1. Chapter 3: Risk Management

2. Risk Management What is Risk Management (RM)?
Making pre-loss arrangements for post-loss resources
The logical approach to financing and controlling loss exposures

3. The RM Function The staff varies based on size and responsibility
All firms and people engage in risk management
Career opportunities in profit and non-profit organizations
Occupation is professionally recognized – RIMS – Risk and Insurance Management Society

4. RM Statement of Objectives and Principles
Distinguish between pre-loss and post-loss objectives
Pre-loss objectives
Survival and growth
Compliance with government regulations
Efficiency
Procedures and principles are implemented and followed

5. RM Statement of Objectives and Principles
Post-loss objectives
Survive the loss
Provide a foundation to grow and prosper
Behave responsibly as a good corporate citizen
Risk Management Manual
Written to articulate goals, standards, how to measure results and provide benchmarks

6. Steps in the Pre-loss Risk Management Process
Identify & Measure (evaluate)
Choose most efficient tool(s) for
Loss Control
Loss Financing
Implement and review

7. Step 1 - Identify What to identify: How to identify Direct losses
Indirect losses
Key personnel
Operations
How to identify
Balance sheet
Income statement
Other records
Checklists
Flow charts
Questionnaires

8. Measure (evaluation) Maximum possible loss Maximum probable loss
The absolute maximum dollar amount of damage
Maximum probable loss
A conservative estimate of what is likely to occur in a worst case loss
Relative Frequency
An estimate (numerical or verbal) as to the number of times the loss will occur

9. Valuing Property
Replacement value versus book value versus actual cash value versus market value
International operations and exchange rate problems
The impact of inflation on values

10. Loss of Income Definition Sources of Loss Problems
Can be seasonal in nature
Difficult to measure
Best measurement still can only be an estimate

11. Liability Losses Examples of loss sources
Bodily injury or personal injury
Property damage to real or personal property
Intentional damage to reputation
Wrongful hiring, firing, sexual harassment, invasion of privacy, age discrimination
Vicarious liability
Products, environmental, workers’ compensation

12. Losses to Key or other Personnel
Death
Disability – physical (medical) or mental
Short or long term
Permanent or temporary
Loss of health
Unplanned retirement
Results in loss of income, business continuation problems, replacement and training issues

13. Step 2 -Decide How to Handle
A ---- Avoid
R ---- Retain
T ---- Transfer
Insurance
Non-insurance

14. Selecting the Risk Management Technique
Frequency
Low High
S L Assume Loss Prevention
e o Loss prevention loss reduction
v w Loss reduction assume risk e
r h Insure Avoid
i i risk transfer loss prevention
t g loss reduction loss reduction
y h loss prevention

15. Loss Control - Prevention
Loss Prevention
Take various steps to reduce the probability of losses occurring
How do you value the loss of life in the cost / benefit equation?

16. Government and Loss Prevention
Occupational Safety and Health Act of 1970 (OSHA)
Consumer Product Safety Act of 1972 (CPSA)
Comprehensive Environmental Response, Compensation Liability Act of 1980 (CERCLA) (Superfund)
Food and Drug Administration (FDA)
The Clean Air Act
The Water Pollution Control Act

17. Loss Control - Reduction
Loss Reduction
Steps designed to reduce the severity
Take steps to reduce the damage before and after a loss

18. Self-insurance - loss financing
What is self-insurance?
Why do companies self-insure?
Save money
Better control
Loss prevention incentives
Improved claims settlement
Profitability and investment earnings
Difference between self-insurance and risk assumption

19. Captive Insurance Companies
A method of self-insuring
A company formed to write insurance for a parent company
Motives for starting a captive
Save the overhead and profits of the insurance company
Earn investment income on the premium
Tax advantages

20. Other Risk Management Tools
Risk Transfer
Hold harmless agreements - transfer of risk through a contract
Hedging - take equal but opposite position on an even based on chance
Financial risk management - techniques to deal with interest rate, currency value, and crop price changes
Leases - transfers risk of obsolescence

21. Step 3 – Review and Update
Regularly review and update the process
New assets or disposal of assets
Valuation changes
New products and processes, materials
New personnel
Law changes
Currency fluctuations
New contractual relationships