RMI 3011 Professor Cole Exam 1 STUDY FOR EXAM o Core Risks involve what you do or what your business does o Secondary risks involve other risks that you take on in the process of doing your core objective o Objective vs Subjective o Objective Risk The relative variation of actual loss from expected loss o Subjective Risk Personal Estimate of Exposure What is Risk Uncertainty Regarding Loss Categories of Risk o Pure vs Speculative o Pure risk has either loss or no loss associated with it o Speculative risk can result in either no loss a loss or a gain o Static vs Dynamic o Static risks do not change through time o Dynamic risks change through time most risks are dynamic o Fundamental vs Particular o Fundamental risks affect everyone at the same time o Particular risks affect one person a few people at a time o Core vs Secondary Sources of Pure Risk o Personal Risks o Property Risks o Premature Death o Insufficient Retirement Income o Poor Health o Unemployment o Real Property Land Buildings o Personal Property Equipment belongings o Direct Property o Indirect Property o Liability Risks Loss of the Property due to fires hurricanes etc Loss of income due to peril increased expenses etc o Can you be held responsible for your actions car accidents o Unfenced swimming pools o Premises Hazards o Product Liability o Professional Liability o Contractual Liability o Environmental Impairment Liability o Employment Related Practices Liability Burden of Risk on Society o Need for Larger Emergency Funds o Huge economic impact as people spend less and save more o Loss of Needed Goods and Services o Fear and Worry Some More Risk Terminology person or property facing risk of loss the immediate cause of loss condition affecting the frequency or severity of loss o Exposure o Peril o Hazard Types of Hazards o Hazards conditions affecting perils frequency or severity of loss o Physical hazards property conditions o Moral hazard behavioral changes deliberately pushing your car off a cliff o Morale Attitudinal hazard indifference o Legal hazards Impact on behavior from legal conditions and legal structure Can I sue for this The Risk Management Process o Pure risks o Traditional Risk Management Process o Enterprise Risk Management Process Operational Risks Loss of earnings Assets damaged destroyed or stolen Assets become obsolete Financial Risks Input price risk Output price risk Interest rate risk o Pure risks o Operational risks o Financial risks o Strategic risks Employee related risks Legal Liability Political risks Credit counterparty risk Currency or foreign exchange rate risk Strategic Risks Macroeconomic and other primarily external influences and trends Loss of Market Share Competition Merger Acquisitions Don t pay off Decisions Regarding Products o Products don t meet sales productions o Technology issues Products become o Economic Risks that Impact sales obsolete and or costs Start Thinking about Risk o Uncertainty is doubt about our ability to predict future outcomes o Uncertainty can differ across individuals o Information does not alter risk objective but can alter uncertainty o Reduction in uncertainty can be a good thing even when risk is the same subjective How Do We Handle Risk o Individuals o Prevent reduce save money for a rainy day o Organizations Entire Industry Risk Management o Strategic risk where will we be 5 years from now o Operational risk Prevent work related injuries o Society o Government has evacuation plans in the event of bombings natural disaster Definition of Risk Management o Scientific approach to dealing with risk Rules of Risk Management 1 Don t risk more than you can afford to lose 2 Don t risk a lot for a little 3 Consider the odds Objectives of Risk Management Pre Loss Objectives o Economy o Reduction of Anxiety Firm should prepare for potential losses in the most economical way Analysis of the Cost of safety programs insurance premiums paid and the costs associated with different techniques for handling losses Certain loss exposures can cause greater worry and fear for the risk manager executives and key The threat of a catastrophic lawsuit due to a defective product can cause greater anxiety than a small loss from a minor fire o Meeting Legal Obligations Government regulations may require a firm to install safety devices to protect workers from harm dispose of hazardous waste materials properly and to label consumer products appropriately Workers Compensation benefits must also be paid to injured workers Post Loss Objectives o Survival of the firm Most Important After a loss occurs the firm can resume at least partial operations within a reasonable time period o Continuity of Operations o Stability of Earnings o Continued Growth other companies grow o Social Responsibility Firms must continue to operate after a loss or business will be lost to competitors EPS can be maintained if the firm continues to operate However due to the possibility of substantial expenses after a loss for example operating out of another location perfect stability of earnings may be difficult to maintain Accomplished by developing new products and markets or by acquiring or merging with Risk manager will need to consider the effect that a loss will have on the firm s ability to Minimize the effects that a loss will have on other people in society These people include employees suppliers customers creditors and the community in general The Risk Management Process 4 STEPS 1 2 3 4 Identify Loss Exposures Measure and Analyze the Loss Exposures Select the appropriate combination of techniques for treating the loss exposures Implement and monitor the risk management program Step 1 Identify Loss Exposures Categorizing potential losses Useful tools o Property o Liability o Loss of income o Reputation Brand Loyalty o Human resources o Crime o Employee benefit o Foreign loss exposures o Regulation o Communication with Other Departments o Loss Exposure Checklist o Financial Statements o Flowchart o Contract Analysis o Physical Inspection o Questionnaires o Past Loss Experience o Consultants Step 2 Measure and Analyze the Loss Exposures o Frequency Likelihood The probable number of losses that may occur during some given time period o Probability Distributions Expected Value of Each Outcome Probability x Value Probability Distribution Ev 1 Ev 2 Ev 3 Ev 4 o Severity Impact The probable size of the losses that may occur o Maximum Possible Loss The worst loss that could happen to the firm during
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