1. Introduction to Analysis of Risk

What are the five steps of the risk management process?

1) Identification 2) Analysis 3) Control 4) Financing 5) Administration

What do indirect costs consist of?

1. Disruption in production/sales 2. Management time spent on loss-related activities 3. Overtime costs 4. Hiring and training replacement costs 5. Opportunity costs 6. Loss of goodwill 7. Social costs

What does risk administration consist of?

1. Implementation 2. Monitoring

What are the methods of risk financing?

1. Retention - internal funds used to pay losses 2. Transfer of financial responsibility - external (non-insurance) funds used to pay losses 3. Insurance - equitable financing of risks, from one entity to another, in exchange for payment

What do outside service fees consist of?

1. Risk management consultants 2. TPAs and other providers 3. Loss control 4. Actuarial 5. Legal 6. Fee-for-service insurance brokers (if 0% commission on policy)

What is quantitative analysis and what does it consist of?

It is the "how much" analysis and consists of: a. Loss projections or forecasts b. Cash discounting and net present value calculations c. Cost-benefit analyses d. Total cost of risk calculations and analyses

What is qualitative analysis and what does it consist of?

It is the "what" analysis and consists of: a. Risk assessment b. Financial assessment c. Loss data assessment

What is risk financing?

The acquisition of internal and external funds to pay losses at the most favorable cost.

What is risk analysis?

The assessment of the potential impact of various exposures to an organization.

What it total cost of risk (TCOR)?

The sum of all quantified costs and expenses associated with the risk management function of an organization.

What is the definition of risk?

Uncertainty that may be either positive or negative arising from a given set of circumstances.

What are the techniques of risk control?

a. Avoidance b. Prevention (frequency) c. Reduction (severity) d. Segregation e. Transfer

What are the ten methods of exposure identification?

a. Checklist and survey b. Flowchart c. Insurance policy review d. Physical inspections e. Compliance review f. Procedures and policies review g. Contract review h. Experts i. Financial statement analysis j. Loss data analysis

What are the general theories of risk control?

a. Human approach b. Engineering approach c. Systems approach

What are the general classes of risk?

i. Economic ii. Legal iii. Political: changes in government policy (i.e. lifting the embargo on Cuba and the effect on the tobacco business) iv. Social: Jared's child pornography charges affecting Subway's image v. Physical vi. Juridical: i.e. change in venue for cases due to favorable or unfavorable location

Why is risk identification the most important step in the risk management process?

Because an exposure and/or risk must be identified before it can be effectively analyzed, controlled, or financed.

What are the classifications of exposures?

1) Property 2) Human Resources 3) Liability 4) Net Income

What do risk management department costs consist of?

1. Salaries 2. Administrative charges 3. Employee benefits 4. Risk management information system 5. Management overhead 6. Other departmental costs

What is risk control?

Any conscious action or inaction to minimize, at the optimal cost, the probability, frequency, severity, or unpredictability of loss.

What is the definition of risk management?

Process of managing uncertainty of exposures that affect an organization's assets and financial statements using five steps: identification, analysis, control, financing and administration.

What are the components of TCOR?

i. Insurance costs ii. Retained losses (passive or active) and associated loss adjustment expenses (LAE) iii. Risk management departmental costs iv. Outside service fees v. Indirect costs - cannot be precisely measured, impact of non-quantifiable indirect costs should be included as part of the qualitative assessment of risk

The TCOR is used as a key risk management tool in what ways?

i. Making effective risk management decisions ii. Measuring progress toward risk management objectives iii. Focusing on and promoting safety and loss control by communicating the financial impact of a loss on the TCOR and sales/revenue iv. Providing management and employee incentives v. Pricing of products and services vi. Assisting with effective management of financial budgets

What are the uses of risk (exposure) analysis?

i. Prioritization of risk factors ii. Verification of loss data iii. Classification of loss data iv. Prediction of losses and ranges of losses v. Cost-benefit decision making vi. Net present value (NPV) analysis vii. Review of insurance program structure to determine: 1. Viability of a retention program 2. Amount of retention 3. Insurance purchasing decisions, including limits of liability

What are the necessary tools to perform risk analysis and how are these broken down?

i. To assess the likelihood an event will occur: 1. Loss analysis 2. Risk mapping or risk factor analysis 3. Probability analysis [FREQUENCY] 4. Linear regression ii. To assess the impact of the event, should it occur: 1. Payback analysis and accounting rate of return 2. Cost-benefit analysis 3. NPV analysis 4. Internal rate of return (IRR) method