Notes Class 1 1 28 14 Topic 1 Intro and Overview Risk Risk Management Uncertainty Topic 2 Risk Management Process and Methods of Risk Identification Risks at Temple University o What Risks Personal Injury Theft Tangible property financial employee diversion of funds intellectual patents ideas security breach cyber security Finance tuition state of Pennsylvania Reputation Natural Disaster Fire Depreciation of real property Separate Assets Lawsuits Sexual Harassment Discrimination Negligence slip and falls Malpractice hospital Professional Liability Negligence Workers Compensation Auto fender bender Uncertainty of outcome Produces loss to you or the company Loss is always financial impact Loss with certainty Risk Loss o Budget Plan Avoid Possibility of Negative Outcome No indication of likelihood Probability of Loss Defining and Quantifying Likelihood of outcome or event Types of Risk o Traditional Risk Management Model Risk Classification Pure Risk VS Speculative Risk Pure Risk o Chance of Loss or no loss NO Gain Example My house it either burns or it didn t Owner of commercial building faces risk associated with fire loss o No Change in Financial Condition Speculative Risk o A chance of loss no loss or chance of gain Example Apartment building Rent out to tenants might profit but also might incur loss Static Risk VS Dynamic Risk Static Risk o Does not change significantly over time Always Present for an organization Natural Disasters death fire theft Dynamic Risk o Varies due to changing circumstances Dependents are covered until age 26 New Law connected to benefits Obamacare New Technology Economic Crisis of 2008 Fuel prices Foreign Exchange Rates Biggest Dynamic Risk Terrorism Examples Recessions Regulatory changes Increased competition Changes in consumer habits Subjective VS Objective Risk Subjective Risk o Perceived amount of risk based on an assessment of risk based on company s opinion of the risk Objective Risk o Based on Facts Usually quantifiable o Measurable Variation in uncertain outcomes based on facts and data Subjective Risk Objective Risk Differ Based On Familiarity Control Consequence over Likelihood Risk Awareness likelihood as low o If you or the company is not aware of the risk impact on company you will perceive the Diversifiable Risk VS Non Diversifiable Risk Diversifiable Risk o Risk that affects some individuals or companies o Random Example Fire in a strip mall that affects one or a small number of businesses Non Diversifiable Risk o Risk that affects society at large Large segment of society affected at the same time o Occur Simultaneously Not Random Example Inflation Unemployment Natural disasters such as hurricanes Liability Exposure o Loss due to acts of negligence Torts Settlements Judgments Cost Legal Fees Cost Reputation Cost Factors Affecting Risk Peril o Immediate cause of loss o Random Event that causes loss to occur Natural Disasters Frequency of Loss How often do losses occur Units of measurement of Injuries Days out of work Days on light duty Days overtime for coverage Temporary Employees Example Flood caused the loss to the beach house only 1 peril o Low Frequency Low Severity o High Frequency High Severity Severity Severity o Given that a loss has occurred How much The Size of a loss o Hazard Severity is always measured in Condition that increases the frequency or severity of a loss Underlying condition behind the loss 4 Classifications for Hazards Can increase frequency severity or both Moral Condition that increases the likelihood that a person will intentionally cause or Morale Condition of carelessness or indifference that increases the frequency or severity of Physical Condition of property persons or operations that increases the frequency and or Legal Condition of the legal environment that increases the frequency and or severity of Example Peril Fire Cause of loss Hazard The distance to the fire hydrant combustible materials lack of sprinklers in exaggerate a loss severity of loss loss loss establishment Difference Between Hazard and Peril Hazard o A condition that increases the frequency or severity of a loss Example Location of my beach house that got flooded o There are numerous hazards Peril o Random event or immediate cause of loss Example Flood cause the loss to my beach house o Only 1 peril Moral Hazard VS Morale Hazard Condition that increases likelihood that a person will intentionally cause or exaggerate a loss Moral Hazard o Act differently because of the existence of insurance o Not Necessarily bad Example o When is it bad to act differently Fraud Epitome of Moral Hazard Health Insurance going to the Doctor more frequently Healthier lifestyle Insurance Fraud life insurance Negative outcome spread risks share costs Home Insurance Fraud Negative outcome spread risks share costs Auto Insurance Fraud Negative outcome spread risks share costs Change your behavior because you have insurance Price is fixed Change demand higher premiums Public Policy Issue Ultimately everyone pays more o Attitude difference o Because you now have insurance you act carelessly Examples Morale Hazard Condition of carelessness or indifference that increases frequency or severity of loss Driving carelessly failing to lock an unattended building failing to clear an icy sidewalk to protect pedestrians Difference Between Moral Hazard and Morale Hazard Moral Hazard Morale Hazard o Condition that increases the likelihood that a person will intentionally cause or exaggerate a loss o Condition of carelessness or indifference that increases the frequency or severity of loss A Moral Hazard results from a deliberate act A Morale Hazard results from carelessness or indifference Cost of Risk Burden of Risk What does risk truly cost an organization How does risk impact an organization How does risk impact society Financial Burden Financial Consequences of Risk o Hospital facing risk of medical malpractice o What is expected cost of loss Provide increased services to a patient Settlements Jury Award goes to trial Legal Fees Reputational Loss Good Will Loss Reputational Loss Loss of Revenue no patients Cost To Manage Risk Expenditures on Risk Management o Training o Increase security staff o Tougher hiring process o Background checks o Crisis management team o More insurance coverage Leading to higher premiums Cost of Risk Expected Cost of Losses or Gains Uncertainty Cost of Residual Uncertainty o Loss of goods services because they are deemed too risky Example