RMI3011 Exam 1 Chapters 1 2 3 6 15 Section 1 Risk and the Risk Management Process Risk uncertainty Risk v Probability If P 0 there is no risk because the event will not happen If P 1 it is going to happen no risk because you know it s going to happen and can plan for it Risk is when probability falls between 0 1 Individual Side most expensive items people own are their greatest liabilities Car protect the vehicle from harm accidents cause damages and liabilities Home protect from loss Fire one of the top losses to home Sinkhole earthquake theft Pools pose liability exposure they are an attractive nuisance Corporate Side wants to protect assets Toy manufacturers concerned with safety recall products change design alter age range etc Food industry recalls create liability exposure Slip and Falls big issue in restaurants Warning labels used to protect companies Instructions easy to follow and complete in nature Classifications of Risk Pure v speculative Pure risk two possible outcomes no change or loss insurable Speculative risk investing money 10 000 you can have a gain a loss or no change so it is not insurable Static v dynamic Static risk unchanging risk has will always exist natural disasters Dynamic risk generally created by changes in society credit cards Fundamental v particular Fundamental Risk a lot of people affected by 1 event Particular risk only affects few people ex fire at home Objective v subjective Objective risk looking at true number of mortalities that occur ex deaths jumps Automobile example insurance company insures 1M cars and approximately 10 000 Subjective risk persons personal assessment of how risky investment is cars will have accidents per year They want to be as accurate as possible in predicting the more cars they insure the more accurate they can be Insufficient retirement income life expectancy higher must save more Premature death Poor health create medical expenses impacts ability to work Unemployment Property Risks Real v personal Direct v indirect Real property risk land and any attachments Personal property risk anything you can pick up and move Direct property risk fire accident Ex accident is a direct loss to the car and an indirect loss to you to rent a car while Indirect property risk caused by the direct loss yours is in the shop Sources of Pure Risk Personal Risks Liability Risks Premises hazards physical hazards ex dark stairwell rips in carpet uneven pavement Product liability toys Professional liability when selling a service ex lawyer architect Contractual liability Environmental impairment liability hazardous to nature Employment related practices liability wrongful termination sexual harassment Burden of Risk on Society adverse impact of risk Emergency Funds Can lose your job injure yourself die prematurely leaves financial burdens on self or others Should save 6 months of your income in savings account in case of emergency Loss of goods or services can happen when a product creates too much liability Fear and worry Life insurance disability insurance If you are the bread winner you worry if something happens to you the burden it will put on your family Perils v Hazards Peril actually causes the loss If driving and hit car the peril is the collision Hazard can increase the likelihood of the loss or the severity of the loss Physical hazard rain impacts how far you can see in front of you Moral hazard doing something intentionally to cause a loss or increase the value of claim after the loss insurance fraud house break in Morale hazard not intentional indifference or carelessness leaving car on could cause hazard Legal lawsuits see a case and want to sue for similar issues that happened to you ex increase likelihood of loss McDonalds coffee too hot Car accident example story Peril is the collision with the other vehicle and the light post Hazards Drinking and diving moral hazard No headlights on physical hazard Texting and driving morale hazard Speeding physical hazard Exam perspective know how to find the peril and hazards of the story Risk Management Process Traditional Risk Management Process Pure risks insurable loss or no loss Pure risks Operational risks Enterprise Risk Management Process more holistic approach to managing risk Loss of earnings assets damaged destroyed or stolen assets become obsolete employee related risks legal liability political risks Financial risks Input price risk agreed upon a price have to stay with it regardless of changes Output price risk produced product selling to distributors something changed in the market and could potentially sell it for more but cant bc of the agreement on the output price Interest rate risk Credit counterparty risk always run the risk of default and people not paying Currency or foreign exchange rate risk Strategic risks macroeconomics 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 Objectives of Risk Management Things to consider Personal organizational goals Last assignment of class think about personal goals Organizations have to have goals as well to track progress Risk tolerance Trade off between risk and costs Lots to do to reduce risks but for a cost associated with Types Pre loss objectives Ex if you own a vehicle insurance is required in the state of Florida Liability insurance designed to protect someone else or someone else s property that you might injure destroy in accident external obligation Companies of a lot of different external obligations as well Post loss objectives Most important objective is to survive Steps to the Risk Management Process repeats 3 5 years Identify exposures Evaluate exposures potential impact of risk Select appropriate technique which technique to use to manage exposures Implement periodically review and revise Risk Management Process Step 1 Identification crucial because if you have an exposure you do not identify than you will not go through the process so essentially you have retained financial responsibility for the loss want to do due diligence identifying all potential exposures if you don t go through the steps its called unplanned pretention Property liability loss of income reputation human resources crime employee benefit Categorizing potential losses foreign loss exposures regulation Useful tools
View Full Document
Unlocking...