Topic 5 Risk Management Techniques Loss Control o Risk Control Objectives Goals Activities Attempts to Control Risk Loss Exposures Risk Management Alternatives o 2 Broad Categories Risk Control Risk Financing Decrease Frequency Decrease Severity Or Both Improve Variability of Losses o Less Variable o Objective Risk Data Quantifying o Decrease Coefficients of Variation Avoidance perfect Risk Control measure because you don t do it o Stop engaging in activity causing loss o Never engage in activity from the start o If it is properly implemented then Frequency 0 Problems With Avoidance o One can t avoid everything Death Natural Disasters Terrorism o Opportunity Cost avoid one loss you may be exposed to another loss By Avoiding you lose potential profit revenue and if you o EXAMPLE Fleet of cars is being outsourced still potential risks downsides Still have drivers But you have less control Perform background checks Incur new expense Depending on supply chain who relies on 3rd party Reputation Quality suffers Legacy Costs o Responsible for prior acts or activities o One of biggest Legacy Costs Asbestes Insulation used for fire prevention in homes o Underground Oil Tanks Pollution exposure Oil spill Loss Control Loss Prevention goal of reducing frequency o Doesn t completely eliminate the loss but may have an impact on severity o Main Goal Impact Frequency o Looking to interrupt of break chain of events prior to loss Measures Loss Reduction Safety security training walk around asking questions walk and talk o Assume Loss will or has occurred o Goal is to reduce severity less money lost o What could be done to minimize severity o Disaster Recovery Debrief What worked What didn t Post Loss Reduction Activities i e PA Turnpike crash during snow o Diligent Record keeping Photos Videos o Fix what caused loss But are you admitting to Negligence o Subsequent Remedial Measures Repairs aren t held against owner Benefit to society o EXAMPLES Crisis Management Training Light duty Product Recalls Salvage Car accident totaled car taken by insurance company Risk Control Separation of exposure units o Breakdown items assets activities responsibilities into smaller parts and separate o EXAMPLE Build another garage Rent 2nd garage Incurring new expense Lost Fleet 1 Garage Fire Occurs Loss of entire fleet Cost Benefit Analysis Limits size of loss from any single occurrence decreasing severity reduces income loss may result in increased expenses Duplicate Exposure Units Key assets that can be replicated Key could lose it Must be held in reserve critical not to use it because if you don t use it you o EXAMPLES Computer data technology documents generator Test to be sure it s operationally fit Does it work isk Transfer Shifting Loss Exposure Shifting activity or asset that s exposed to loss to a 3rd party o Lease Fleet maintenance Insurance o Rent Lease garage read contract o Due Diligence references background checks o Potentially less expensive when you transfer risk Security Services for Temple as example Want 3rd party to be responsible due diligence In position to know or should have known Social Media Best way to perform due diligence o EXAMPLE Fox Chase Cancer Center now temple owned Malpractice HR practices building financial standing Reputation Avoidance loss control loss reduction separate exposure units duplicate exposure Risk Management Alternatives units Financing Options Sources of funds to pay for losses o External or Internal Risk Transfers of Finance Type o Still have asset still exposed to loss o Transferring financial responsibility for the loss Big Insurance Not responsible for asset or activity owner firm is Insurance will step in and pay financial loss Problem if insurance doesn t pay you will Non Insurance Risk Transfer Hold Harmless Agreement o Engaged contractor financially responsible for any losses contractor will accept the loss risk for you firm But contractor will not assume responsibility liability for your negligence Hold Harmless Waivers Releases o Assumption of Risk Skydiving bungee jumping Lease Tennant financially responsible for all losses that occur to property that is in his her Care Custody Control The 3 C s CCC i Actively and deliberately chose to retain at least part of loss General 1 Retention Retain Exposure a Firm individual assumes responsibility for loss b EXAMPLES i Not buy insurance ii Under insure iii Insurance policy with deductible c Deductible Active Retention liability of property and auto 2 Passive Retention a May not be aware of deductible b Failed to properly identify the loss or c Flat out underestimated 3 Funded Retention i Money in reserve for losses ii Very intentional budget plan 4 Unfunded Retention Choice a Putting no money aside pay out of pocket i May have to borrow money if you don t have it If there is a loss there is low severity low cost b c Low frequency d P 1 200 000 Put aside 100 000 month Losses that are predictable a Putting funds away every period monthly yearly quarterly Self Insurance Active Funded Retention Program for firms with many losses and potentially large losses o Large deductible self insurance retention funding most losses Very well planned strategy o Large group needed o Health Insurance need 50 of employee participation o ER Benefit plan dental visual prescriptions o Workers comp largest number of employees Wages and medical benefits Ideal Characteristics for Self Insurance o Large Number of participants o Fairly predictable losses o Long pay out period Advantages of Self Insurance o No premiums No Losses you keep the money o No Risk Charge or outsider administration costs Commission and state fee 10 30 o Personalized product Disadvantages of Self Insurance o Catastrophic loss could ruin company o Commercial product you know what premium will be With a good year rates may get better Stop Loss Policy Policy of Last Resort o Will stop company from losing everything Employer has to submit plans for audit Employer needs to prove its providing what it promised Company not paying premiums maybe use elsewhere Self Insure still retaining benefit of successful loss control and loss reduction techniques o Incentives smoking cessation gym o Cash bonus to opt out but employee must have coverage o Take spouses coverage Firm is Self Insured No risk charge no administrative cost to insurance company Firm increase administration cost when it self insures Employees o Data records o Settle claims o Return to work o Wellness