Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
56 Cards in this Set
- Front
- Back
|
Two types of risk
|
Pure - Chance of loss or no loss
Speculative - Chance of gain or loss (usually associated with a business activi |
|
|
Six general classes of risk
|
Economic
Legal Political Social Physical Juridical |
|
|
Definition of risk management
|
It’s a process or protecting an organization's assets through exposure identification and analysis, controlling exposures, financing losses with external and internal funds, and the implementation and monitoring of the risk management process.
|
|
|
Holistic, aka Enterprise, Risk Management
|
You know what this is...what is it?
|
|
|
Factors that affect an organization
|
Global, internal and external
Global environments: Society Economy Marketplace (hard and soft insurance markets as a reaction to cat losses) Financial markets Internal factors: Employees Your Products and services Property and other assets Activities your company is involved in External factors: Suppliers and distributors Customers Regulatory bodies Competitors |
|
|
Benefits of an effective risk management program to an organization
|
Benefits (think about the process here):
IDs exposures and risks Provides resources Reduces and mitigates losses Spreads the cost of risk Integrated risk control Improves ability to budget and plan Adds value to the organization |
|
|
Risk management’s general objectives before losses occur
|
Before loss:
Operation efficiency Compliance Focus on controllable risks Minimize variability in financial goals Promote stability and profitability Maintain appropriate cash flow levels |
|
|
Risk management’s general objectives during losses occur
|
During loss:
Protect people Protect physical assets Gather data, info and resources to manage claims Arrange/implement interim financing of the loss |
|
|
Risk management’s general objectives after losses occur
|
After loss:
Survival Stability Maintain our return to profitability Maintain our return to growth Social responsibility or citizenship |
|
|
Components of the cost of risk
|
Insurance premiums
Retained losses RM dept Outside services Indirect costs (think ERM stuff) |
|
|
Five steps of the risk management process
|
Identify
Analyze Control Finance Administer |
|
|
Basic risk tenets
|
Don’t retain more than you can lose
Don't risk a lot for a little Consider the likelihood of events and their potential impact Don't treat insurance a substitute for risk control There is no such thing as an uninsured loss. An uninsured loss is a retention. |
|
|
1. Explain why risk identification is the most important step of the risk management process. (p. 3)
|
Exposures, perils and hazards must be first ID’d if they are to be effectively managed.
ID them - Use effective methods of exposure identification Classify them - Classify exposures |
|
|
List the ten risk identification methods
|
Checklist and survey
Flowcharts Insurance policy review Physical inspection Compliance review Procedures and policies Contract review Experts Financial statement analysis Loss data analysis |
|
|
Name a strength and weakness for this risk identification method: Checklist and survey
|
Strength:
allows you to systematically search and ID as many exposures and hazards as you can. It is standardized can be used by non-RM person Weakness: cannot cover it all provides limited financial impact does not prioritize any exposure my not ID new exposures |
|
|
Name a strength and weakness for this risk identification method: Flowcharts
|
Strengths:
interdependency with org, pinpoint bottlenecks and chokes, critical path and points Weaknesses: Does not indicate freq or severity, does not show minor process with major loss potential, limited applicability to liability exposures, too process oriented. |
|
|
Name a strength and weakness for this risk identification method: Insurance policy review
|
Strength - many perils, States what specifically is covered.
Weaknesses - Focus is on wha coverage you have and not on what you don't have |
|
|
Name a strength and weakness for this risk identification method: Physical inspection
|
Strengths - personal, onsite, provide visualization, unreported hazards or assets discovered
Weaknesses - time consuming, situations change, subject to steering by local personnel |
|
|
Name a strength and weakness for this risk identification method: Compliance review
|
Strenghts:
Most are free Provides outside opine whether you want it or not Weaknesses: Regulations or laws have their own set of problems Little or no control over compliance evaluation May get unwanted attention |
|
|
Name a strength and weakness for this risk identification method: Procedures and policies
|
Strength
IDs exposures within the org Weakness Org politics may prevent effective treatment |
|
|
Name a strength and weakness for this risk identification method: Contract review
|
Strenghts
May ID holes in RM plan Weaknesses Involvement of second party may prevent control of exposures |
|
|
Name a strength and weakness for this risk identification method: Experts
|
Strengths:
Saves time Provides a level of experience to focus on exposures Weaknesses: May be difficult to find qualified experts External experts can be expensive |
|
|
Name a strength and weakness for this risk identification method: Financial statement analysis
|
Strengths:
Assists in forecasting Weaknesses: usually does not addr business risk unable to predict losses of sole or key suppliers or EEs can lead to manipulation of financial records |
|
|
Name a strength and weakness for this risk identification method: Loss data analysis
|
Strengths:
Can be used for benchmarking Can be used for forecasting Weaknesses: Data is after the fact and reactive Hx does not always repeat Losses may not have occurred in the past Data credibility may be an issue |
|
|
Discuss the purpose, focus and process of due diligence. (p. 36)
|
Purpose:
The purpose of due diligence is to examine a proposed action before it is undertaken. Focus: The common focus of due diligence is on mergers and acquisitions Four steps to the due dilligence process: Identify Review Report post-aquisition |
|
|
Explain the general rules applicable to risk identification methods. (p. 42)
|
A. Risk identification is the most important step
B. Risk is present in every business activity. C. Risk is not always self-evident. D. Risk is subject to diagnosis and treatment. E. A combination of identification methods should be used F. Often one method will reveal the greatest number of risks. |
|
|
What are the four logical classifications of exposures. (p. 4)
|
Property
Human Resources Liability Net Income |
|
|
Describe the exposures, perils, hazards and losses associated with Property
|
Exposures:
Real Property Personal Property Intangible Property Intellectual Property Legal interest Perils: Windstorm Theft by EEs Patent infringement Loss of reputation Hazards: C.O.P.E. |
|
|
Describe the exposures, perils, hazards and losses associated with Human Resources
|
Exposures:
Owners, partners Board members EEs, mgmnt, and non mgmt Outside EEs Perils: EE practices Death Disability Resignation, termination Travel Strikes and labor unrest Hazards: Unclear personnel practices Non adherence to safety practices Poor morale, poor performance or natural aging processes Terrorist acts Management attitudes |
|
|
Describe the exposures, perils, hazards and losses associated with Liability
|
Exposures:
Premises and ops Personal injury, libel, slander and defamation Products and completed ops Perils: Slip and fall Product malfunction Work related injury Hazards: Poor housekeeping poor QA Lack of safety equipment |
|
|
Describe the exposures, perils, hazards and losses associated with Net Income
|
Exposures:
Loss of use of property (property) Loss of productivity from human resources (HR) Reduction of income or assets (liability) speculative risk (ERM) Perils (same ones as from above): Property, HR or liability Legal liability and related expenses Personnel losses Loss or primary supplier Weather Market Government actions Economy fluctuations Hazards: Most hazards affecting net income are the same as those affecting property, HR and liability exposures |
|
|
Define, explain, and apply property valuation methods. (p. 16)
|
Historical cost - the original purchase price
Book value - the hx cost less accumulated depreciation Market value - the amount a willing buyer will pay Replacement Cost - the amount to replace ACV (different than book value) - the replacement cost less an allowance for insurance depreciation or obsolescence Economic value - a future stream of income assigned to the property Functional replacement cost - the cost to repair or replace with stuff that is functionally the equivalent Other valuation methods - reproduction costs, assessed value etc... |
|
|
Define, explain, and apply tort liability concepts.
|
Tort - a private or civil wrong, other than a breach of contract for which the courts will provide a remedy of an action for damages
Intentioanl acts and Negligence doctrine (Negligence Doctrine will be on test) |
|
|
Define, explain, and apply contract liability concepts.
|
Four characteristics of an enforceable contract:
Competent parties Agreement of assent Legal consideration Legal purpose (this will be on the test) |
|
|
Define, explain, and apply statutory liability concepts.
|
Statutory law – enactments of legislative and administrative bodies
|
|
|
Identify and apply factors affecting net income losses. (p. 28)
|
These are things a little less apparent or every day for us. i.e. when gas goes up in price, less people travel to Vegas and casinos. Or volcanos around the world that disrupt air travel.
|
|
|
1. Define business ethics and describe the typical sources of ethical problems. (p. 4)
|
Sources of ethical problems: greed and ignorance
|
|
|
2. Discuss specific ways to manage ethical behavior in the workplace. (p. 6)
|
Managing ethical behavior is a top-down process
Each individual's responsibility -- ultimately one person will be responsible It’s an ongoing process in the workplace: Newsletters Hotlines Codes of conduct questionnaires |
|
|
3. Describe topics typically addressed by a code of ethics or code of conduct. (p. 10)
|
Balanced and accurate reporting of all conditions and facts
Fair and unbiased presentation of info, no influence of outcome Unauthorized use of org property and time Mgmnt of conflicts of interest Entertainment and gift policy |
|
|
4. Discuss the benefits to an organization of having an ethics program and code of ethics. (p. 11)
|
Establish a level of trust
Promote high standards Integrate into decision making Resolve dilemmas |
|
|
5. Define “conflict of interest” and explain how to manage conflicts of interest. (p. 13)
|
For purpose of our class...
A situation that places one between the duty to the ER and the EEs own self interest. |
|
|
1. Discuss the difference between accounting and finance. (p. 2)
|
Accounting -- is a process to quantify an org’s assets, cash etc -- it’s an accounting of things at a point in time
Finance -- is a process of managing an orgs assets, liabilities and cash flow to maximize shareholder wealth. |
|
|
2. Describe the types of accounting systems and who uses financial information. (p. 3)
|
GAAP
Statutory (STAT) Tax accounting Governmental or fund accounting Managerial accounting |
|
|
3. Discuss how financial statement analysis is used as a risk identification method. (p. 7)
|
Assess asset valuation
Assess net income loss Find hidden assets and liabilities Determine management's tolerance for risk Uncover o/s litigation ID key suppliers Property - items with “value” Income - BI, profit, continuing exposures Liabilities - from balance sheet |
|
|
4. Explain income statement, balance sheet and statement of cash flows concepts. (p. 12)
|
Income statement -- like a funnel...all the stuff going in and you hope some little bit flows out the bottom
Balance sheet -- like a teeter totter Statement of cash flows -- tic tac toe board -- three columns and rows (Inflows and outflows) |
|
|
5. Define cost of capital and explain its use in financial decision-making. (p. 35)
|
Definition: the cost associated with various sources of
financing to the organization -- gotta get past the hurdle point for the investment to make sense |
|
|
6. Discuss the use of common financial ratios in time series and cross section analysis. (p. 40)
|
1. Liquidity ratios -- ability to pay over the short term
2. Debt ratios -- ability repay creditors over the long term 3. Coverage ratios -- ability to meet interest requirements 4. Profitability ratios -- returns on various bases: Net profit margin, Return on assets (ROA), Return on equity (ROE), Earnings per share (EPS) 5. Market ratios --- values shares: Price / earnings ratio, Market / book |
|
|
1. Why loss data must be collected and analyzed
|
Make informed decisions about deductibles and retentions and coverage
Establish a method for evaluating performance |
|
|
2. Specific types of loss data that should be collected
|
Category? BI, PD, WC etc...
Location Claimant Cause Type Body part Hazard (noise, slippery surface etc) |
|
|
3. Why collecting and reviewing exposure data is as important as collecting and reviewing loss data
|
This is the denominator in the fraction -- just as important as the numerator (the losses)
Keeps the relativity factor in check |
|
|
4. Components and statistical credibility of loss data
|
Need to have a big number
Need to look at them over a sufficient period of time (one year may not be enough) Operations need to be stable over the time period examined Integrity Relevance |
|
|
5. Types of analyses that can be performed using loss data
|
Freq vs severity rankings
By location, veh, product Reporting time intervals You can conduct loss projections -- Run loss triangles |
|
|
6. When to use benchmarking in risk management
|
Benchmarking is a systematic way of continuously comparing an organization’s performance against others
Common pitfalls of benchmarking: Unfair comparisons, over focus on one causation, Not ERM, Data may be capped or massaged |
|
|
1. The risk-taking appetite of an organization and its importance to an effective risk management program
|
Three alternatives to loss...
Avoid Transfer Finance (retain?) |
|
|
2. Key financial and non-financial factors used to determine per-occurrence and aggregate retention amounts
|
Financial factors: Net income, Net worth, Ability to borrow, Cash flows
Non-financial factors: Risk appetite, Ability versus willingness to take on losses, Cost effectiveness of retention (price of insurance relative to the cost of losses retained) |
|
|
3. How loss stratification helps determine per-occurrence retentions
|
Stratify losses into layers of size and/or frequency. Decice which layers you are comfortable and capable of retaining. Compare to cost of insurance and cost of retained losses.
|
