SECTION 1 Risk o Uncertainty not knowing if an event will happen o Probability likelihood an event will occur 100 chance means NO risk we are sure it will happen o Classifications o Pure Risk can lose money or break even insurable VS Speculative can lose money breakeven OR make money o Static not changing i e natural disasters death VS Dynamic created overtime b c of change in society i e credit cards o Fundamental effects large groups i e natural disasters VS Particular effects small groups i e your property o Objective that measures risk variation of losses surrounding mean of risk VS Subjective how someone feels about riskiness of something S i e more times you flip coin the closer to 50 you will get law of large the of exposure the closer loss will be to what you expect variation risk sources of pure risk o Personal i e Health causes price decrease income death unemployment outliving savings lack of resources i e damaged lost or stolen house car o Indirect additional expenses caused by direct damage i e hotel o Direct lose damage to property itself Indirect and direct also apply to businesses o Property rental o Liability Responsible for injury you cause OR that occurs on your property product liability People are saving instead of spending which does not help i e ordering a product recall even though it may help more people than it hurts Burden on society o Emergency Funds foster economy o Loss of Goods or Services o Fear and Worry Peril VS Hazard o Peril actual cause of loss o Hazard Physical Moral lie about loss fraud Morale not as careful b c you have insurance Legal more likely to sue b c other people have I e McDonald s hot coffee lawsuit Risk management process o Steps Identify Exposures Useful tools o Communication with Other Departments o Loss Exposure Checklist o False advertisement unclear instructions for products Categorizing potential losses o Property Real vs personal Direct vs indirect o Liability Premises Hazards Product Liability product Professional Liability service i e lawyer Contractual Liability Environmental Impairment Liability Employment Related Practices Liability i e discrimination o Loss of income o Reputation Evaluate Exposures Frequency and Severity Probability Central Tendency Variation Quantitative risks Law of Large Numbers return IRR o Value at risk VaR Qualitative risks o Net present value NPV or internal rate of o Scenario planning scan internal external environments build scenarios plan response identify realistic future capitalize on futures o Brainstorming o Decision tree analysis Select Appropriate Technique Transfer Shifting between a company to another o Noninsurance Transfer Spread exposure among o Insurance Transfer i e my car accident 500 deductible High severity low frequency Retention Unplanned or purposeful o Where would come from to repair a loss i e bank loan line of credit insurance o active identify o Passive not identify Loss prevention vs loss reduction o LP stop from happening o LR trying to lower severity Doesn t effect frequency Separation don t keep all resources together i e factory drawing in class Duplication having break up systems Avoidance prevent use of o Want to utilize when frequency and severity are very high o Not always a technique option Implement Periodically Review and Revise Must go back and review old customer portfolios Risk Management Policy Risk Management Manual Cooperation w Other Departments o Traditional Risk Management Process Pure risks o Enterprise Risk Management Process Pure risks Operational risks Earnings can be affected by a host of risks Assets can be damaged destroyed and stolen and some become obsolete over time Employee related risks such as injury or death resignation including being fired strike or being the object of kidnappings and ransom Legal liability is a major concern for businesses in several countries Political risks are especially relevant for MNCs Financial risks Currency or foreign exchange rate risk Interest rate risk Input price risk Output price risk Credit counterparty risk Strategic risks a new product will not meet sales production Macroeconomic and other primarily external influences and trends Loss of Market Share Competition Decisions Regarding Products Products Don t Meet Sales Productions Technology Issues Products Become Obsolete Economic Risks that Impact Sales and or Costs Merger Acquisition Doesn t Pay Off Types of risk management o Pre loss objectives legal requirements government mandated i e having to buy insurance if you take a loan for a house from the bank mortgage o Post loss objectives bankruptcy Insurance o Pooling gathering losses of a few individuals and spreading amongst all individuals insured i e cars 1M insured only 10 000 damaged o Fortuitous loss unexpected occurs by chance Risk reduction only have to pay premium don t risk paying for full property damage loss o Problem of Adverse Selection People w risk will try to get insurance for better rate Underwritter evaluate people to assess risk level Risk requirements o Large number of similar exposures o Loss must be accidental and unintentional o Loss must be determinable and measurable o Loss should NOT be catastrophic o Chance of loss must be calculable o Premium must be economically feasible Legal principles persons legal rights o Types o Legal Wrong failure to perform a legal duty or violation of another Breach of Contract Crime wrong against society Civil Torts wrong against individual or organization Negligence What makes something negligent o Legal Duty must be owed o Failure to Perform that legal duty o Damages or Injuries 3 types of damages o Proximate Cause Relationship need to show that someone s carelessness caused accident Defense against it o Contributory Negligence o Comparative Negligence o Last Clear Chance Rule o Assumption of Risk
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