1. Topic 5. Risk Management and Risk Management Process Bus 200 Introduction to Risk Management and Insurance Jin Park

2. Overview Risk Management Risk Management process

3. Risk Management Risk management A systematic process for managing (pure) risks faced by an individual or organization. Pre-loss risk management Should prepare for potential loss in the economical way possible Post-loss risk management Survival of the organization Continuation of operation Stability of earnings

4. Risk Management Process Identify risks or exposures to loss Evaluate risks or exposures to loss Identify and select risk management techniques Implement and monitor

5. Identify Risks Organization Property Liability Business income Death or disability of key persons Job-related injuries or disease Fraud, dishonesty, crime International operation Individual Property Liability Premature death or disability Unemployment Sickness

6. Identify Risks Physical inspection Questionnaire Financial statement analysis Flowchart Contract analysis Statistical analysis of past losses Risk management information system (RMIS)

7. Evaluate Risks Risk management matrix Frequency Severity High Low Frequency Severity

8. Identify and select RM techniques Risk avoidance Risk retention (Risk assumption) Risk reduction (control) Loss prevention – frequency Loss reduction – severity Risk transfer Insurance Non-insurance Example: sprinkler system, hold-harmless agreement, ignorance, safety education, smoke alarm, deductible, warm-up, rent, fire drill, top salaries for key employees, good housekeeping

9. Evaluate Risks Risk mapping 50% $1 Mil 1% $1 Frequency Severity

10. Identify and select RM techniques Risk mapping Risk Map A graphical presentation of potential frequencies and severities of identified loss exposures faced by individual/organization Critical issue tolerance boundary or risk- tolerance boundary Prioritize risks

11. Implement and Monitor Are techniques implemented correct? If not, …

12. Insurance Advantages Uncertainty is reduced Insurers can provide. their expertise such as loss control services. Insurance premium is tax-deductible. Insurance proceeds are tax-free. Disadvantages Insurance premium may be a major cost. Moral and morale hazards may be created. Time and effort have to be spent. Insurance may not be renewed.

13. Others CAT bonds Forward/Future Swaps Options Securitizations CDO, CMO