Chapter 1 Introduction 50 Multiple Choice Questions What is Risk many definitions uncertainty regarding loss how do you classify risk Uncertainty definition doubt about our ability to predict future outcomes uncertainty can differ across individuals even when risk is the same subjective information does not alter risk objective but can alter uncertainty reduction in uncertainty can increase firm value Categories of Risk Pure stolen car vs Speculative stocks Subjective personal view vs Objective Static slower changes of risks in time frequency and serve of earthquakes vs Dynamic risks that change throughout time cell phone risks stolen missing texting and driving plane crashes Boeing planes Fundamental risks that affect a large area group of people vs Particular risks that affect a particular company or a few Core risks that your in business to manage taking on financial risks hedge funds taking on technology risks Apple vs Secondary risks concerning employee customer satisfaction risks etc risks that can be managed by someone else When you talk about of risk you must always consider the reward as well Personal Risks examples loosing family members health injury death Sources of Pure Risk loss vs no loss things you can loose Chances of a woman aged 20 dying before 21 05 Chances of a man aged 20 dying before 21 015 Property Risks example home fire floods possessions vehicle Chances of having an auto vehicle accident over 5 year window 25 Chances of having a house lost in a fire occurs 1 in 15 years Liability Risks personal torts you can be subject to sue Examples being involved in a car accident and it being your fault fraud defamation employment Financial Risks bank accounts stock exchange Exposure vs Peril vs Hazard Things you can actually lose house car money cell phone Exposure person or property facing risk of loss Peril the immediate cause of loss What causes the loss fire caused you to lose your house Hazard condition affecting the frequency or severity of loss Types of hazards hazards conditions affecting perils frequency or severity of loss Physical hazards property conditions Intangible hazards attitudes or culture Moral hazards behavioral changes Morale hazard indifference Prof Nyce believes these are the same thing Do you behave differently when your car or cell phone are insured Because you have an airbag does that mean you drive reckless or you don t drive as carefully as you can Societal hazards legal or cultural Example of change gay changes television shows being aired Two and a Half Men marijuana changes Colorado Washington Risk Measurement Degree of Risk How often does this risk occur Breaks down to probability and statistics when looking at the degree of the risk Relative variation of actual from expected loss variation or standard deviation Objective risk probable variation of actual from expected losses expected losses People s Attitude Toward Risk How to make decisions with risks based on uncertainty If you ve been drinking you question whether to get a cab get a friend or risk driving and not knowing where the cops are or getting pulled over Risk Neutral indifferent toward risk Value of risky situation is expected loss Risk Averse prefer to avoid risk best marketing method for insurance which is why insurance companies create high premiums in the event of a loss most people Willing to pay more than expected loss to avoid risk Would pay more than expected return to engage in risky situation Risk seeker prefer risk gamblers dilemma roulette wheel Cost of Risk RIMS Sum of Outlays to reduce risk Opportunit y costs Expenses from financing potential losses Cost of unreimbursed losses Graph illustrates risks companies risk 10 per 10 000 Cost of risk doubled Burden of Risk on Society Need for Larger Emergency Funds Federal Government Disaster Relief Hurricane Katrina 50 Billion Dollars Setting aside Home Owner s Insurance to prevent wind damage for hurricane disasters especially if you live in South Florida Loss of Needed Goods and Services Supplies good and services needed and are limited due to a risk or disaster Fear and Worry How Do We Handle Risk Entire Industry Risk Management Enterprise Risk Management Holistic view of risk we are going to create a committee who will focus on the risk of the organization and enterprise view of risk management Prof Nyce doesn t believe in it because there s a reason why Financial Risks are handled by Financial Departments etc Because they are in their areas of expertise Definition of Risk Management Scientific approach to dealing with risk more an art than a science Broader than just insurance management Rules of Risk Management it s Common Sense its the hardest to teach Don t risk more than you can afford to lose Don t risk a lot for a little Consider the odds Strategic Management The Core Functions of an Organization gain more rewards than risks What is our mission our goals and objectives our strategic plan our means of measuring progress toward our mission Operations Management The activities that move us toward our mission Risk Management The activities that facilitate the most direct achievement of our mission The Risk Management Process Assessment Control Management Process never changes no matter what the organization is assessing controlling and financing management Determination of objectives Identification of risks Evaluation of risks Consideration of alternatives selection of the tool Implementing the decision Evaluation and review how well did you do Evaluation and Review In theory the evaluation and review are the final step in the risk management process Except in the rare case where an organization is newly created every organization will have a risk management program already in existence Evaluation and Review Generally Reevaluate program s objectives what were the programs objectives last year What are their objectives this year Do they have new or old risks Repeat identification process to assure that it was performed correctly Evaluate the risks that have been identified Verify that the decision on how to address each risk was proper Verify that the decision was property executed what worked and what didn t work Step 1 Determination of Objectives how to make money with the least amount of risks following the correct ratio Risk Management Objectives further away from the loss focus on survival first Post loss Objectives crisis management survival continuity of operations Pre Loss Objectives what we are
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