Bảo hiểm - Chapter 3: Introduction to Risk Management

Chapter 3Introduction to Risk ManagementAgendaMeaning of Risk ManagementObjectives of Risk ManagementSteps in the Risk Management ProcessBenefits of Risk ManagementPersonal Risk ManagementMeaning of Risk ManagementRisk Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposuresA loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occursE.g., a plant that may be damaged by an earthquake, or an automobile that may be damaged in a collisionNew forms of risk management consider both pure and speculative loss exposures Objectives of Risk ManagementRisk management has objectives before and after a loss occursPre-loss objectives:Prepare for potential losses in the most economical wayReduce anxietyMeet any legal obligationsObjectives of Risk ManagementPost-loss objectives:Ensure survival of the firmContinue operationsStabilize earningsMaintain growthMinimize the effects that a loss will have on other persons and on societyRisk Management ProcessIdentify potential lossesMeasure and analyze the loss exposuresSelect the appropriate combination of techniques for treating the loss exposuresImplement and monitor the risk management programExhibit 3.1 Steps in the Risk Management ProcessIdentifying Loss ExposuresProperty loss exposuresLiability loss exposuresBusiness income loss exposuresHuman resources loss exposuresCrime loss exposuresEmployee benefit loss exposuresForeign loss exposuresIntangible property loss exposuresFailure to comply with government rules and regulationsIdentifying Loss ExposuresRisk Managers have several sources of information to identify loss exposures:QuestionnairesPhysical inspectionFlowchartsFinancial statementsHistorical loss dataIndustry trends and market changes can create new loss exposures.e.g., exposure to acts of terrorism Measure and Analyze Loss ExposuresEstimate the frequency and severity of loss for each type of loss exposureLoss frequency refers to the probable number of losses that may occur during some given time periodLoss severity refers to the probable size of the losses that may occurOnce loss exposures are analyzed, they can be ranked according to their relative importanceLoss severity is more important than loss frequency:The maximum possible loss is the worst loss that could happen to the firm during its lifetimeThe probable maximum loss is the worst loss that is likely to happenSelect the Appropriate Combination of Techniques for Treating the Loss ExposuresRisk control refers to techniques that reduce the frequency and severity of lossesMethods of risk control include:AvoidanceLoss preventionLoss reductionAvoidance means a certain loss exposure is never acquired, or an existing loss exposure is abandonedThe chance of loss is reduced to zeroIt is not always possible, or practical, to avoid all lossesSelect the Appropriate Combination of Techniques for Treating the Loss ExposuresLoss prevention refers to measures that reduce the frequency of a particular losse.g., installing safety features on hazardous productsLoss reduction refers to measures that reduce the severity of a loss after is occurse.g., installing an automatic sprinkler systemSelect the Appropriate Risk Management TechniqueRisk financing refers to techniques that provide for the funding of lossesMethods of risk financing include:RetentionNon-insurance TransfersCommercial InsuranceRisk Financing Methods: RetentionRetention means that the firm retains part or all of the losses that can result from a given lossRetention is effectively used when:No other method of treatment is availableThe worst possible loss is not seriousLosses are highly predictableThe retention level is the dollar amount of losses that the firm will retain A financially strong firm can have a higher retention level than a financially weak firmThe maximum retention may be calculated as a percentage of the firm’s net working capitalRisk Financing Methods: RetentionA risk manager has several methods for paying retained losses:Current net income: losses are treated as current expensesUnfunded reserve: losses are deducted from a bookkeeping accountFunded reserve: losses are deducted from a liquid fund Credit line: funds are borrowed to pay losses as they occurRisk Financing Methods: RetentionA captive insurer is an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposuresA single-parent captive is owned by only one parentAn association or group captive is an insurer owned by several parentsMany captives are located in the Caribbean because the regulatory environment is favorableCaptives are formed for several reasons, including:The parent firm may have difficulty obtaining insuranceTo take advantage of a favorable regulatory environmentCosts may be lower than purchasing commercial insuranceA captive insurer has easier access to a reinsurerA captive insurer can become a source of profit Premiums paid to a captive may be tax-deductible under certain conditionsRisk Financing Methods: RetentionSelf-insurance is a special form of planned retention Part or all of a given loss exposure is retained by the firmAnother name for self-insurance is self-fundingWidely used for workers compensation and group health benefitsA risk retention group is a group captive that can write any type of liability coverage except employer liability, workers compensation, and personal linesFederal regulation allows employers, trade groups, governmental units, and other parties to form risk retention groupsThey are exempt from many state insurance lawsRisk Financing Methods: RetentionAdvantages Save on loss costsSave on expensesEncourage loss preventionIncrease cash flowDisadvantagesPossible higher lossesPossible higher expensesPossible higher taxesRisk Financing Methods: Non-insurance TransfersA non-insurance transfer is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party Examples include:Contracts, leases, hold-harmless agreementsRisk Financing Methods: Non-insurance TransfersAdvantagesCan transfer some losses that are not insurableSave moneyCan transfer loss to someone who is in a better position to control lossesDisadvantagesContract language may be ambiguous, so transfer may failIf the other party fails to pay, firm is still responsible for the lossInsurers may not give credit for transfers Risk Financing Methods: InsuranceInsurance is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is highThe risk manager selects the coverages needed, and policy provisions:A deductible is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insuredAn excess insurance policy is one in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retainThe risk manager selects the insurer, or insurers, to provide the coveragesRisk Financing Methods: InsuranceThe risk manager negotiates the terms of the insurance contractA manuscript policy is a policy specially tailored for the firmLanguage in the policy must be clear to both partiesThe parties must agree on the contract provisions, endorsements, forms, and premiumsThe risk manager must periodically review the insurance programRisk Financing Methods: InsuranceAdvantagesFirm is indemnified for lossesUncertainty is reducedInsurers may provide other risk management servicesPremiums are tax-deductibleDisadvantagesPremiums may be costlyOpportunity cost should be consideredNegotiation of contracts takes time and effortThe risk manager may become lax in exercising loss controlExhibit 3.2 Risk Management MatrixMarket Conditions and the Selection of Risk Management TechniquesRisk managers may have to modify their choice of techniques depending on market conditions in the insurance marketsThe insurance market experiences an underwriting cycleIn a “hard” market, when profitability is declining, underwriting standards are tightened, premiums increase, and insurance becomes more difficult to obtainIn a “soft” market, when profitability is improving, standards are loosened, premiums decline, and insurance become easier to obtainImplement and Monitor the Risk Management ProgramImplementation of a risk management program begins with a risk management policy statement that:Outlines the firm’s risk management objectives Outlines the firm’s policy on loss controlEducates top-level executives in regard to the risk management processGives the risk manager greater authority Provides standards for judging the risk manager’s performanceA risk management manual may be used to:Describe the risk management programTrain new employees Implement and Monitor the Risk Management ProgramA successful risk management program requires active cooperation from other departments in the firm The risk management program should be periodically reviewed and evaluated to determine whether the objectives are being attainedThe risk manager should compare the costs and benefits of all risk management activitiesBenefits of Risk ManagementPre-loss and post-loss objectives are attainableA risk management program can reduce a firm’s cost of riskThe cost of risk includes premiums paid, retained losses, outside risk management services, financial guarantees, internal administrative costs, taxes, fees, and other expensesReduction in pure loss exposures allows a firm to enact an enterprise risk management program to treat both pure and speculative loss exposuresSociety benefits because both direct and indirect losses are reduced Insight 3.2 Show Me the Money–Risk Manager Salaries RisePersonal Risk ManagementPersonal risk management refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risksThe same principles applied to corporate risk management apply to personal risk management