RMI - Topic 3 - TRM loss exposures & ERM

silo/isolated approach of erm

- break down silos in erm - unified management strategy for risks - able to see how they are connected/correlated

personnel loss exposure (exposure #4 under trm)

- key employee suffers personal loss (death, illness, or disability) - decrease in revenue (sales down, decisions not made, bad decisions made, loss of productivity) - increase in expenses (replacement costs) - both decrease net income - unlike typical net income loss exposures triggered by multiple events, personnel loss exposure comes from only one event, a personal loss to a key employee

property loss exposure (exposure #1 under trm)

- must have legal interest in property - financially responsible if loss to property

questions to ask utilizing trm

- source of risk? (not called loss exposure) - who traditionally manages it? - pure or speculative? - diversifiable (particular/micro) or undiversifiable (fundamental/macro) risk?

trm

- traditional risk management based upon pure risk

sources of legal interest in property

1. ownership interest - most common 2. use interest - use of the property for a specified period of time, for a specific person, for a specific rental rate - may or may not have leasehold interest (i.e. fair market value compared to your current rental rate at the time of loss) (Guinness signed 9,000 year lease) 3. secured creditors - borrow funds from bank to purchase house, bank is secured creditor - mortgage, secured creditor • credit card, unsecured creditor - bank holds title and is secured creditor, person living there still has ownership interest - bank insists on person buying insurance or there is forced placement (expensive) 4. buyers and sellers - transportation risk from losses in transit - depends on free on board (FOB) point aka where the financial responsibility shifts - ocean marine and inland marine insurance oldest type of insurance (first transportation) 5. bailee interest - bailor owns property, gives it to bailee for specific reason, at some point property is returned - contract and bailment is the term for this situation - bailee can take action to limit liability while they own property (limited to repairs or replacement costs) - ex. valet, repair shop, jewelry store, coat check, dry cleaning - borrowing has no legal interest, requires a reason for bailee to have property

net income loss exposure (exposure #3 under trm)

1. property loss - property loss is triggering event - resulting decrease in revenue or increase in expenses is the net income loss - two losses in this situation: the property loss (repair/replacement cost) and the net income loss (buy new building/ increase in rent, etc.) - requires property loss to happen first - loss to property owned by you or owned by someone else causes normal productive processes to be disrupted 2. contingent net income loss - loss to a key supplier, causes shut down in operation, leads to decrease in revenue and decrease in net income - ex. supply chain issue, go to marketplace buy from higher priced supplier, increase in expenses, decrease in net income 3. legal liability loss - liability issues (value comes in form of legal fees and judgement) - products liability issues most common (recalls) - impacts goodwill./reputation (decreased revenue) and product recall (increase expenses) - leads to decrease in net income - exs: tainted Tylenol, Johnson&Johnson engaged in excellent crisis management, Ford/Firestone F for crisis management, BP oil spill ? for crisis management

trm vs erm

trm: - four types of loss exposures only looking at pure risk (property, liability, net income, personnel) - usually losses that are insurable - evaluated in an isolate/silo approach erm: - looks at all risk, pure and speculative - manages risk across entire enterprise - first look at risk that threatens long run

erm

- enterprise risk management based on speculative risk

risk management implications for firms (from personnel loss exposures)

1. buy life insurance for key employee 2. succession plan or cross-training in event of loss 3. worker's compensation (entitled) 4. employee benefits (health/life/disability insurance) helps deal with personnel loss

types of erm risk (4)

1. hazard - by definition is pure risk - ex: property, liability, health and safety 2. operational risk - risk from business operations - ex: product manufacturing, supply chains, customer service, turn-over, labor relations - tends to be pure 3. financial risk - arrises from changing market conditions - directly impacts firms position in market - ex: commodity prices, interest rates, foreign exchange rates - by definition, speculative risk 4. strategic/business risk - risk from a firms S.W.O.T. - management, adverse business, or implementive decisions - speculative

loss exposures under trm

1. property loss exposures 2. liability loss exposures 3. net income loss exposure 4. personnel loss exposure