Risk Management 101 Workshop

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Workshop Agenda
Introductions
 General/Safety
 Cell Phones
 Purpose
 Approach
 Q & A Time
 Evaluations

Workshop Materials Used
Old
 New
 Borrowed
 And True

Organizational Objectives
Profit
 Operating Efficiency
 Continuous Operations
 Stable Earnings or
Revenue Stream
 Growth
 Legal Compliance
 Humanitarian Concerns
 Reputation

Risk Management


A system for planning, organizing, leading, and
controlling the resources and activities that an
organization needs to protect itself from the
adverse effects of accidental losses.
Goal- To reduce the exposure to loss for the
organization.
Risk Management Objectives
Pre-Loss





Economy of RM
Operations
Tolerable
Uncertainty
Legality
Ethical Approach
Social
Responsibility
Post-Loss






Survival
Continuity of
Operations
Profitability
Stable
Earnings/Revenue
Social Responsibility
Growth
Risk Management Responsibilities:
Communication
Strategy/General
Claims
Management
Safety/Loss Control
Claims Analysis
Risk Financing
RM Advice
Management Reporting
Risk Management
Administration
Advice
Key Partnership Building
Executive Management
Internal Audit
Operations/Unions
Human Resources
Benefits
Planning
Construction
Real Estate
Contracts Admin.
Safety/Security
Risk
Management
(Traditional
Role)
Legal
Regulatory
Compliance
Insurers
3rd Party
Administrators
Finance
Accounting
Brokers
Major Types of Exposures

Property



Liability


Buildings-Business Personal Property
Rolling Stock- Personal Property of Others
Legally Enforceable Obligation
Personnel
Key Personnel and Officers and Directors

Net Income

Revenue Reduction/Expense Increase/Both
Basic Risk Management
Decision-Making Process
1.
Identify Exposures to Loss. (Analyze)
2.
Examine Feasibility of Alternative Techniques
3.
Select Most Suitable Technique
4.
Implement Chosen Technique
5.
Monitor and Evaluate Performance of the Risk
Management Program. Modify as needed.
Step 1-Identify/Analyze
Exposures to Risk







Standardized
Surveys/Questionnaires
Financial Statements
(Budget-P&L-CAFR)
Records and Files
Flowcharts (Fault Tree
Analysis)
Personal Inspections
Experts (Internal &
External)
Benchmarking
Step 1-Identify/Analyze
Exposures to Risk

“Benchmarking is the
practice of being
humble enough to
admit that someone
else is better at
something, and being
wise enough to learn
how to match or even
surpass them at it.”

Unknown
Risk Management Techniques

Avoidance- Ceasing or not undertaking an activity
that creates exposures to loss.

Loss Prevention- A technique that reduces
frequency of a particular loss.

Loss Control - A technique that reduces the
severity of a particular loss.

Risk Transfer - Shifts the financial consequences
of loss to another party or insurer.

Risk Finance - An conscious act or decision not to
act that generates the funds to pay for losses.
Step 2-Examine Feasibility of
Alternative Techniques





Loss Frequency
Loss Severity
Maximum Possible
Loss (MPL)
Probable Maximum
Loss (PML)
Loss Frequency
and Loss Severity
Interaction
Basic Approach
Frequency and Severity Interaction
Frequency
Severity
Remedy
High
High
Avoid
High
Low
Retain
Low
Low
Retain
Low
High
Transfer
Risk Mapping Approach
Frequency and Severity Interaction
5
High Severity
High Impact
High Impact
Low Likelihood
High Likelihood
Transfer
Avoid
2.5
Low Severity
0
Low Impact
Low Impact
Low Likelihood
High Likelihood
Retain
Retain
5
2.5
0
Low
Frequency
High
Frequency
Too Late For A Break?
Risk Management Techniques
Loss Prevention- Pre-Loss Activity

Loss Prevention
 System and Behavioral Safety
 Training
 Good Housekeeping and Proper Storage
Practices
 Proper Installation and Maintenance of
Equipment
 Accepted Procedures for Welding, Hazardous
Material Handling
 Adherence to Safe Work Procedures
 Machinery Guards
 Improved Building Materials
Risk Management Techniques
Loss Control- Concurrent Loss Activity

Loss Control Devices/Materials - Products that
are triggered during a loss or are made with
special material to control severity of injury
and/or destruction of property.

Separation - Disperses a particular asset or
activity over several locations.

Duplication - Uses back-ups, spares or copies of
critical property, information or capabilities and
keeps them in reserve.
Risk Management Techniques
Risk Transfer

Contractual Risk Transfer







Indemnity Agreements
Hold Harmless
Agreements
Insurance Requirements
OCIPS and CCIPS
Financial Capacity of
Insurers
Additional Insured
Agreements
Waivers of Subrogation
Proof of Coverage



Certificates
Insurance Policy
Endorsements
Obtaining Certified Copies
of Policies
Risk Management Techniques
Risk Transfer

Insurance- A technique that
transfers the potential financial
consequences of certain
specified loss exposures from
the insured to the insurer at a
guaranteed cost.




Declarations
Insuring Agreements
Conditions
Exclusions
Risk Management Techniques
Common Insurance Coverages




Liability
Auto Liability
Privacy and Security
Liability (Cyber)
Workers’
Compensation

Employer’s Liability




Employment Practices
Liability
Environmental Liability
Property





Earthquake
Flood
Business Travel
Accident
Builder’s Risk
Railroad Protective
Crime
Risk Management Techniques
Risk Finance

Insurance- Used as a finance technique for
catastrophic losses.

Self-Insurance- A technique that described
special situations in which risk retention has been
consciously selected as the appropriate risk
management technique.

Large Deductible Program- insurer assumes full
statutory liability while employer retains a
significant portion of the risk.
Factors in Designing
Risk Financing Programs





Expected Losses
Market Conditions
Corporate Philosophy
Risk Control
Commitment
Financial Position





Geographical Locations
Loss Payout Patterns
Effective Tax Rate
Corporate Ownership
Cash Flow Comparisons
Factors in Designing
Risk Financing Programs

Net Present Value

Today’s $ is worth
more than
tomorrow’s $
because of
investment income
implications.
Net Present Value Cash Flow Versus
Guaranteed Cost Comparison
Net Cash Flow
$1,600,000
$1,400,000
$1,200,000
$1,505,963
972,424
972,424
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
972,424
$787,871
$428,825
Optimistic
Expected
Loss Scenario
Pessimistic
Self Insurance
Guaranteed Cost
Qualified Self Insurance
Formalized retention program
 Excess insurance purchased for losses
exceeding limit
 Qualification requirements vary by state
 Positive cash flow
 Ability to influence program costs
 Unbundled services
 Administrative requirements

Definition of Large Deductible Program
A policy in which the insurer assumes full
statutory liability to all workers within the
scope of coverage, in the same manner as
any other workers’ compensation policy,
while the employer assumes a contractual
obligation to the insurer under which the
employer retains a significant portion of
the risk.
Large Deductible
Loss retention plan
 Excess insurance covers losses above
deductible
 Positive cash flow
 Ability to influence program costs
 Access to insurer services
 Collateral requirements
 Tax deduction disadvantage

Costs Included






Expected losses
Primary and excess
premiums
Claims handling
Taxes
Assessments
Loss Control





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Broker fees
Collateral
Fronting costs
Residual market loads
Boards and bureaus
State funds
Questions?
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