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Chapter 3: Introduction to Risk Management - Coggle Diagram
Chapter 3: Introduction to Risk Management
Meaning of Risk Management
Objectives of Risk Management
Pre-loss objectives
prepare for potential losses in the most economical way
reduction of anxiety
meet any legal obligations
Post-loss objectives
survival of the firm
continue operating
stability of earnings
continued growth of the firm
Steps in Risk Management Process
Identify loss exposures
Property loss exposures
Liability loss exposures
Business income loss exposures
Human resources loss exposures
Crime loss exposures
Employee benefit loss exposures
Foreign loss exposures
ntangible property loss exposures
Failure to comply with government laws and regulations
sources of information
Risk analysis questionnaires and checklists
Physical inspection
Flowcharts
Financial statements
Historical loss data
■ Measure and analyze the loss exposures
Loss frequency
Loss severity
maximum possible loss
probable maximum loss
■ Select the appropriate combination of techniques for treating the loss exposures
Risk Control
Avoidance
Loss prevention
Loss reduction
Risk Financing
Retention
active risk retention
Passive retentio
Retention can be effectively used in a risk Manaagement program under the
No other method of treatment is available
The worst possible loss is not serious
Losses are fairly predictable
Determining Retention Levels
A corporation can determine the maximum uninsured loss it can absorb without adversely affecting the company’s earnings.
a company can determine the maximum retention as a percentage of the firm’s net working capital
Paying Losses
Current net income
Unfunded reserve
Funded reserve.
Credit line
Captive Insurer
single parent captive
association or group captiv
Reasons for Captive insurers
Difficulty in obtaining insurance
Favorable regulatory environment
Lower costs
Easier access to a reinsure
Formation of a profit cente
Income Tax Treatment of Captives
The transaction is a bona fide insurance transaction
The captive insurer’s owner is organized
The captive insurer writes a substantial amount of unrelated business.
Ownership of the captive insurer is structured
self-insurance
Advantages
Save on loss costs
Save on expenses
Encourage loss prevention
Increase cash flow
disadvantages:
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
f 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
Commercial insurance
five key areas
Selection of insurance coverages
Selection of an insurer
Negotiation of terms
Dissemination of information concerning insurance coverages
Periodic review of the insurance program
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, loss exposure analysis, and claims adjusting
Insurance premiums are income-tax deductible as a business expense
Disadvantages of Insurance
The payment of premiums is a major cost because the premium consists of a component to pay losses
Considerable time and effort must be spent in negotiating the insurance coverage
The risk manager may have less incentive to implement loss-control measures because the insurer will pay the claim if a loss occurs
■ Implement and monitor the risk management program
Benefit 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 reduce
Society also benefits since both direct and indirect (consequential) losses are reduced
Personal Risk Management
steps
identify loss exposures
measure and analyze the loss exposure
select appropr ate techniques for treating the loss exposures
implement and review the risk management program periodically