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Chapter Three
| Term | Definition |
|---|---|
| Risk Management | process that identifies loss exposures faced by an organization and chooses best techniques to deal w/ them |
| Pre-Loss Objectives | prepare for potential losses in the most economical way (analyze cost of safety programs, insurance premiums paid, costs of other techniques), reduce anxiety, and meet legal obligations (install fire alarms, pay worker's comp) |
| Post-Loss Objectives | ensure survival of firm, continue operations, stabilize earnings, maintain growth (develop new markets/products, or maybe merge with another company), minimize overall social impact |
| The 4 Steps of Risk Management Process | 1) identify loss exposures, 2) measure and analyze loss exposures, 3) select the best risk mgt techniques to treat the loss exposure, and 4) implement and monitor the program |
| PROPERTY Loss Exposures | damage to building, plants, furniture, equipment, supplies, computers, software, inventory, accounts receivable, records, company vehicles |
| LIABILITY Loss Exposures | defective products, environmental pollution, sexual harassment of employees, discrimination, misuse of internet and email transmissions, unsafe premises (faulty building structure causes light fixture to fall on customer's head) |
| BUSINESS INCOME Loss Exposures | loss of income from a covered loss, continuing expenses after a loss, contingent business income losses |
| HUMAN RESOURCES Loss Exposures | death/ disability of key employees, retirement or unemployment exposures, job-related injuries or disease experienced by workers |
| CRIME Loss Exposures | holdups, robberies, burglaries, employee theft, fraud, embezzlement |
| EMPLOYEE BENEFIT Loss Exposures | failure to comply with gov regulations, violation of fiduciary responsibilities, group life and health and retirement plan exposures, failure to pay promised benefits |
| FOREIGN Loss Exposures | acts of terrorism, kidnapping of key personnel, political risks, foreign currency risks |
| INTANGIBLE PROPERTY Loss Exposures | damage to company's public image, loss of goodwill and market reputation, loss or damage to intellectual property |
| Methods of Identifying Loss Exposures | risk analysis questionnaires and checklists, physical inspection, flowcharts, financial statements, historical loss data |
| Measuring and Analyzing Loss Exposures | estimate frequency and severity of each loss exposure, rank each of them in order of importance and measure the freq and severity of each, note that loss severity is more important than loss freq |
| Maximum POSSIBLE Loss | part of measuring and analyzing loss exposures step: this is the worst loss that could happen to the firm during its lifetime, the most severe |
| Maximum PROBABLE Loss | part of measuring and analyzing loss exposures step: this is the worst loss that is likely to happen |
| Select Appropriate RM Technique: Risk Control | techniques that reduce the frequency or severity of loss (avoidance, loss prevention, loss reduction) |
| Select Appropriate RM Technique: Risk Financing | techniques that provide for the funding of losses (retention, non-insurance transfers, commercial insurance) |
| Risk Control: Avoidance | you forgo this activity or product; a certain loss exposure is never acquired, or an existing loss exposure is abandoned (chance of loss = 0) |
| Risk Control: Loss Prevention | refers to measures that reduce the frequency of a particular loss (install safety features on dangerous product, put instructions on drugs for patients) |
| Risk Control: Loss Reduction | refers to measures that reduce the severity of a loss after it occurs (sprinkler system for fires, break lights, limit amount of cash on premises) |
| Risk Financing: Retention | very broad form of risk financing, see all the notes on retention break down page |
| Risk Financing: Non-Insurance Transfers | methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party (as discussed in ch1) |
| Risk Financing: Commercial Insurance | appropriate for loss exposures with low probability of loss but high severity; if used, these 5 areas must be emphasized (selection of coverage, of insurer, negotiation of terms, dissemination of info concerning insurance coverages, periodic review) |
| Paying Losses Through Retention | current net income, unfunded reserve, funded reserve, credit line (you don’t put any money in any of the accounts, but when it occurs you borrow money from a bank – you’re basically saying I can pay it back soon but my money now is not liquid) |
| Method of paying through retention: Unfunded Reserve | a bookkeeping account that is charged w/ actual or expected losses from an exposure |
| Method of paying through retention: Funded Reserve | set aside liquid funds to pay losses (i.e. a self insurance program that is funded) - note, not the best technique because losses are tax deductible when paid |
| Retention: Captive Insurer | an insurer owned by a parent firm for the purpose of insuring the parent's loss exposures |
| Single Parent Captive (Pure Captive) | insurer owned by only one parent, such as a corporation |
| Association/Group Captive | insurer owned by several parents (corporations that belong to a trade association may jointly own a captive insurer) |
| Benefits of Captives | less difficult to obtain insurance, favorable regulatory environment, lower costs, easier access to a reinsurer, formation of a profit center |
| Form of Retention: Self Insurance | type of active retention where part or all of a loss exposure is covered by the firm (widely used with workers comp, group health care for employees) |
| Form of Retention: Risk Retention Groups | group captive that can write any type of liability coverage except employer liability, workers compensation, and personal lines; these are exempt from many state insurance laws; often formed by like groups of doctors or whatever) |
| Hold Harmless Clause (Non-Insurance Transfer through Contract | for example, my publishing firm inserts this clause in a contract by which the author, not my firm, is held responsible if sued for plagiarism |
| Deductible | a plan in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain; firm may set retention level at max probable loss, not max possible loss |
| Manuscript Policy | a policy specially tailored for the firm (language in the policy must be clear to both parties) |
| Excess Insurance | a plan in which the insurer doesn't participate in the loss until the actual loss exceeds the amount a firm has decided to retain |
| Risk Management Policy Statement | part of step 4 in rm process; outline firm's RM objectives and policy to treat loss exposures, educate top-level executives in regard to RM process, give risk manager greater authority, provides standards for judging the risk manager's performance |
| Risk Management Manual | manual used to describe the risk management program, train new employees, state risk manager's responsibilities, objectives, available techniques and responsibilities of other parties |
| Steps in Personal Risk Management | identify loss exposures, measure and analyze them, select appropriate techniques to treat them, and implement and review the program(s) |
| Personal Loss Exposures | premature death of family head, insufficient income and financial assets during retirement, catastrophic medical bills and loss of income if disability, unemployment loss of income, identity theft |
| Property Loss Exposures | direct physical damage to home (fire, nat disaster), indirect loss (extra expenses, temporary stay in hotel while home is damaged, loss of rents), theft |
| Liability Loss Exposures | legal liability arising out of personal acts causing harm to others, libel, slander, negligent operation of your car, liability from business or professional activities, attorney/legal fees |
Created by:
kmassey94
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