INS 21- Chapter 7: Risk Management

People matter, results count

Risk Management

Risk management involves the effort of individuals or organizations to

efficiently and effectively assess, control and finance risk in order to minimize
the adverse effects of losses.

 Primarily, Risk Management is the process of making and implementing

decisions to deal with loss exposures.

It involves identifying loss exposures and then applying various techniques to

eliminate, control, finance, or transfer those exposures.

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Types of Risks

• Pure Risk:
A chance of loss or no loss, but no chance of gain.
• Speculative Risk:
A chance of loss, no loss or gain.

ENTERPRISE-WIDE RISK MANAGEMENT:

• Enterprise wide risk management takes into account both pure and speculative risks.
• ERM is an approach to managing all of an organization’s key risks and opportunities with
an intent of maximizing the organization’s value.
• It allows an organization to integrate all of its risk management activities so that risk
management happens at the enterprise level, rather than at the departmental or business
unit level.

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Steps in Risk Management

• Identifying and analyzing loss exposures

• Examining risk management techniques

• Selecting the most appropriate techniques

• Implementing the chosen techniques

• Monitoring and modifying the risk management program

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Risk Management Process

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Step 1: Identifying Loss Exposures
• Identifying Loss Exposures:
To handle loss exposures, a risk manager must first identify them. Identifying Loss
Exposures involves developing a complete list of loss exposures and possible accidental
losses that can affect a particular household or organization. The risk manager can start
with a physical inspection of the premises and then use other tools that aid in the
identification process, such as loss exposure surveys and loss history analysis.

• Physical Inspection
The most straight forward method of identifying loss exposure is a physical inspection of all
locations, operations, maintenance routines, safety practices, work processes and other
activities.

• Loss Exposure Survey

A loss exposure survey is a risk management tool in the form of a checklist or
questionnaire listing potential loss exposures that a household or an organization might
face. A loss exposure survey can be a valuable tool to help the risk manager identify the
organization’s loss exposures.

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Sample Survey

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Step 1: Identifying Loss Exposures….Continued

Loss History Analysis :

Loss history analysis deals with an organization’s past losses and can assist a risk
manager in identifying that organization’s exposures to future accidental losses. A high
quality loss history is one which is complete, organized consistent and relevant. Past
events or conditions that were not recorded or inaccurately recorded have little value for
forecasting future events.

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Step 2 : Analyzing Loss Exposures

• Analyzing a loss exposure requires estimating how large a possible loss could be and how
often it might occur.
• Such an analysis helps to determine how losses may interfere with the activities and
objectives of the organization and what their financial effect may be.
• It enables the risk manager to give priority to the most significant loss exposures.

• To determine the financial effect of losses, a risk manager needs to measure two
parameters,
 Loss Frequency
 Loss Severity

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Step 2 : Analyzing Loss Exposures…..Continued

Loss Frequency:
• Loss frequency indicates the number of losses that occur within a specified period. Loss
frequency is used to predict the likelihood of similar losses in the future.
• Accurate measurement is important because the proper treatment of the loss exposure
often depends on how frequently the loss is expected to occur.

Loss Severity:
• Loss severity is a term that refers to the dollar amount of damages that results or might
result from loss exposures. Loss severity is used to predict how costly future losses are
likely to be.
• It is much easier to predict the value of property losses than of liability losses.
• Loss severity estimation is very important as it plays a major role in deciding whether one
should insure a particular exposure or retain all or part of the financial consequences of the
loss.

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Step 3: Examining Risk Management Techniques
RISK CONTROL TECHNIQUES
Technique What the Technique Does
Avoidance Eliminates the chance of a
particular type of loss by either
disposing of an existing loss
exposure or by not assuming a
new exposure
Loss prevention Lowers loss frequency
(number of losses)
Loss reduction Lowers loss severity
(dollar amount of losses)
Separation Lowers loss severity
Duplication Lowers loss frequency
Example
A family decides not to purchase
a boat and therefore avoids the
property and liability loss
exposures associated with boat
ownership.
A business installs a burglar
alarm system in attempt to
prevent burglaries.
A business installs a sprinkler
system to reduce the amount of
fire damage from potential fires.
A business buys multiple small
warehouses to contain the effects
of a single loss
A taxi firm maintains a few
spare vehicles to keep all drivers
on the road even if one vehicle
needs repair. Insurance Practice 11
Step 3: Examining Risk Management Techniques……………….Continued
RISK FINANCING TECHNIQUES
Technique What the Technique Does
Retention Retains all or part of a loss
exposure (intentionally or
unintentionally) which means
that losses must be paid for with
available funds or other assets
Noninsurance transfer Transfers potential financial
consequences of a loss
exposure from one party to
another party that is not an
insurance company
Insurance Transfers financial
consequences of specified
losses from one party (the
insured) to an insurance
company in exchange for a
specified fee (premium).
Example
A business decides not to
purchase collision coverage for
its fleet of vehicles and sets aside
its own funds to pay for possible
collision losses.
In a lease, a landlord
transfers the liability
exposures of a rented
building to the tenant.
A family purchases
homeowners and personal
auto policies from an
insurance company.
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Step 3: Selection Criteria for Risk Management Technique

Decisions Based on Financial Criteria

• Financial management standards typically call for making those choices that promise to
increase profits and/or operating efficiency.
 
Decisions Based on Informal Guidelines
 
• Do not retain more than you can afford to lose.
• Do not retain large exposures to save a little premium.
• Do not spend a lot of money for a little protection.
• Do not consider insurance for a substitute of loss control.

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Example

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 Step 4: Implementing the Chosen Risk Management Techniques

 
Implementation of the chosen technique requires that risk manager make decisions
concerning:

• What should be done:

• Who should be responsible

• How to communicate risk management information

• How to allocate the costs of the program

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Step 5: Monitoring and Modifying Risk Management Program

• Risk management process is an ongoing Activity

• Needs of individuals, families and organizations might change with time.

• Risk Manager would analyze periodically new and existing loss exposure areas and
reapply risk management techniques

• Process of monitoring and modifying risk management program begins risk management
process again

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Benefits of Risk Management

Benefits of Risk Management to Business

• Improved access to affordable insurance
• Increased opportunities
• Achievement of Business Goals

Benefits of Risk Management to Individuals and Families

• Coping more efficiently with financial disasters
• Enjoying greater peace of mind
• Reducing expenses
• Taking more chances and making aggressive decisions
• Continuing activities following an accident or other loss
• Improving image in the community

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Benefits of Risk Management……………..Continued

Benefits of Risk Management to Society

• Stimulating economic growth
• Reducing number of person dependant on society for support
• Causing fewer disruptions in economic and social environment

Benefits of Risk Management to Insurers

• Creating a positive effect on insurer’s underwriting results
• Providing more thoughtful consumers of insurance
• Creating innovative products and competitive prices and servicing
• Obtaining the respect and business of risk managers and companies

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Thank You !!

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