Operations Risk Management - Study 2: The Risk Mangement Process

Front 1

Steps in the risk management process (5):

Back 1

1. identify and analyze loss exposures
2. formulate options
3. select the best technique(s)
4. implement the plan
5. monitor and modify

Front 2

Methods of exposure identification (4):

Back 2

1. surveys
2. flow charts
3. financial statements
4. inspections

Front 3

Outside sources of exposure identification assistance

Back 3

fire departments
police
lawyers
accountants
consultants
safety service companies

Front 4

Survey Types

Back 4

checklists
content schedules
software programs
relevant survey forms

Front 5

Checklists

Back 5

describe subjects of insurance
highlight perils
list appropriate insurance policies
should only be used as a guide

Front 6

Contents schedule

Back 6

detailed survey form devoted to contents and the legal liabilities flowing from such property
income losses contingent on damage to property are also mentioned

Front 7

software programs

Back 7

can help determine likelihood of loss and probable location of loss

Front 8

relevant survey forms

Back 8

should be appropriate for the type of operation

Front 9

Flow Charts

Back 9

Map of business activity
Bottlenecks in production

Front 10

Map of business activity

Back 10

maps sequence of business activity in its basic components using graphical representation

Front 11

Bottlenecks in production

Back 11

shows indispensable areas of operation that would basically put a halt to the entire operation if they were faced with an exposure

Front 12

Financial Statements

Back 12

- balance sheets/income statements
reveal loss exposures
accounting valuation methods vary greatly from those used for risk analysis
give hints about the types of exposures that various areas may face

Front 13

Inspections

Back 13

useful first-hand information
expensive
joint inspection with risk manager, producer, underwriter/loss control specialist is ideal

Front 14

2. Analysis of loss exposures:

Back 14

analyzed considering:
a. (loss frequency) - likelihood of the loss occurring
b. (loss severity) - seriousness of the loss (loss severity)
c. (frequency times severity) - financial effect of all losses in any given period of time
d. reliability of the predictions of severity and frequency

Front 15

Frequency and Severity

Back 15

can be classified using Prouty Measures, which rely on cmmon sense and judgment to analyze an exposure

Front 16

Frequency by Prouty Measures

Back 16

almost nil - extremely likely unlikely to happen, virtually no possibility
slight - it could happen, but has not
moderate - happens once in a while
definite - happens regularly

Front 17

Severity by Prouty Measures

Back 17

(maximum possible loss) - the worst that can happen
(maximum probable loss) the worst that likely will happen
(annual expected dollar loss) the expected average severity times the expected frequency

Front 18

Statistical Probability

Back 18

make predictions using sophisticated mathematical models
statistical base must have a sufficient number of losses and exposures - law of large numbers

Front 19

Average severity of a loss

Back 19

possible to calculate from industry average

Front 20

Formulating options to deal with loss exposures

Back 20

2 major categories:
(loss control techniques) - control the exposure to prevent losses or reduce their severity
(loss financing techniques) - pay for losses which do occur

Front 21

Loss Control Techniques(5)

Back 21

- avoidance
- loss prevention
- loss reduction
- separation or diversification
- non-insurance risk transfer

Front 22

Domino Theory

Back 22

all accidents are the fault of unsafe acts of people
unsafe acts start a chain of events which ultimately lead to accidents

Front 23

Energy Release Theory

Back 23

accidents result from mechanical failures
if a driver was unable to avoid an accident it was the car's fault for releasing too much energy resulting in unsafe handling

Front 24

avoidance

Back 24

eliminating an exposure
not assuming a new exposure

Front 25

loss prevention

Back 25

inspection
training programs
safety guards/apparel
control procedures for handling cash and other valuables

Front 26

loss reduction

Back 26

lessen severity of losses which do occur (eg. sprinklers)

Front 27

separation or diversification of loss exposures

Back 27

spreads concentration of value
reduces the maximum possible loss
expensive
can be coupled with other goals, such as service-oriented ones

Front 28

duplication

Back 28

eg. computer backs

Front 29

Loss Control Noninsurance Transfers

Back 29

pass any financial responsibility for a loss to someone else
asset or activity from which exposure to loss arises is transferred to another party
often done by contracting certain processes to an independent specialized firm

Front 30

Loss Financing

Back 30

done through:
1. retention
2. transfer

Front 31

Retention

Back 31

absorbing all or part of the loss
last resort

Front 32

retain losses ____ in severity and ____ in frequency

Back 32

low, high

retention plan works best for losses that aren't too serious and are fairly predictable

Front 33

active decision

Back 33

mode consciously - whether it involves doing something or not

Front 34

passive retention

Back 34

when an exposure is retained because it was never identified
unwelcome situation since no plan will exist to deal with the unexpected loss

Front 35

Sources of funds to meet the costs of retained losses (5):

Back 35

1. current expenses
2. unfunded reserves
3. funded reserves
4. borrowing
5. captive insurers

Front 36

1. Current Expensing of Losses

Back 36

Just paying the loss when it occurs.
Ideal for small losses.
doesn't require large funds or borrowing
must have cash to this method

Front 37

2. Unfunded Reserve

Back 37

an account set up on the balance sheet to which funds are allocated for retaining losses
money is not actually on hand to deal with the loss, but there are resources which could be used to account for it

Front 38

3. Funded Reserve

Back 38

there exists actual money on hand designated to pay for the loss
more certain than unfunded
could be viewed as incurring opportunity costs

Front 39

4. Borrowing

Back 39

done when current income and reserve (funded/unfunded) are not enough to pay for losses
very problematic

Front 40

5. Captive Insurer

Back 40

established to finance retained losses
usually owned by parent company
sometimes formed by group of companies with similar risks
purpose is to fund losses
insures one/very few clients

Front 41

Income Tax Considerations

Back 41

insurance premiums can be deducted from taxable income

Front 42

with loss retention deduction is only taken __________

Back 42

when losses occurs

Front 43

money set aside to pay for future losses _______

Back 43

be deducted

Front 44

Loss of insurer services

Back 44

occur when losses are fully retained

services include:
loss control support
claims investigation/administration
exposure id
in liability losses -> defense strategy and costs associated with defense

Front 45

Unbundled services

Back 45

a way to customized the services needed
lets larger orgs pick and choose what they want

Front 46

Loss Financing Transfer

Back 46

Two methods:
1. transfer of loss to other entities by business contract
2. transfer of loss to an insurer through an insurance policy

Front 47

Any type of contract may include these provisions:

Back 47

lease of premises or equipment
construction agreements
bailment contract
contracts of sale and supply
purchase order agreements
service contracts

Front 48

in a contract for services, the party performing the work, the ______, usually agrees to accept the financial responsibility of paying certain losses for the party who is receiving the benefit of the work, the _________.

Back 48

indemnitor, indemnitee

Front 49

hold-harmless agreements

Back 49

hold the indemnitee (beneficiary of the work) free of fault from any liability, damage, loss, injury, expenses that may occur as a result of the indemnitor's work

Front 50

Negligence

Back 50

sometimes indemnitor agrees to only hold the indemnitee harmless for negligence of the indemnitor
sometimes the indemnitor agrees to assume even more responsibility
sometimes transfer of responsibility of negligence is not legal (eg. physician)

Front 51

test of reasonability

Back 51

if clauses in a contract are not reasonable they may not be enforceable

Front 52

in shifting responsibility, the indemnitee should

Back 52

ensure that the indemnitor has adequate coverage for the assumed risk
ensure that they are themselves on the insurance as an additional insured

Front 53

insurance

Back 53

transfer of uncertainty of future losses for the certainty of a fixed sum - the premium

Front 54

premiums = ______ + ______ + ______ + ______

Back 54

expected losses + profit + expenses + contingencies

Front 55

why does cost to the buyer of insurance end up being more than just premiums?

Back 55

purchase and maintenance of appropriate insurance coverage is time-consuming

Front 56

considerations for selecting an intermediary/insurer (4)

Back 56

1. financial strength of insurer
2. willingness of insurer to provide required coverages
3. range of additional services offered by the insurer
4. cost of coverage