Risk management essentials
Incident Rate
(# of lost time injuries X 200,000)/Man hours of exposure
Because inventory can be the least liquid asset (availability to convert to cash), some accountants remove it by using a Quick Ratio or Acid Test Ratio. This would help you as risk manager see how the organization's inventories compare with other organizations in your industry. What is the formula used to determine a Quick Ratio?
(Current Assets - Inventory)/Current Liabilities
Severity Rate
(Days lost time X 200,000)/Man hours of exposure
Claim
A demand for payment or an obligation to pay as a result of a loss
Preferred Stock
A hybrid security having characteristics of debt and of equity
In the area of liability, penalties or remedies are imposed under the law of torts. Most torts are associated with negligence, or the failure to exercise a degree of care a reasonably prudent person would exercise under the circumstance. What are the four elements necessary for establishing negligence?
A legal duty is owed. There is a breach of the duty. The breach of the duty is the proximate cause of an injury. Bodily injury or property damages result from the injury.
Exposure
A situation, practice, or condition that may lead to an adverse financial consequence; an activity or asset
Managerial accounting
A system created for internal purposes only
Tax accounting
A system following Internal Revenue Service and Internal Revenue Code rules and regulations and used by any tax-paying entity to determine its tax liability
Financial accounting
A system that uses the Generally Accepted Accounting Principles and is the system used by most publicly owned companies because they must file public financial statements with governmental regulators and annual reports for stockholders
Government or fund accounting
A system used by governmental and non-profit organizations where reports may be required, but not for investment activities
Statutory or regulatory accounting
A system used by insurance companies and financial institutions where the emphasis is on solvency and protection of customers and depositors.
In the following situation, using strict, absolute, and intentional, name, and briefly describe the type of liability involved. The manufacturer of a saw is sued when someone drops a spinning saw and it rips through a wall in the house.
Absolute liability- liability imposed without regard to fault because the offender manufactures a product that causes injury to a person or property
In the following situation, name and briefly describe the type of risk financing the risk manager is using. Hank rents the bay beside Bubba's repair shop for a muffler repair operation. Besides paying the rent on the bay and hiring Jim Bob's brother Joe Bob as his mechanic, he gets a line of credit at First City Bank and hopes it will be enough to pay any claims for mufflers that fall off or dings that happen while Joe Bob is moving the cars from the lot onto the service rack.
Active retention- financing exposure through current expenses, funded or unfunded reserves, use of capital markets (bonds, hedging, lines of credit, etc.), group or single parent captives, or risk retention and risk purchasing groups.
You as the risk manager are explaining the risk management policy statement to the senior management committee at your organization. The policy statement defines the organization's policy for managing risk and its relevance to its overall strategic plan, goals, and objectives. One benefit is that it clarifies the risk management goals and direction. What are three other benefits of a policy statement?
Addresses ideas that might not otherwise be expressed Focuses on essentials Increases management's appreciation for risk management as a business tool Includes contractual duties and responsibilities of the organization from insurance policies, contracts, and leases Minimizes duplicate efforts Opens up lines of communication Outlines fundamental guidelines Specifies responsibility and authority
Jon, the new risk manager, realizes that the most important thing he can do to influence the activities of the company will be to convince all the levels of management of the importance of risk management by tying risk management issues to some beneficial outcomes. At the first meeting with the senior level managers, he gets full attention of the managers by telling them that risk management will enhance profits by reducing costs or increasing revenues (in the form of reduced cost of risk and protecting assets and cash flow). What are three other reasons the managers should wholeheartedly support the risk management team?
Allow management to plan and budget more accurately Allow more effective analysis of losses for projection of future losses Improve product quality, processes, and technology Increase productivity and morale in the work force Provide increased awareness of indirect losses Reduce exposures in new operations, mergers, and acquisitions Reduce frequency and severity of losses
Briefly describe the difference between an Income Statement (Profit and Loss Statement) and a Balance Sheet.
An Income Statement provides information on revenues, expenses, and profit over a period of time (usually quarterly or annually). A Balance Sheet is a snapshot of the organization's assets and liabilities at a given point in time.
Occurance
An accident with the limitation of time removed (an "accident" that is extended over a period of time rather than a single observable happening)
Accident
An event definite as to time and place that results in injury or damage to a person or property
Incident
An event that disrupts normal activities and may become a loss
Technical skills
Analyzing losses Conducting cost-benefit analysis Evaluating and interpreting coverages Managing claims Negotiating bids Purchasing insurance programs or retentions Selecting insurance carriers, intermediaries, or administrators Supervising inspections
The risk manager at June's Jukebox Company brings in a big stack of loss reports for the last 10 years and asks you to help him with loss projections for the next year. What is the formula you could use to determine the Expected Annual Losses?
Average # of losses times average cost of a loss
Leading skills
Being a positive role model Causing people to take appropriate actions Fostering open communications Keeping others informed Listening attentively to suggestions and complaints Managing disagreements and conflicts fairly Motivating the safety committee Promoting teamwork and cooperation Providing clear direction and goals Removing obstacles to employee performance Rewarding, inspiring, and helping to develop potential Selecting a third party administrator (TPA) to handle claims Using sound judgment
What are three of the four definitions of risk?
Chance or probability of loss Uncertainty concerning a loss A possibility of variation of outcomes from a given set of circumstances The difference between expected losses and actual losses
Even with a clear, consistent, and valid loss reporting format and with a sufficient # of losses over a sufficient period of time, other factors or changes can have an impact on the usefulness of the data in predicting future losses, such as the intro of a new product or service. What are 4 other factors or changes that can impact data?
Changes in equipment, materials, work process, social or economic environment, statutory benefits, wages, incentive or safety award programs, deductibles, insurer or third-party admin, insurance coverages Acquisitions Divestitures Restructuring Legal or regulatory changes Labor and management issues Inflation Employee changes (age, gender, education level, ethnic background, or turnover)
Mary Smith, the risk manager of Smith's Widget Company asks you what tools she might use to identify risks. What are four of those tools?
Checklists/Survey Questionnaire Flowcharts Insurance Policy Analysis Physical Inspection Net Income/Financial Analysis Compliance review Contract Identification and Analysis Policy and Procedures Review Loss History Review Experts
Managerial Skills
Communication Engaging strong senior management support Implementing programs and plans through other managers Leading, organizing, and controlling others Advising
In evaluating property risks, analysts and insurance rating authorities use COPE methodology. Name and briefly describe the topics represented by this acronym as included in the following example: The building is a simple frame structure
Construction- materials and type of construction used in the building
Last In First Out (LIFO) and First In First Out (FIFO) are 2 methods accountants use to match the cost of products sold during a quarter with the revenue generated from the sale of those products. Using LIFO, the last units purchased or produced are the first units to be sold, and with FIFO, the first units purchased or produced are the first units to be sold. This becomes important when the cost of the product or the sales prices changes during the period. Doug's Decoy Company sells plastic ducks to hunters, and the wholesale cost of each duck is going up rapidly while Doug's retail prices remain the same. If Doug's Decoy's accountant uses the FIFO method, how will this method affect the following:
Cost of Goods Sold- lower with FIFO (bc the oldest units cost the least) Tax liability- Higher with FIFO (bc the pre-tax profits are higher) Profitability (for stockholders)- higher with FIFO (bc even though the taxes are higher, profits appear to be higher)
On a Balance Sheet, what assets are cash or will be converted to wash within one operating cycle or less?
Current Assets
One of the key steps a risk manager who wants to be effective must take is to work with the networks inside the organization to get "plugged in" as a team player. The risk manager should know who makes a difference in the organization and can create relationships with those individuals to further the risk management process and contribute to the bottom-line results. Briefly describe 2 of the 3 other key steps a risk manager must take to be an effective risk manager.
Demonstrate the positive financial impact good risk management can have on the organization. An effective risk manager is as important as any other financial manager or production manager or sales manager- the reductions in costs associated with successfully managed losses (avoided, minimized, or transferred) go directly to the bottom-line results. The effective amounts to have additional sales without the costs of sales. Communicate risk management results to appropriate levels of management, employees, and stakeholders. Getting the right message to the right people is part of the process of being "plugged in," knowing who needs to know, and what they need to know, to accomplish the organization's goals. Understand that a risk manager cannot rest on the merits of pass successes or being an expert at any one or even all areas of risk management. The effective risk manager is manager, with the abilities to plan, lead, organize, and control, as well as communicate. Risk management is more than being able to read an insurance contract, negotiate a claim, or conduct a safety audit.
Planning skills
Determining an insurance or self-insurance budget Establishing a risk management policy Forecasting losses Publishing loss control procedures
As a risk manager, you will need to understand that losses have directed and indirect (or hidden) costs. For the following situations, are the loss costs direct or indirect? The replacement cost of a machine that breaks down and can't be repaired. The costs of retaining employees to use the new and improved replacement machine.
Direct costs Indirect costs
Flowcharts five a logical, graphic, and sequential picture of activities in an operation or process. By using the analysis of product, dependency, site, decision, and critical path, flowcharts illustrate interdependency, pinpoint bottlenecks and can help determine the critical path or activity. What are 2 possible drawbacks to flowcharts?
Do not indicate frequency or severity of risks Do not show minor processes with major loss potential Are too process oriented Have only limited use for liability exposures Provide no information about financial impact
Sally is planning to open a home for furnishing and design shop. She comes to you for risk management advice. To start your discussion, you mention the four basic risk tenets or "rule of thumb." One of those tenets is, "Don't retain more than you can afford to lose." What are the other 3 tenets?
Don't risk a lot for a little. Consider the probabilities of likelihood of loss. Don't treat insurance as a substitute for loss control.
Operating Margin
Earnings before interest and taxes (EBIT) divided by sales
Level of Data: Hazards Leading to Accident/Loss
Electrical overload Leak High noise level Slippery surface Unprotected combustible storage Slippery walkway
Gross Profit
Equals net sales minus the cost of goods sold
A new employee starts work on Monday at Bill's Brick Yard. Bill, the owner, takes her around the premises, telling her about the company's safety record. Then he asks her who she thinks is the risk manager of the company. She gives her the choices: the owner, clean-up crew, the accountant, brick makers, or everyone. Which would you select? Explain your answer.
Everyone. Everyone manages risk within his or her assigned job responsibilities, even without the official title of risk manager, from the owner of the janitor or mail clerk. The risk management team comes from all available human resources.
In evaluating property risks, analysts and insurance rating authorities use COPE methodology. Name and briefly describe the topics represented by this acronym as included in the following example: The building next door to the subject property houses a fireworks manufacturing company.
Exposure- occupancy and use of adjacent properties
As a risk manager, you will be reviewing both Income Statements and Balance Sheets to look for values at risk and for the means to finance risk. From the following list, put the items on the table as they would appear as Fixed Assets or Current Assets on a Balance Sheet. Accounts Receivable, buildings, capital assets, cash, construction in progress, equipment, inventory, land, leasehold improvements, marketable securities, property
FIXED ASSETS: buildings, capital assets, construction in progress, equipment, land, leasehold improvements, property CURRENT ASSETS: accounts receivable, cash, inventory, marketable securities
In order to have an enforceable contract, the parties must be competent. What are the other three characteristics of an enforceable contract?
Genuine agreement or assent (agreement without undue pressure from either party) Exchange of legal consideration (payment of money or some other valuable property or service) Legal purpose (activities considered must be legal)
Raw loss data can be misleading if there is nothing to compare it to. For instance, your VP of Finance at XYZ Widgets, Inc. may be shocked when you show him loss data that reflects a doubling of frequency of losses on the manufacturing line, but then you tell him that the corresponding exposures (# of widgets made) have quadrupled, and it doesn't look so bad. The # of units of production would be one type of key unit of measure or exposure unit. Name 4 other exposure units that can be used to index losses.
Gross receipts or revenue Net income Payroll by class code Headcount Hours worked Vehicles by types Geographic area Annual mileage Square footage Property values (book value, ACV, replacement cost)
You tell John Smith, who is considering a large investment in Fine Foods Corp., that he should read the notes to the financial statement before he reads the rest o the financial statement. What are 3 of the 5 main reasons (or topics) that lead you to tell him this?
Hidden assets and liabilities- values that may be understated for various reasons, but still need to be protected Litigation- a number of lawsuits may be ongoing Bond requirements and ratios- understated inventory may result in a low current ratio, which may result in declination from a bond underwriter Ability and willingness to absorb risk- risk appetite or senior management's attitude toward risk. Does the appetite match the means to fund it? Retention levels- willingness (appetite) and ability (financial strength) to finance losses at the front end (deductibles and self-insured retentions) and at the back end (when insurance limits are used up) to be paid internally or through credit lines determines whether to retain or transfer risk
Your risk consultant client is busy looking for the 5 years of loss data you requested and asks what you recommend as good sources of information on the company's losses. Name 3 of the internal and external sources you would tell her
INTERNAL: The company's incident, accident, and near miss reports First aid logs Litigation records Human resources department Operations department Accounting entries for equipment repair and replacement EXTERNAL: Occupational Safety and Health Association (OSHA) logs Insurance company loss runs 3rd party administrator loss runs
When you visit your newest risk consulting client, Rose Gardens, Inc., which has two greenhouses sites and 15 wholesale florist locations, you ask the new CEO for 5 years of loss data. The CEO asks why you need so much info. Besides the necessity of evaluating the potential cost/benefits of loss control alternatives (e.g., avoidance, control, transfer, and finance), what are 5 reasons you could give her?
Identify the cause of the most frequent and serious accidents Quickly and easily identify trends in loss experience Focus management's attention on the organization's overall cost of risk Gain support for loss control efforts Evaluate cost effectiveness of alternative methods for financing losses Establish a basis for allocating premiums and loss costs Evaluate performance between operating units, vendors, and in-house adjusters Benchmark loss experience Establish product or service development and pricing Respond to litigation or regulatory actions Satisfy underwriting requirements when insurance is selected as the risk financing method
As your client becomes more risk management savvy, she begins to ask how she can compare her company's loss experience with that of other similar companies. Name 3 sources she might tap for this information.
Industry associations Insurance carrier-wide loss records NAICS Code from Bureau of Labor Statistics National Safety Council Risk and Insurance Management Society (RIMS) National Council on Compensation Insurance (NCCI) American Trucking Association
One of a company's most valuable assets turns out to be its human resources, and human resources can be a sizable risk. Your client Mabel, who owns the restaurant chain Mabel's Diners, doesn't understand why this is true. Give Mabel 3 examples of the types of risk associated with employees.
Injury, illness, death or disability (on or off the job) Unemployment Resignation Termination Morale (lack of enthusiasm) Moral (lack of honesty) Personal activities and avocations Employee benefits (life and health insurance) Employee contracts (covenants and non-competes)
In the following situation, using strict, absolute, and intentional, name, and briefly describe the type of liability involved. A house guest gets angry and pushes the owner down the stairs.
Intentional damages- the offender intends to commit an act that results in injury or damages
After the old risk manager got a pink slip for failing to improve anything at the company, the new risk manager comes to work with a new plan, a plan that includes a risk management mission statement, something the old risk manager failed to write. Briefly, what is a risk management mission statement?
It broadly states what the risk management department is about and what it stands for. OR It ties the risk management mission into the organizational mission. OR As concisely and clearly as possible, it includes a few of the highest priorities of the risk management program.
Mr. Jackson, who is the owner of Stonewall's Masonry, asks why the liability risk is such a big deal. You begin by telling him that it is because the amount of the loss will depend on the circumstances of the event, the nature and severity of the damage or injury, the degree of negligence, the applicable law, and finally, the decision of the judge or jury. So, as a bottom line, what is the most prominent characteristic of liability risk?
It cannot be accurately measured in advance of a loss
Though the depreciated asset values on a balance sheet may be skewed from market value or replacement cost, what function can balance sheet perform as a tool for the risk manager?
It provides a list of assets the risk manager needs to protect
Economic risk is uncertainty arising out of the organization's operations, marketplace, financial, or entrepreneurial endeavors. Name and briefly describe 3 of the other 5 general classes of risk.
Legal risk- uncertainty in the applicability or interpretation of contracts, laws, liability, or regulations Political risk- uncertainty associated with changes, interpretations, or reinterpretations of governmental rules and regulations. Social risk- uncertainty concerning public relations, image, and cultural problems- losing touch with the social direction of the country Physical risk- uncertainty concerning damage or injury to property, persons, and other resources (information, etc.) Juridical risk- uncertainty regarding decisions by judge or jury, or tends in the legal climate
Your client, Sally, of Oil Wells, Inc., wants a simple way for shift supervisor at each of her locations to be able to help her determine the exposures at that location. She decides to use the loss exposure identification methods of checklists. Name and briefly describe 3 types of checklists.
List of Assets- provides a list of resources and capacities Activity or Situation List- provides a list of liability and human assets Perils Analysis- provides a list of common or likely causes of loss Insurance Checklist- provides a definitive list of available coverages and exclusions Industry List- provides a list of specific assets, activities, perils, and insurable exposures common to a certain industry.
Exposure: Accident and injuries on the stage, turnover in the cast and crew
Logical Classification: Human resources
Exposure: Injuries to audiences coming and going from the theater
Logical Classification: Liability
Exposure: Loss of ticket sales because of repairs to the street in front of the theater
Logical Classification: Net income
Exposure: Damages to sets, theater building, costumes
Logical Classification: Property
Cost of Goods Sold (CGS)
Made up of 3 components: direct labor, direct materials, and an allocation of overhead and strongly impacted by the organization's choice of inventory accounting methods.
Ratio analysis allows the risk manager to evaluate an organization's financial strengths and weaknesses by comparing that organization's ratios to internal and external benchmarks. However, as with any technique, the effectiveness of ratio analysis has limitations. What are four of the limitations?
Many organizations operate in a # of different industries, which makes it difficult to compare them to a particular industry or group of industries. Many organizations have a goal to be the best in their industry and want to be compared to the best practices or leaders in their industry rather the the industry average. Inflation can distort an organization's financial statement and ratios. Accounting practices can distort the results. The definition of a good versus bad ratio is subjective. The quality of the data provided will affect the quality of the analysis.
Amortization
Non-cash expenses, governed by Internal Revenue Code regulations, by which a company allocates the cost of intangible assets including goodwill, patents, trademarks, copyrights, and licenses, etc.
In evaluating property risks, analysts and insurance rating authorities use COPE methodology. Name and briefly describe the topics represented by this acronym as included in the following example: The business is auto repair
Occupancy- type of business or activity housed in the building
One definition states that risk is the variation between what is predicted and what actually occurs. Which of the following loss probabilities (P) is riskier? Explain your answer, including the reasons the other two are not riskier. P(a)=1%, P(b)=50%, P(c)=99%
P(b) is riskier because risk is UNCERTAINTY concerning loss, and this has the highest degree of risk, uncertainty. We are almost certain in P(a) that a loss WILL NOT happen and we are almost certain in P(c) that a loss WILL happen.
In the following situation, name and briefly describe the type of risk financing the risk manager is using. Bubba decides to open a tire repair shop. With every last penny of his limited funds, he rents one of the three bays in a local garage, hires Jim Bob has his head tire buster, and opens the shop.
Passive retention- not knowing or not acting on an exposure because it was forgotten or overlooked.
Hazard
Physical, moral, or morale characteristics that make the likelihood of a loss from a given peril greater
In helping your new risk manager assistant, Fred, understand the use of ratios, you start with a current ratio, the company's current assets divided by its current liabilities. When he sees that XYZ's current ratio was 1.0 last year, the industry average is 2.0, and this year XYZ's current ratio is 3.5, Fred reasons that the upward trend of the current ratio is great news. But you have to explain that this also might be bad news. Would this be good news or bad news for the following areas? Explain your answers.
Profitability- bad news bc this company appears to be sacrificing profitability for the sake of excess liquidity Risk Management- good news because the company appears to have a large amount of current assets available to pay for losses.
In evaluating property risks, analysts and insurance rating authorities use COPE methodology. Name and briefly describe the topics represented by this acronym as included in the following example: The property is one mile from the nearest fire station
Protection- public protection (fire department services and logistics) and private protection (sprinkler systems, fire extinguishers, guards, etc.)
Of pure risk (chase of loss or no loss) and speculative risk (chance of loss, no loss, or gain), which is insurable? Which should be considered when managing risk?
Pure risk Both
Define the two types of risk: pure and speculative. Give an example of each and indicate whether the type of risk is insurable.
Pure risk- has only the chance of loss. Example: a person is injured in an accident or a building burns down. (Insurable) Speculative risk- has the chance of loss or gain. Example: stock markets go up and down, a business may succeed or fail, and gamblers can win or lose. (Not insurable)
Frequency (the # of times a loss occurs) can be categorized as low, slight, moderate, and high. Severity (the dollar amount of each loss) can be categorized as low, significant, and severe.
Retain loss if frequency is low and severity is low or significant. Transfer loss if frequency is low and severity is high or if frequency is slight and severity is low or significant. Prevent if loss frequency moderate or high and if severity is low. Reduce or prevent if frequency is slight and severity is high or if frequency is moderate and severity is significant or high. Avoid if loss frequency is high and severity is either significant or high.
Rod of Rod's Rod and Reel Supply knows the costs of materials and supplies, labor and benefits, shipping, and overhead but he asks you what other costs he should be considering as he establishes the wholesale prices for fishing tackle for sale to sporting goods stores. You mention to him that he will need to consider the cost of insurance premiums. What are four other costs of risk he should consider?
Retained losses (whether passively or actively retained) Risk management departmental costs Outside services (risk management consultants, third party administrators, and actuarial services) Loss of productivity, cost of overtime, and lost opportunity costs Costs of preventing and reducing losses (training sessions or safety consultant) Costs of physical measures (sprinkler system or installation of fire walls)
With widely differing risk-taking personalities, one company might decide to build something like bombs or fireworks while another chooses to manufacture pillows or perhaps clothespins. Each company has to consider its willingness to accept or retain risk, as well as its financial ability to accept or retain risk. What term is used to describe the willingness to accept or retain risk?
Risk appetite
Name and briefly describe the 5 steps in the risk management process
Risk identification- the process of identifying and examining the potential sources of losses Risk analysis- the assessment of potential impact that various exposures can have on the firm Risk control- an action to minimize, at the optimal cost, losses which strike the organization Risk financing- the acquisitions of funds at the least possible cost to pay for the losses that strike the organization Risk administration- the implementation and monitoring of the risk management process
One of the 6 general rules of risk management is that exposure identification is the most important step in the Risk Management Process. What are 3 other risk management rules?
Risk is present in every phase of business. Risk is now always self-evident. Risk is subject to diagnosis and treatment More than one identification method should be used to diagnose and identify risks. Often one method will reveal the greatest # of exposures.
A personal physical inspection may turn up a Rolls Royce and Bentley that are sorted on the property or some other situation the risk manager has not addressed. What 3 internal or external entities might perform a physical inspection?
Risk manager Safety department Operating personnel Professional consultants (insurance agent or risk manager) Fire department Regulatory agencies (OSHA) Insurance company inspector
Operating Expenses
Selling, general, and administrative expenses and the non-cash expenses of depreciation, depletion, and amortization.
Sorting loss data by year may be a good way to compare overall loss costs with annual insurance costs or some other benchmark. Your insurance company always presents the loss runs this way. However, in taking a closer look at some of these reports, you happen to notice a trend that most of the automobile accidents at Terrific Taxis, Ltd. happen on Friday nights, and then you notice that Luigi, a former race car driver, is on duty on Friday night. What type of sorting would have helped you notice this trend sooner?
Sorting by day of the week Sorting by name of the employee
In the following situation, using strict, absolute, and intentional, name, and briefly describe the type of liability involved. The circus owner is sued because his tiger gets out of the cage area and mauls someone in the audience.
Strict liability- liability imposed without regard to the intention of the offender's actions (without considering fault) because of the nature of the activity (blasting, demolition, dangerous animals)
Peril
The cause of loss, e.g., fire, wind, hail, slip and fall
Functional Replacement Cost
The cost to repair or replace damaged property with materials that are functionally the equivalent of the damaged or destroyed property
Severity
The dollar amount of a given loss or the aggregate dollar amount of all losses for a given period
As a risk management consultant, you have several clients who regularly bring in insurance policies for your review. They include their agents' proposals, which outline the coverages and some of the exclusions and brochures from insurers, which list all the great features of their policies. In examining these two insurance policy analysis formats, what are two shortcomings?
The focus is on what is covered and not covered or available in that market, not on what coverage is desirable. There is little standardization of policies, so it is difficult to compare available coverage from other markets. Through the analysis may attempt to accurately show what coverages are in place, a court may override or disregard the policy wording.
Book Value
The historical cost less accumulated accounting depreciation
What is one main difference between a risk management mission statement and the risk management policy statement?
The mission statement is shorter OR The policy statement has more details OR The policy statement deals more specifically with the various areas of risk management
Frequency
The number of losses occurring in a given time period
Net Income
The organization's after-tax profit, which when divided by expenses is equal to the net profit margin
Historical Cost
The price paid to acquire the property
Economic Value
The projected or future income stream assigned to the property
Operating Profit Before Interest and Taxes (EBIT)
The remaining revenues after being decreased by reductions from the cost of goods sold and other selling, general, and administrative expenses.
Actual Cash Value
The replacement cost less a reduction for insurance depreciation or obsolescence
If a friend of yours knows you are a risk management consultant and corners you at a party, asking, "How can the owners of my company say it is a non-profit when I know they made a profit last year?" How would you answer?
The term "non-profit" really describes a "tax-exempt" entity under Section 501c of the Internal Revenue Code, but the entity can make a profit. There are more than 25 types of organizations that qualify under Section 501c. The concern is that the company must not earn too much profit or retain too much profit.
In the following situation, name and briefly describe the type of risk financing the risk manager is using. Mitch rents the last bay in the repair shop for an oil change and lube shop. Hiring Harold as his mechanic, he signs a contract with Harold in which Harold agrees to be responsible for all his own damages, and he purchases a Garage Liability policy for any other liability.
Transfer- financing exposures from outside the organization by non-insurance means (contract) or insurance transfer (insurance policy).
Level of Data: Cause of Loss
Type of Information: Fall from height Repetitive motion Inhaling fumes Hit by object
Level of Data: Type of Loss
Type of Information: Strain Sprain Puncture Laceration Disease Water damage
Level of Data: Date and Time of Loss
Type of Information: Year Date Day of Week Shift Time of day Division Department Plant
Level of Data: Identity of Injured Person
Types of Information: Name Date of hire (if employee) Occupation at time of accident Age
Level of Data: Category of Loss
Types of information: Property damage Automobile accident Worker injury Injury from a product
Janice Jones brings you a corporate financial statement. She proclaims that the statement has been prepared and checked carefully by her chief financial officer, who has a master's degree in accounting and has earned the CPA designation. Would this financial statement be considered audited or unaudited? Explain your answer.
Unaudited- an internal audit is subject to some prejudice or bias on the part of the auditor while an independent audit will include the auditor's opinion as to the fairness and accuracy of the financial information and usually will be done using Generally Accepted Accounting Principles.
Market Value
What a willing buyer would give to a willing seller for the property
Loss
a reduction in value