Cpcu 500 Ch.3

Front 1

Risk management techniques

Back 1

Risk management techniques are categorizaed as either risk control or risk financing techniques.

Risk control techniques (may also be referred to as measures, or strategies) (PRSADD):

Loss prevention - reduces loss frequency.

Loss reduction - reduced loss severity.

Separation - reduces loss severity.

Avoidance - reduces loss frequency.

Duplication - reduces loss severity.

Diversification - reduces loss severity.

*When you get the exam, write this down on scratch paper. PRSADD, FSSFSS

Front 2

Loss prevention

Back 2

Loss prevention reduces the frequency of a loss. Includes conducting safety seminars. Can reduce both frequency and variability.

Loss prevention measures are typically implemented before a loss occurs. Attempts to break the sequence of events leading to a loss.

Reduces the frequency of loss w/o increasing severity.

Front 3

Loss reduction

Back 3

Loss reduction reduces the severity of a loss. Includes installation of sprinkler system (doesn't count as prevention b/c the fire could still happen however the sprinkler could put out the fire before there's more damage to the property). Security alarms are considered loss reduction measures, but can also prevent loss.

Can be implemented before or after loss occurs. Pre-loss measures - reduce extent of damage or injury. Post-loss measures - focus on emergency procedures or salvage operations.

Front 4

Separation

Back 4

Separation isolates loss exposures form each other. Minimizes the adverse affect of a single loss. Usually a byproduct of another management decision. E.g. if you own a warehouse of toys and all the toys are in the same warehouse, if there's a fire, there's a chance all the inventory will be wiped out, so you may consider renting second warehouse to keep some toys so if warehouse is destroyed you still have some product to sell.

Reduces severity of loss at single location. By creating separation location, loss frequency may be increased (by having two different locations, there could be damage at either location, increasing frequency).

Employee e.x. if you have 5 executives and they're all on the same airplane, if that plane crashes, all your executives will be gone so you can put only 2 on one plane and the rest on another in order to stop them all from being injured if a crash occurs.

Front 5

Avoidance

Back 5

Avoidance is the most extreme and effective way of managing a loss exposure (may not be practical). Ceasing or never undertaking an activity. Eliminates any possibility of loss, eliminates frequency. Should be considered when expected value of losses exceeds expected benefits.

Complete avoidance is usually not feasible nor desirable. Avoiding one loss exposure may create or increase another.

Front 6

Duplication

Back 6

Duplication involves copies or backups of records kept in reserve. Reduces loss severity and makes losses more predictable without increasing loss frequency. Includes arrangements with backup or alternate supplier of raw materials or backing up computer records. Unlike separation, duplication is not part of organization's daily resources (separation is when you separate a product but still utilize the product out of each location whereas with duplication you won't utilize the backup unless the original is destroyed).

Front 7

Diversification

Back 7

Diversification spreads the loss exposure (reduces severity). Spread over various regions, products or projects. Includes providing multiple products or services. E.g. buying more than one type of stock or even investing in other securities besides just stock, also you could sell more than one type of product like life insurance, auto insurance and health insurance.

Diversification is an appropriate strategy for investors.

Front 8

Risk control goals

Back 8

Risk control goals support the goals of the overall risk management program.

The four risk control goals are (BELL):

Ensure business continuity.

Implement effective and efficient risk control measures.

Comply with legal requirements.

Promote life safety.

Front 9

Ensure business continuity

Back 9

Risk control should minimize or eliminate significant business interruptions. Designed to meet post-loss goals of survival and continuity of operations (first goal after a loss is survival). Measures to promote business continuity are unique to each organization.

Front 10

Implement measures

Back 10

One goal of risk control is to implement efficient and effective risk control measures. Effective if helps organization achieve risk management goals. Efficient if least expensive effective measure.

Cash flow analysis can be used to select appropriate risk control measures given a loss exposure and alternative measures. Does not consider non-financial goals.

Front 11

Comply with legal requirements

Back 11

Many laws and regulations require implementation of specific risk control measures. Protecting employees from disability. Supports pre-loss goal of legality.

Cost of risk includes the cost of satisfying legal requirements. Failure to comply with laws results in fines, penalties or sanctions.

Front 12

Promote life safety

Back 12

Promoting life safety is focused on safeguarding people from fire and other potential losses of life. Focuses on minimum building design, construction, operation and maintenance requirements necessary to assure safe exit.

Promoting life safety can also include any cause of loss that threatens the life of an organization's employees or customers. Includes product safety, pollution and industrial accidents.

Front 13

Property loss exposures

Back 13

Property loss exposures include exposures to tangible and intangible property. All categories of risk control techniques (PRSADD) can be applied to property loss exposures. Risk control technique depends on type of property and cause of loss.

Commercial property loss exposures are usually examined based on COPE. Construction, occupancy, protection and external environment.

Front 14

Liability loss exposures

Back 14

Effective risk control techniques for liability loss exposures: (PAR)

Loss prevention - hazard control.

Avoidance.

Loss reduction including: includes ways of reducing the loss after you've been in court, alternate dispute resolution, consulting with an attorney, and properly responding to the claimant.

Front 15

Liability loss exposures pt.2

Back 15

Type of loss - exposure is created by (not that important for exam)

Premisis - having visitors on the premisis

Operations - conducting operations on or away from premisis

Products - manufacturing preducts

Workers comp - state statues

Professionals - common law

Management - duties those in position of trust owe those they serve

Completed operations - organization is responsible for injury or property damage caused by completed work

Automobile - drivers and owners of autos owe duty of safety to others

Front 16

Personnel loss exposures

Back 16

Personnel loss exposures can arise from events both inside and outside the organization.

Most risk control measures involve preventing and reducing injury and illness. Loss prevention - safety measures, education (safety seminars). Loss reduction - emergency response training, rehabilitation management. Separation - placing a restriction on number of employees who can fly on same airplane.

Front 17

Net income loss exposure

Back 17

Net income loss exposures can be associated with other loss exposures, can arise from property, liability or personnel loss exposures, therefore any measure that controls property, liability or personnel exposures also indirectly controls net income loss exposures.

Separation and duplication are measures directly aimed at reducing the severity of net income losses.

Front 18

Business continuity management

Back 18

Business continuity management attempts to minimize or avoid significant business interruptions. Designed for post-loss goals of survival and continuity of operations (primarily concerned with survival). Initially developed with a focus on information technology concerns that could disrupt operations (how does comp survive if network crashes?).

Front 19

Business continuity process

Back 19

Steps of the business continuity process: identify the organization's critical functions. Identify the risks/threats associated to those organization's critical functions. Evaluate the effect of the risks on those critical functions. Develop a business continuity strategy. Develop a business continuity plan. Monitor and revise plan as necessary.

Front 20

Business continuity plan

Back 20

A business continuity plan is a planned response after a loss has occurred (what is done after a loss occurs). All relevant parties should have a copy. Next step is to provide training and periodic rehearsals of the procedures.

Content included in most plans includes the roles of various individuals, crisis management plan, and steps to be taken to prevent further loss.