Risk Management Defined
• Process to identify loss exposures and
selection of techniques to deal with
them.
• Can encompass both pure risks and
speculative risks.
• We will focus on pure risks but “new”
philosophy integrates management of
both.
• Personal risk management is important
too.
3
INSU 2500
Chapter 3
Sept. 5 & 7
Risk Management Characterized
Topic Objectives
• Defining risk management.
• Describing risk management process
and options.
• Evaluating loss potential.
• Explaining enterprise risk management.
• Corporate and personal risk
management.
2
• Stresses
identification and
analysis of pure
risks.
• Various methods of
dealing with risk,
including but not
confined to
insurance.
• Periodic evaluation
of all techniques
dealing with risk.
• Involves many
people and effects
extend beyond
insurance per se.
4
1
Evaluating Potential Losses
Risk Management Process
Concepts
• Identifying potential losses
• Loss Frequency:
the number of
losses
• Loss Severity:
the amount of
loss for each
occurrence
• Evaluating potential losses
• Selecting appropriate techniques
• Implementing program
Measuring
Severity
• distribution of
possible losses
• maximum
possible loss
• maximum
probable loss
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Types of Potential Losses
• physical damage
• loss of income
• liability lawsuits
• death or disability
7
Insurance Loss Distribution
Probability
• work injuries
• fraud, crime,
dishonesty
• employee benefits
loss exposures
• international loss
exposures
Low
Probability
of High
Losses
Max probable loss
Max possible loss
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$0
8
$900,000
$1,000,000
2
Likelihood (Frequency)
Risk Map: Implications
Personal Risk Management
• Personal Risks
Prevent
Share
ƒ loss of income due to
premature death
ƒ insufficient
income/assets during
retirement
ƒ catastrophic medical
bill/income loss due
to disability
ƒ loss of income from
unemployment
Avoidance
Reduction
Transfer
Retention
Impact (Severity)
• Property Risks
ƒ direct physical
damage to property
ƒ indirect losses
ƒ theft
• Liability Risks
ƒ
ƒ
ƒ
ƒ
ƒ
personal acts
libel, slander, etc.
negligence
business related
legal costs
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Enterprise Risk Management
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Risks Faced by Firms
• Property Exposures
• Expand and coordinate identification and
management of all firm risks: pure,
speculative, strategic, operational.
• Examples: fire, liability suits, economic
changes, new competition.
• Emphasis on risk financing as well as risk
transfer; range of tools.
• Consider interdependence of risks:
opportunities to diversify, hedge.
• New insurance products to stabilize
performance, e.g., profits, revenues.
ƒ Direct
ƒ Indirect
• Liability Exposures
ƒ product
ƒ premises and operations
ƒ managerial errors & omissions
• Personnel Exposures
ƒ employee benefits
• Financial Exposures
• Strategic Exposures
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3
Firestone Tire Recall
Risk Management
• What risks do Firestone & Ford
face?
• What risk management
techniques are applicable?
• How well have they managed
their risk?
• The logical development and
implementation of a plan to deal with
potential losses.
– Insurance is just one option.
– Financing and controlling loss exposures.
• Making pre-loss arrangements for post-
loss resources
• Read the “Texas Bank Tornado” case on
pp.64.
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Please Read the Tornado Case
Now
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RM at UNT
• P. 64
• We will use this real-world case as we
cover the principles of risk management’
Chapter 3.
• UNT Risk Management Services
• Yes, we do have a risk manager at UNT.
– Doug Welch
• http://web2.unt.edu/riskman/index.php?se
ction=index
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4
The RM Function
Better Definition of RM
• Skip, but fun reading material…
• An ongoing process that requires the
organization to identify the level of risk it
wants to maintain, to identify the risk it
currently retains, and to make insurance
and other financial arrangements to
make the desired and the actual level of
risk the same.
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The RM Process
RM Step 1
1. Identify & Measure (evaluate) potential
• Use the __________ as our
organization.
• Direct property losses:
loss exposures
2. Choose most efficient tool(s) for
•
•
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Loss Control
Loss Financing
– Checklists
– Flow Charts
– Questionnaires
3. Implement and review (monitor)
• Indirect losses
• Key personnel
Fig. 3-3 on pp. 61 (excellent illustration!)
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20
5
Liability Losses
RM Step 2
• Construct a RM program for handling
loss:
• 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
– Loss Control
• Risk Avoidance (ZERO COL!)
• Don’t do it.
• No flight zone.
– Loss Prevention (reduces frequency)
• Defensive driving, bank security guard.
– Loss Reduction (reduces severity)
• Seat belt, fire walls.
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Estimation of Loss
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Homework
• Frequency and Severity.
• Maximum Possible Loss
• Read Chapter 3 (p. 54)
– Federal Loss Control Regulation
– The absolute maximum dollar amount of
damage (the worst circumstances).
• OSHA
• The Consumer Products Safety Act of 1972
• Other regulations
• Maximum Probable Loss
– Who benefits from these Federal
Regulations?
– A conservative estimate of what is likely to
occur in a worst case loss (the average
circumstances).
• Emergency Planning – Disaster
Recovery
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24
6
Risk Financing
Self-Insurance
• RF determines when and by whom loss
costs are borne.
– Risk assumption
– Risk transfer other than insurance
– Self-insurance
– Insurance
• Do-it-yourself.
• The pooling and funding of the cost of
losses take place within one business
entity.
• Must meet all criteria for any insurance
system.
– What are the criteria? Hint: Chapter 2
25
Risk Assumption/Retention
27
The Captive Insurance Company
• The consequences of a loss will be borne
by the party exposed to the chance of loss
(COL).
• Co-pay/deductible
• How does it work?
• Potential advantages??
• What’s the catch???
– Self-defined loss
– Lowers premium
26
28
7
Risk Transfer
RM Step 3
• Definition:
• Implement the RM plans
• Examples:
• Regular Review of the RM Program
– Hedging
• Derivatives Securities
– Financial Risk Management
29
Q1
RM Tools
Direct property losses would include
each of the following except:
a. Losses to owned buildings.
b. Losses to leased buildings.
c. Losses of inventory.
d. Loss of income after inventory is
destroyed by fire.
Frequency
Low
S
e
v
e
r
i
t
y
L
o
w
Assume
loss prevention
loss reduction
H
i
g
h
Insure
risk transfer
loss reduction
loss prevention
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High
Loss Prevention
loss reduction
assume risk
Avoid
loss prevention
loss reduction
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32
8
Q2
Q4
Typical sources of liability losses include all
the following except:
a. A worker allows a machine to be destroyed by
improper maintenance.
b. Losses caused to workers injured on the job.
c. Losses caused to the real property of others.
d. Losses caused by bodily injury to customers in
a store.
“The logical development and carrying
out of a plan to deal with potential
losses” is the definition of:
a. Loss control
b. Risk management
c. Emergency response team
d. Risk financing using derivative
options
33
Q3
35
Q5
Risk avoidance:
a. Means measures are taken to eliminate
the loss exposure.
b. Means measures are taken to reduce
loss severity.
c. Means insurance has been purchased and the
risk transferred to an insurance company.
d. Is never a useful risk management tool.
34
Business firms face liability lawsuits
when their: (choose best answer)
a. products injure consumers
b. customers steal their inventory
c. unions go on strike
d. attorneys fail to file legal documents
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9
Q6
The Cash America Building
The federal law that promotes a safe
working environment for workers is:
a. Superfund
b. Equal Opportunity Act
c. OSHA
d. CERCLA
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The Bank One Tower
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The Matlock Tower
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40
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41
43
42
44
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