SECTION 1- Risko Uncertainty; not knowing if an event will happeno Probability- likelihood an event will occur 100% chance means NO risk-we are sure it will happen o Classificationso 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- createdovertime 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 meanof 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 risko Personal i.e.: Health (causes: ^ price, decrease income), death, unemployment, outliving savings (lack of resources)o Property i.e.: damaged, lost or stolen – house, caro Indirect- additional expenses caused by direct damage (i.e. hotel, rental)o Direct- lose/damage to property itself * Indirect and direct also apply to businesseso Liability Responsible for injury you cause OR that occurs on your property; product liability - Burden on societyo Emergency Funds People are saving instead of spending $ which does not help foster economyo Loss of Goods or Services i.e. ordering a product recall even though it may help more people than it hurts o Fear and Worry- Peril VS Hazardo Peril – actual cause of losso 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 processo Steps: Identify Exposures- Useful tools o Communication with Other Departmentso Loss Exposure Checklist o False advertisement, unclear instructions for products- Categorizing potential losseso Property Real vs personal Direct vs indirecto 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 incomeo Reputation Evaluate Exposures- Frequency and Severity- Probability- Central Tendency- Variation- Law of Large Numbers- Quantitative riskso Net present value (NPV) or internal rate of return (IRR)o Value at risk (VaR)- Qualitative riskso Scenario planning- scan internal/external environments; build scenarios; plan response; identify realistic future; capitalize on futureso Brainstormingo Decision tree analysis Select Appropriate Technique- Transfer - Shifting between a company to anothero Noninsurance Transfer Spread exposure among o Insurance Transfer i.e. my car accident, $500 deductible High severity, low frequency - Retention -- Unplanned or purposefulo Where would $ come from to repair a loss i.e. bank loan, line of credit, insuranceo active: identifyo Passive: not identify- Loss prevention vs loss reductiono 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 Departmentso Traditional Risk Management Process: Pure riskso 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 managemento 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 forfull property damage/losso Problem of Adverse Selection People w/ > risk will try to get insurance for better rate Underwritter- evaluate people to assess risk level- Risk requirementso Large number of similar exposureso Loss must be accidental and unintentionalo Loss must be determinable and measurableo Loss should NOT be catastrophico Chance of loss must be calculableo Premium must be economically feasible- Legal principleso Legal Wrong- failure to perform a legal duty, or violation of another persons legal rightso Types: Breach of Contract Crime- wrong against society Civil (Torts) - wrong against individual or organization Negligence- What makes something negligento Legal Duty must be owedo 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 Negligenceo Comparative Negligenceo Last Clear Chance Ruleo Assumption of
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