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
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The physical survey
Analysis of contracts
Flow charts
Analysis of financial statements
Checklists
Measure Loss Potential
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Loss frequency
Loss severity
Maximum possible loss
Maximum probable loss
Control of RiskTools of Risk Management
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Avoid
Prevent
Reduce
Retain
– Unfunded
– Funded
Control of Risk (cont.)
• Transfer
– Property
– Risk
– Contractual
– Insure
• Pooling
• Combination
Risk Characteristics as Determinants of
the Tool
Severity of Losses
Frequency of Losses
High
Low
High
Avoidance
Retention & Control
Low
Transfer
Retention
Risk Administration
• Policy statement
• Location of risk manager in the
organization
• Disaster plan
• Evaluating risk management decisionsthe importance of feedback
Case Studies of Commercial Risk
Management
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Precious metals firm
Hospital
Municipality
Amusement park
Major sports event
Concert
2011 Emerging Liabilities
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EMF
Nano Scale Materials
Genetically Modified Plants and Animals
Weather Patterns
Hydrofracking Social Media
Pooling of Risks
Pooling of Risks
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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
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Loss prevention
Loss reduction
Deductibles
Coinsurance
Copayments
Limits of liability
Exclusions
Characteristics of Insurance
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Risk transfer
Pooling concept
Law of large numbers
Reduces uncertainty
Exchange
Costs
• Operation
– Cost of doing business
• Fraud
• Inflated losses
Benefits
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Indemnification
Reduction- worry & fear
Source of investment funds
Loss prevention
Enhanced credit
Encourages innovation