Dr. James Kallman, ARM 6-1 Advanced PowerPoint Presentation ©2009 The National Underwriter Company

Dr. James Kallman, ARM 6-2 This Advanced PowerPoint Presentation accompanies the “Tools & Techniques of Risk Management & Insurance” textbook. Each of the 28 chapters in the textbook are presented here in the following sections:  Outline  Key concepts  Major sections  Chapter summary ©2009 The National Underwriter Company

Dr. James Kallman, ARM 6-3 Contents Techniques of Risk Management & Insurance Ch 1 Introduction to Traditional Risk Management……………1-5 Ch 2 Enterprise Risk Management…………………………….2-1 Ch 3 Risk Assessment: Identification…………………………..3-1 Ch 4 Risk Assessment: Quantification…………………………4-1 Ch 5 Overview of Risk Treatment Alternatives………………. 5-1 Ch 6 Non-insurance Transfer of Risk…………………………. 6-1 Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1 Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1 Ch 9 Global Risk Management…………………………………9-1 Ch 10 Loss Control Techniques……………………………… Ch 11 Emergency Response Planning……………………… Ch 12 Business Continuity Planning………………………… Ch 13 Claims Management…………………………………… Ch 14 Monitoring Claims for Financial Accuracy…………… Ch 15 Insurance Companies and Risk Management……… Ch 16 Working with an Agent or Broker……………………….16-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-4 Contents Tools of Risk Management & Insurance Ch 17 Commercial General Liability Insurance……………….17-1 Ch 18 The Workers’ Compensation System………………….18-1 Ch 19 Commercial Property Insurance……………………… Ch 20 Directors and Officers’ Liability Insurance…………… Ch 21 Employment-Related Practices Liability Insurance… Ch 22 Business Automobile Insurance……………………… Ch 23 Crime Insurance………………………………………….23-1 Ch 24 Capital Markets Risk Transfer Tools………………… Ch 25 Loss Control Tools……………………………………….25-1 Ch 26 The Certificate of Insurance…………………………….26-1 Ch 27 Surety Bonds…………………………………………… Ch 28 Claim Reviews……………………………………………28-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-5 Chapter 6 Noninsurance Transfer of Risk Outline What is it? Before-Loss Transfers After-Loss Transfers Steps to Implement Advantages and Disadvantages Time and Cash Commitment Chapter Summary

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-6 Chapter 6 Noninsurance Transfer of Risk What is it? Defined: transferring exposures or the financing of risk to a party other than an insurer Loss may occur at any time Before loss transfers: purpose is loss prevention After loss transfers: purpose is loss reduction Decision to implement a non-insurance transfer of risk should be based on goals and capabilities

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-7 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Examples Incorporation Leases Sub-contracts Surety bonds Waivers Maintenance agreements Licensing

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-8 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Incorporation Creating a legal entity to whom the risk is transferred Protects individual assets to the extent invested in the corporation Corporation pays tax for this right of limited personal liability Other forms: Limited Liability Corporation (LLC) Supplement Society is the transferee who accepts the risk from the corporation’s owner

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-9 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Leases Defined: A contract in which one party grants another the right to possess some item Property: In a sale and lease-back, lessee transfers risk to new owner (lessor) Workers: Lessee attempts to transfer workers’ compensation and third party liability risks to lessor. Transfers may fail: depends on strength of contract

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-10 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Sub-contracts Defined: Agreement that transfers the work and risk to a third party Examples of risks: Workers’ compensation risks Public liability risks Owners’ construction risks

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-11 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Surety Bonds Defined Agreement that transfers the risk to a third party for one party’s responsibility to a second party Parties to a surety bond: Principal – party responsible to the obligee Surety – assures that principal will fulfill responsibility Obligee – receives benefits of principal’s and surety’s promise Guaranty – Guarantor assumes risk upon default of principal Examples Bid bonds  Performance bonds Maintenance bond  Completion bond

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-12 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Supplement Bonds not related to financial institution transactions Fidelity bonds – protect the employer from the costs of financials losses caused by the dishonest acts of employees Surety bonds commercial bonds – contract bonds, license, lost securities public bonds – public official, permit, judicial, fiduciary

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-13 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Waivers Defined: Intentional and voluntary relinquishment of a right, especially the right to sue. Purpose: Facilitates business deals by transferring risk from one party to another. Example: Subrogation

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-14 Chapter 6 Noninsurance Transfer of Risk Before-Loss Transfers Maintenance agreements Defined: Agreement to maintain a premises Purpose: Transfers risks surrounding maintenance services Licensing Defined: Allowing one party to engage in an otherwise prohibited activity Purpose: Transfers risk from licensor to licensee Example: Franchise license – transfers risk to fanchisee

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-15 Chapter 6 Noninsurance Transfer of Risk After-Loss Transfers Purpose: transfer the costs of paying for losses that occur Examples: hold-harmless, indemnification, loss sharing Hold harmless agreement An contract in which one party agrees not to sue a second party if the first party is sued by a third party. May be limited to vicarious liability May be limited to joint liability Indemnification One party agrees to indemnify a second if the second is held responsible for damages to a third party Loss sharing agreement Losses are shared among signatories to the agreement Examples: condominium associations

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-16 Chapter 6 Noninsurance Transfer of Risk After-Loss Transfers Supplement Hold harmless agreements and indemnity clauses Attorneys often combine the two and concepts have blurred Understand subtle but important differences Risk Managers should tailor transfers to their benefit

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-17 Chapter 6 Noninsurance Transfer of Risk Steps to Implement Look at all loss exposures Decide which to keep and to transfer Decide on insurance or non-insurance transfer Use attorneys to draft contracts Monitor results of contract

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-18 Chapter 6 Non-insurance Transfer of Risk Advantages and Disadvantages Advantages + transfer of worry + Retention of resources + Certain payment in exchange for uncertain payment + No additional cost if loss occurs + No additional impact on balance sheet + May be seen as prudent business decision in markets Disadvantages – Time and effort to identify risks to transfer – Lose control over exposure unit – Transfers may be deemed invalid by courts

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-19 Chapter 6 Noninsurance Transfer of Risk Time and Cash Commitment A commitment of time and cash is necessary to ensure the non-insurance transfer is it legal and enforceable. Every level of management must be committed to the transfer Use an attorney to facilitate these legal documents

©2009 The National Underwriter Company Dr. James Kallman, ARM 6-20 Chapter 6 Noninsurance Transfer of Risk Chapter Summary What is it? Transferring before and after loss exposures to another party other than an insurer Before-Loss Transfers Agreements to prevent losses Examples: incorporation, leases, subcontracts, surety bonds, waivers, maintenance agreements, & licensing After-Loss Transfers Agreements to mitigate losses Examples: hold harmless, indemnity, & loss sharing Steps to Implement: identify exposures, decide which to transfer, decide on insurance or non-insurance transfers, let attorneys draft contracts, monitor results Advantages and Disadvantages + transfers worry, retains resources, certain payment, no impact on balance sheet, seen as prudent business decision in markets - Requires time and effort, lose control, court interpretations Time and Cash Commitment