Risk Management Concepts, Pooling of Risks, & Principles of Insurance Dr. John F. Fitzgerald, Jr CLU, CPCU, CIC

RISK MANAGEMENT CONCEPTS

Importance of Risk Management Early history of insurance management RIMS Risk manager of the year- Business Insurance Interest in risk management Need for risk management

Commercial Risk Management Defined The identification, measurement, control, and administration of potential loss-causing events, given limited resources, in order to accomplish the financial goals of the entity.

Risk Identification The physical survey Analysis of contracts Flow charts Analysis of financial statements Checklists

Measure Loss Potential Loss frequency Loss severity Maximum possible loss Maximum probable loss

Control of Risk- Tools of Risk Management Avoid Prevent Reduce Retain – Unfunded – Funded

Control of Risk (cont.) Transfer – Property – Risk – Contractual – Insure Pooling Combination

Risk Characteristics as Determinants of the Tool

Risk Administration Policy statement Location of risk manager in the organization Disaster plan Evaluating risk management decisions- the importance of feedback

Case Studies of Commercial Risk Management Precious metals firm Hospital Municipality Amusement park Major sports event Concert

2011 Emerging Liabilities EMF Nano Scale Materials Genetically Modified Plants and Animals Weather Patterns Hydrofracking Social Media

Pooling of Risks

Pooling technique Pooling of losses Long term care- policies have pooled benefits Reinsurance facility- pool for high risk drivers Reinsurance pools for aircrafts Natural disaster pools

Principles of Insurance

Requisites of an Insurable Risk Large number of homogeneous units Fortuitous loss – Accidental and unintentional Definite and measurable loss No catastrophic loss Economically feasible

How Insurers Control Risk Loss prevention Loss reduction Deductibles Coinsurance Copayments Limits of liability Exclusions

Characteristics of Insurance Risk transfer Pooling concept Law of large numbers Reduces uncertainty Exchange

Costs Operation – Cost of doing business Fraud Inflated losses

Benefits Indemnification Reduction- worry & fear Source of investment funds Loss prevention Enhanced credit Encourages innovation