INS 21 Chapter7-Risk Management

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.
Insurance Practice 2
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.
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
Risk Management Process
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.
Sample Survey
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.
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
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.
Step 3: Examining Risk Management Techniques
RISK CONTROL TECHNIQUES

Technique What the Technique Does Example
Avoidance Eliminates the chance of a A family decides not to purchase

particular type of loss by either a boat and therefore avoids the
disposing of an existing loss property and liability loss
exposure or by not assuming a exposures associated with boat
new exposure ownership.
Loss prevention Lowers loss frequency A business installs a burglar

(number of losses) alarm system in attempt to
prevent burglaries.
Loss reduction Lowers loss severity A business installs a sprinkler

(dollar amount of losses) system to reduce the amount of
fire damage from potential fires.
Separation Lowers loss severity A business buys multiple small
warehouses to contain the effects
of a single loss
Duplication Lowers loss frequency 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 Example
Retention Retains all or part of a loss A business decides not to
exposure (intentionally or purchase collision coverage for
unintentionally) which means its fleet of vehicles and sets aside
that losses must be paid for with its own funds to pay for possible
available funds or other assets collision losses.
Noninsurance transfer Transfers potential financial In a lease, a landlord
consequences of a loss transfers the liability
exposure from one party to exposures of a rented
another party that is not an building to the tenant.
insurance company
Insurance Transfers financial A family purchases

consequences of specified homeowners and personal
losses from one party (the auto policies from an
insured) to an insurance insurance company.
company in exchange for a
specified fee (premium).
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.
Example
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
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
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
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
Thank You !!

INS 21 Chapter7-Risk Management

Uploaded by

Copyright:

Available Formats

INS 21 Chapter7-Risk Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

INS 21 Chapter7-Risk Management

Uploaded by

Copyright:

Available Formats

INS 21- Chapter 7: Risk Management

People matter, results count

Risk management involves the effort of individuals or organizations to

Primarily, Risk Management is the process of making and implementing

It involves identifying loss exposures and then applying various techniques to

ENTERPRISE-WIDE 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

• Loss Exposure Survey

Loss History Analysis :

RISK CONTROL TECHNIQUES

Avoidance Eliminates the chance of a A family decides not to purchase

Loss prevention Lowers loss frequency A business installs a burglar

Loss reduction Lowers loss severity A business installs a sprinkler

RISK FINANCING TECHNIQUES

Insurance Transfers financial A family purchases

Decisions Based on Financial Criteria

• What should be done:

• Who should be responsible

• How to communicate risk management information

• How to allocate the costs of the program

• Risk management process is an ongoing Activity

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

Benefits of Risk Management to Business

Benefits of Risk Management to Individuals and Families

Benefits of Risk Management to Society

Benefits of Risk Management to Insurers

You might also like