Dr. James Kallman, ARM 10-1 Advanced PowerPoint Presentation ©2009 The National Underwriter Company

Dr. James Kallman, ARM 10-2 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 10-3 Contents Techniques of Risk Management & Insurance Ch 1 Introduction to Traditional Risk Management……………1-1 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……………………………… Ch 10 Loss Control Techniques……………………………… Ch 11 Emergency Response Planning……………………….11-1 Ch 12 Business Continuity Planning………………………….12-1 Ch 13 Claims Management…………………………………….13-1 Ch 14 Monitoring Claims for Financial Accuracy…………….14-1 Ch 15 Insurance Companies and Risk Management……….15-1 Ch 16 Working with an Agent or Broker………………………16-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 10-4 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 10-5 Chapter 10 Loss Control Techniques Outline The Importance of Loss Control What is it? Loss Control Theories Developing a Contemporary Loss Control System The Five-Step Process Advantages Disadvantages Loss Control Regulation Chapter Summary

©2009 The National Underwriter Company Dr. James Kallman, ARM 10-6 Chapter 10 Loss Control Techniques The Importance of Loss Control Loss control is common sense An ounce of prevention is worth a pound of insurance A stitch in time saves $9M in legal fees Most solutions include a risk financing AND loss control Loss control saves risk financing costs Loss control protects property Loss control protects earnings Loss control protects human resources Loss control creates value

©2009 The National Underwriter Company Dr. James Kallman, ARM 10-7 Chapter 10 Loss Control Techniques What is it? Defined: Intentional acts to modify the probability and/or severity of losses These acts create the desired amount of risk at a desired time Loss control enables workers to focus on speculative risks and creating value Loss control is done by internal workers and outsourced to experts Certain loss control projects may be mandated by regulations

©2009 The National Underwriter Company Dr. James Kallman, ARM 10-8 Chapter 10 Loss Control Techniques Loss Control Theories Theories help risk managers be more effective in creating and implementing loss control programs The Domino Theory of Accident Causation - H.W. Heinrich A sequence of five conditions or events resulting in loss Focus on the 3 rd : modify the unsafe acts or conditions General Methods of Control – Military research Focus on creating a logical process to modify hazards Engineering Approach – e.g.: Wm. Haddon’s release of energy Focus on modifying physical systems to reduce hazards Technique of Operations Review – Weaver & Petersen Focus on motivating management to create safe environments

©2009 The National Underwriter Company Dr. James Kallman, ARM 10-9 Chapter 10 Loss Control Techniques Loss Control Theories Theories help risk managers be more effective in creating and implementing loss control programs System Safety Approach – All processes occur within a system. Focus on interaction of people, processes, machines, & mgmt Behavior Modification - The most cost effective tool Supplement System Safety Approach – application of life cycle theory enables viewing hazardous process or condition as part of a larger system system can be the entire enterprise or the society in which the enterprise exists

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques Developing a Loss Control System The management approach to loss control The system integrates theory and practice for optimal results The loss control system minimizes the agency problem The agents act more in the interest of the principals The loss control system minimizes the silo effect All exposures are managed as a portfolio

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques The Five-step Process 1. Create a loss control Program 2. Risk (loss) Analysis 3. Loss control Solution Analysis 4. Loss control Decision Process 5. Loss control System Administration 

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques The Five-step Process 1. Create a loss control Program a. Planning loss control activities Understanding the organizations goals Determining the desired levels of risk (risk philosophy: risk tolerance, risk appetite) b. Organizing loss control activities Authorizing and empowering internal actors Engaging external vendor specialists c. Writing a standard operating procedures manual for prevention, reduction, and emergency response plans

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques The Five-step Process 2.Risk (loss) Analysis Understanding the hazards (factors) that increase the likelihood and/or impact of the losses. 3.Loss control Solution Analysis a. Identify all the options available b. Measure the quantitative impacts of loss control activities Effects on frequency Effects on values (impact) Effect on variability (risk) NPV of the loss control activity (cost:benefit analysis) c. Analyze the qualitative impacts Effect on strategies Effect on stakeholders Effect on culture

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques The Five-step Process 4.Loss Control Decision Process a. Use all available Decision models NPV, benchmarking, professional judgment, ethics, and combinations b. Get Support from all relevant stakeholders Senior Executives, Divisional managers, Operations managers, and workers c. Implement the decision Allocate resources Prepare budgets Proforma financial PERT and Gantt time charts Resource charts

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques The Five-step Process 5.Loss Control System Administration a. Monitor your progress formal RMIS informal grapevines b. Judge the success of the program c. Communicate the system’s success Annual report Interim reports

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques Advantages Decrease worry  better morale & production Improved efficiency Decreased loss costs (proactive costs are less than reactive costs) Improved planning – more realistic & cost effective Improved likelihood of achieving goals – fewer surprises Corporate returns (EPS, ROA, ROA, NPV, shareholder value) Earnings stability (net working capital, cash flows) Service efficiency (faster, better, consistent service and quality) Dividend growth (increases shareholder value, and plowback) Social responsibility (protect workers and the environment)

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques Disadvantages Competes for scarce resources (people, materials, money, time) The Invisible Improvement problem (unrecognized benefits) The Profit Center problem (proving a negative, “but for”) The Geek problem (money is sexy, loss control is nerdy) Creates new risks Public relations issues (zero tolerance for losses versus a more realistic acceptable tolerance for losses)

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques Loss Control Regulation A highly regulated discipline Protects the public trust, workers, and reduces social costs OSHA Property Fire Safety Human resource Life Safety Environmental Protection Agency Transportation many others

©2009 The National Underwriter Company Dr. James Kallman, ARM Chapter 10 Loss Control Techniques Chapter Summary The Importance of Loss Control – a common sense approach to creating value What is it? - modifying hazards to acceptable levels Loss Control Theories - Domino, general methods of control, engineering, technique of operations review, system safety, behavior modification Developing a Loss Control System – a management approach The Five-Step Process - Program, loss analysis, solution analysis, decision process, system administration Advantages -Protects assets & creates value Disadvantages- requires resources and may create new risks Loss control regulation- many, to protect the public trust