliminating noncompliant vehicles that fail to legally sustain vehicle purposes and attributes and replacing them with vehicles that align with the org's transportation needs

IP Valuation Methodologies

1. fair market value approach: based on the value it would have on the open market (market value) -used by most formal intellectual property valuation reports, as it is the standard recognized by most courts and tax authorities 2. Income approach: assigns a current value to a piece of IP based on the discounted cash flows the property would generate over its useful life -most prevalent valuation method -most effective approach for risk management purposes because its formula can incorporate a number of risk factors -examines various scenarios under which threats to the value of IP could lower its income potential, leading to the prioritization of resources to protect it 3. cost approach: assigns a value based on the amount the org invested in its creation and development -assumes that no other entity would pay more for the IP than the cost to create it

Incorporating Risk Into Strategy

1. first component of incorporating risk into an org's strategic decisions involves the strategic management process, when an org analyzes its internal and external environments 2. assessing the risks associated with the strategic plans senior execs are considering to meet organizational goals -scenario analysis can help an org prepare strategies to deal with multiple future events and make an org more resilient (won't predict) -scenario analysis can help an org create a strategy map, which identifies key objectives that, when achieved together, will result in obtaining a strategic goal 3. determining the org's risk threshold, risk appetite, KRIs, and treatment trigger levels for identified risks; also used KPIs to inform their strategies -KPIs (measure what already happened) measure an org's progress toward achieving its goals, while KRIs (predictive) measures risks and volatility that can affect whether those goals can be achieved -KRIs help an org maintain a level of risk within its defined risk appetite and indicate when the threshold are or are about to be breached -treatment trigger levels indicate when an org must take corrective action

Functions that Reinsurance can perform for primary insurers

1. increase large-line capacity: allows the primary insurer to increase its market share while limited the financial consequences of potential losses 2. provide catastrophe protection: keeps a catastrophe from greatly reducing an insurer's earnings or even threaten its solvency 3. stabilize loss experience: can smooth the resulting peaks/valleys in an insurer's loss experience curve which in turn encourages capital investment 4. provide surplus relief: when an insurer recognizes expenses immediately and revenue gradually, its policyholders' surplus decreases and its capacity ratio increases; reinsurance can provide surplus relief with its ceding commission 5. facilitate withdrawal from a market segment: insurer may want to leave a market segment bc it's unprofitable or incompatible with its strategic plan; can purchase portfolio reinsurance to avoid reputational harm 6. provide underwriting guidance: have expertise that they share with the primary insurers that are their customers

elements of a successful holistic risk treatment program

1. involvement from entire org: willing to share info, making risk management a priority 2. an organizational and departmental structure that facilitates managing risks as a group: departments need to look beyond their own risks 3. risk treatment policies that cross departmental barriers 4. measurements that consider the entire org 5. visible engagement from upper management 6. risk treatment performance measures

Captives Ability to Meet Risk Financing Goals

1. pay for losses: yes if property capitalized and managed 2. maintain liquidity: yes if property capitalized 3. manage uncertainty: yes if captive charges level premiums to parent and affiliates and by retaining earnings in the years with lower losses to pay for higher losses in other years 4. comply with legal and regulatory requirements: can be structured to meet requirements, but are rarely licensed to operate as a primary insurer in the US 5. minimize the cost of risk: yes if properly managed and funded, despite large start-up costs

Ability of Hold-Harmless Agreement to Meet Risk Financing Goals

1. pay for losses: yes provided loss exposures are covered by agreement and other party has the financial means to pay 2. maintain liquidity: yes; requires less liquidity 3. manage uncertainty: yes subject to the extent of the agreement 4. comply with legal and regulatory requirements: can't be used to comply with a law or regulation requiring insurance 5. minimize cost of risks: yes; subject to any other contractual demands the other party requires before accepting the HH agreement

Ability of Guaranteed Cost Insurance to Meet Risk Financing Goals

1. pay for losses: yes provided the loss exposures are covered by the policies 2. maintain liquidity: yes bc insurance requires less liquidity compared with retention 3. manage uncertainty: yes bc uncertainty is transferred to insurer 4. comply with legal and regulatory requirements: yes 5. minimize the cost of risk: yes but not ideal bc premiums cover expected losses and all associated costs -additional benefit of guaranteed cost insurance is that an org can generally deduct insurance premiums for income tax purposes

Ability of a Retrospective Rating Plan to meet risk financing goals

1. pay for losses: yes; insurer pays for losses as they become due 2. maintain liquidity: yes if loss limit and max premium are chosen carefully 3. manage uncertainty: yes bc it caps amount of losses to calculate premium, but some uncertainty remains bc of the retrospective nature of the premium 4. comply with legal and regulatory requirements: yes bc insurer issues a policy guaranteeing that all covered claims will be paid 5. minimize the cost of risk: yes bc it includes a significant amount of retention and can reduce an org's cost of risk over the long run

Types of Excess of Loss Reinsurance Agreements

1. per risk excess of loss reinsurance: limits amount primary insurer will have to pay for each risk 2. catastrophe excess of loss reinsurance: protects primary from an accumulation of retained losses from a single catastrophic event 3. per policy excess of loss reinsurance: limits amount primary will have to pay under each policy, regardless of number of losses (used primarily with liability) 4. per occurrence excess of loss reinsurance: limits amount primary will have to pay for all loss resulting from a single event affecting one or more of the primary's policies (used with liability insurance) 5. aggregate excess of loss reinsurance: limits amount the primary will have to pay for aggregated losses that occur over a stated period (can be used for property or liability insurance)

Types of Captive Insurance Plans

1. single-parent captive, or pure captive 2. group captive 3. risk retention group 4. agency captive 5. rent-a-captive 6. protected cell company

Risk Control Measures for vehicles

1. vehicle selection: choosing appropriate vehicles requires a full understanding of how the vehicles will be used -primary objective is to select vehicles that can transport cargo and passengers safely and efficiently -factors are type, size, weight of cargo, potential to shift, geographic area, etc. -GVWR: max weight a vehicle can safely handle; includes weight of vehicle, drivers, passengers, fuel, cargo -vehicles selected should have excellent safety records, ease of maintenance, and selecting similar makes and models enhances fleet safety and simplifies maintenance 2. Safety equipment 3. Vehicle Replacement: orgs should retire vehicles that can't be operated safely, are obsolete, or require cost-prohibitive repairs

insurance-linked security

a financial instrument whose value is primarily driven by insurance and/or reinsurance loss events

capital markets

a financial market in which long-term securities are traded

system safety

a safety engineering technique also used as an approach to accident causation that considers the mutual effects of the interrelated elements of a system on one another throughout the system's life cycle

management controls

a system of specified standards or objectives against which an org's management measures performance -resource allocation, motivate performance, measure outcomes

drop-down coverage

coverage provided by many umbrella liability policies for (1) claims not covered at all by the underlying policies and (2) claims that are not covered by an underlying policy only because the underlying policy's aggregate limits have been depleted

Trademark Categories

decreasing order of the extent to which they provide protection from infringement 1. fanciful mark: an invented word or phrase; can't be found in dictionary and had no meaning before adopted for the product; stands out -ex: Pepsi -these qualities provide the highest degree of trademark protection possible requiring the lowest burden of proof to be successful in court 2. arbitrary mark: a common word that could be found in a dictionary but had no meaning in relation to the product before it was adopted; ex: Apple 3. suggestive mark: implies certain product qualities; ex: Bite-No-More insect repellent 4. descriptive mark: describes the product; name emphasizes a product feature rather than distinguishing the product from its competitors; ex: Luxury Limo Service -if a mark is generic, in that it describes the type of product rather than the brand (ex: sport utility vehicle) it is not covered by federal statute -people's names are also not entitled to protection under trademark law, unless the name becomes well know through use or advertising (ex: mcdonalds or cambells) -a trade name or name of business is not considered a trademark unless it's used in the marketplace to identify a product produced by the business (ex: Dixie Cup Company)

patent duration

depends on type of patent but always shorter than duration of copyrights -utility patent: 20 years from app date; a utility patent's practical life is 17 years because it takes about 3 years from filing for the patent to be issued -design patent: 14 years from date of issuance -plant patent: 17 years from date of issuance

Reasons for Valuing IP

essential to determine the value of IP bc of its importance to an org's identity, market share, competitive strategies, and overall worth; reasons why it must be property appraised: -even though IP is protected, it is still vulnerable to infringement which is made very easy through technology; org needs to quantify the resulting damage in order to recover -an org can generate revenue with its IP by selling it or licensing it so it's necessary to make sure the profit potential is maximized -acquiring IP is frequently the primary goal in M&A so an entity's worth may be largely determined by the true value of its IP -if an org pursues financing, securitization, or other means of acquiring capital, the value of its IP could be a source of collateral -IP's accounting and taxation treatment differs from other types of assets because it is an intangible asset -the value of a piece of IP may be used to determine the amount of risk management resources that should be devoted to it

Capital Market Risk Transfer

insurance securitization involves three actors: 1. the org transferring the risk 2. the investors who take on the risk 3. the special purpose vehicle -the SPV acts as the insurer (or reinsurer) -an org pays cash to the SPV in exchange for the promise to pay any losses that occur -the SPV obtains the funds necessary to pay for potential losses by accepting funds from investors, who will either receive interest on their investments if there are no losses or lose some of all of the investment if losses do occur

Risk Control Measures for Trade Secret Loss Exposures

measures that can be used to ensure info confidentiality: -disclose info only to the employees who need to know the info to perform their jobs -require sign-in or similar security measure to gain access to area where secret info is -control any documentation with secret with a confidential stamp or burn bag -require employees to sign a restrictive covenant -confidentiality agreements and employment contracts

Berne Convention

the international agreement that governs copyright and establishes that a copyright is created automatically as soon as work is fixed