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Chapter Three: Introduction to Risk Management - Coggle Diagram
Chapter Three: Introduction to Risk Management
Meaning of Risk Management
Objectives of Risk Management
Pre-loss objectives
economy
reduction of anxiety
meeting legal obligations.
Post-loss objectives
survival of the FIRM
continued operations
stability of earnings,
continued growth
social responsibility
Steps of Risk Management Process
■ Identify loss exposures
■ Measure and analyze the loss exposures
■ Select the appropriate combination of techniques
for treating the loss exposures
■ Implement and monitor the risk management Program
Risk Management Techniques
Risk Control
■ Avoidance
■ Loss prevention
■ Loss reduction
Risk Financing
■ Retention
No other method of treatment is available
The worst possible loss is not serious
Losses are fairly predictable.
Captive Insurer
association or group captive
A single parent captive a pure captive
Difficulty in obtaining insurance
Favorable regulatory environment
Lower costs
Easier access to a reinsurer
Formation of a profit center
Paying Losses
Current net income.
Unfunded reserve
Credit line
Funded reserve.
■ Noninsurance transfers
■ Commercial insurance
Advantages of Retention
Save on loss costs
Save on expenses
Encourage loss prevention.
Increase cash flow
disadvantages of Retention
Possible higher losses
Possible higher expenses
Possible higher taxes
Noninsurance Transfers
advantages
The risk manager can transfer some potential losses that are not commercially insurable.
■ Noninsurance transfers often cost less than insurance
■ The potential loss may be shifted to someone who
is in a better position to exercise loss control.
disadvantages:
The transfer of potential loss may fail because the contract language is ambiguous
If the party to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim.
An insurer may not give credit for the transfers and insurance costs may not be reduced.
Insurance
five key areas
■ Negotiation of terms
■ Dissemination of information concerning insurance coverages
■ Periodic review of the insurance program
Selection of an insurer
Selection of insurance coverages
Advantages of Insurance
The firm will be indemnified after a loss occurs
Uncertainty is reduced, which permits the firm to lengthen its planning horizon
Insurers can provide valuable risk management services, such as risk-control services,
Insurance premiums are income-tax deductible as a business expense.
Disadvantages of Insurance
The payment of premiums is a major cost
Considerable time and effort must be spent in negotiating the insurance coverages.
The risk manager may have less incentive to implement loss-control measures because the insurer will pay the claim if a loss occurs
Which Technique Should Be Used?
Loss Severity
Low
High
Loss
Frequency
Low
High
Cooperation with Other Departments
Accounting
Finance
Marketing
Production
Human resources
Benefits of Risk Management
A formal risk management program enables a firm to attain its pre-loss and post-loss objectives more easily
The cost of risk is reduced, which may increase the company’s profits.
Because the adverse financial impact of pure loss exposures is reduced, a firm may be able to implement an enterprise risk management
Society also benefits since both direct and indirect (consequential) losses are reduced
Personal risk management
Steps in Personal Risk Management
measure and analyze the loss exposures
identify loss exposures,
select appropriate techniques for treating the loss exposures
implement and review the risk management program periodically.