Notes Topic Chapter 2 Topic 2 Risk Management Process and Methods of Risk Identification 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 Sports cars Participating in Extreme Sports Hospital that do not deliver babies o The total cost incurred by an organization because of the possibility of accidental loss o Location traveling further to hospital that does deliver babies o Little variety of choice o Bad service o Because Risk is concentrated in the only 5 hospitals in the area that deliver babies Actual Risk VS Expected Loss If Actual Loss Expected Loss Neutral If Actual Loss Expected Loss Good If Actual Loss Expected Loss Bad Measure Objective Formula to quantify who experienced greater Loss Actual Loss Expected Loss Expected Loss Example o Building Owner A Owns 50 buildings Expects 5 Fires Actually had 10 fires 10 5 5 1 100 o Building Owner B Owns 500 buildings Expects 75 Fires Actually had 90 fires 90 75 75 15 75 20 1 Identify Risk Loss Exposure Risk Management Process Most Important piece of Risk Management Process a If you fail to properly identify the risk ultimately you go into bankruptcy 2 Analyzing Loss Exposures Loss Exposures Analyzed through 4 Dimensions 1 Loss Frequency Number of Losses within specific time period o i e fires auto accidents liability claims Loss Severity Amount in of a loss for a specific occurrence 2 3 Total Dollar Losses Total amount of losses for all occurrences during specific time period 3 Measure and Evaluate 4 Timing when losses occur and when loss payments are made a Frequency and Severity b Prior losses current statistics compared to former statistics c Easy to Predict i Personal Issues 1 Workers Compensation 2 Retirement 3 Turnover 4 Strikes d Difficult to Predict i Terrorism BIGGEST IMPACT ii Natural Disasters 4 Identify Options Alternatives a Risk Control If possible use lessons learned i Training ii Mitigate Lessen Risk before it happens iii iv Best Practices v Safety b Risk Financing i ii Self Insure Save for it borrow or suffer major loss Insurance c Employee Mitigation Worker s Comp i NJ Employer drives Workers Comp for injured employee ii PA Employer drives 90 days Light duty 1 2 Rehabilitation Physical Therapy iii Pre Injury Prevent Employee Accidents Group 1 Exercise 2 Gym Membership Discounts 3 Weight Watchers 4 Health Incentives Offered At Job Site 5 Implement The Chosen Option a Begin Safety Program b Purchase Insurance c Create Self Insured Fund d Funding retention programs e f g Contracting for loss prevention services Light Duty Purchase Loss reduction devices 6 Reevaluate Periodically a Make sure it is working b Monitoring Risk Management Program requires 4 steps i Establish standards of acceptable performance ii Compare actual results with accepted standards iii Correcting substandard performance or revisiting standards that are unrealistic iv Evaluate standards that have been substantially exceeded 5 Ways to Identify Risk 1 Walk Around Evaluate what you see Best Way to Identify Risk a Ask employees customers vendors 2 Contracts Leases a Hold Harmless Clause Contractual provision that obligates one party to assume legal liability of another party Example Bounce House Childhood birthday parties mechanical bull Contracts prevent injuries caused by Bounce House and Bull 3 Look at Prior Info Losses a Document analysis b Compliance reviews c d Expertise within and beyond the organization Inspections 4 Financial Statement Approach a Balance sheet Assets and Liabilities Logo Reputation b Liabilities 5 Income Statement Risk To Finances a Sources of revenue b Cash Flows c Supply Chain 6 Flow Chart to Capture Supply Chain 7 Share Info with others Professional Groups a Traditional Risk Management concerned almost exclusively with Pure Risk i Property Loss ii Liability iii Net Income iv Personnel b Enterprise Risk Management concerned with all risks Pure Speculative that organization faces i Hazard Risk ii Operational Risk iii Financial Risk iv Business Strategic Property damage 3rd party liability health and safety Product recall discrimination turnover Debt rating asset valuation Economic recession growth Intellectual property technology media coverage
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