Risk Management

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Risk Management

• RMI 3500
• Intro. to Risk Management Insurance
• Robert Klein

Revised 1/28/06
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Topic Objectives

• Defining risk management.
• Describing risk management process and options.
• Evaluating loss potential.
• Explaining enterprise risk management.
• Corporate and personal risk management.

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Risk Management Defined

• Process to identify loss exposures and selection
  of techniques to deal with them.
• Can encompass both pure risks and speculative
  risks.
• We will focus on pure risks but new philosophy
  integrates management of both.
• Personal risk management is important too.

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Risk Management Characterized

• Stresses identification and analysis of pure
  risks.
• Various methods of dealing with risk, including
  but not confined to insurance.

• Periodic evaluation of all techniques dealing
  with risk.
• Involves many people and effects extend beyond
  insurance per se.

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Objectives of Risk Management

• Prior to Loss
• economy
• reduction of anxiety
• meet external obligations

• After Loss
• survival
• continued operation
• stability of income
• continued growth
• social responsibility

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Risk Management Process

• Identifying potential losses
• Evaluating potential losses
• Selecting appropriate techniques
• Implementing program

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Types of Potential Losses

• physical damage
• loss of income
• liability lawsuits
• death or disability

• work injuries
• fraud, crime, dishonesty
• employee benefits loss exposures
• international loss exposures

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Evaluating Potential Losses

• Measuring Severity
• distribution of possible losses
• maximum possible loss
• maximum probable loss

• Concepts
• Loss Frequency the number of losses
• Loss Severity the amount of loss for each
  occurrence

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Insurance Loss Distribution
Probability
Low Probability of High Losses
Max probable loss
Max possible loss
0
900,000
1,000,000
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Selecting Appropriate Technique Examples?

• Insurance
• Deductibles, excess insurance used to combine
  retention insurance

• Avoidance
• Retention
• current income
• special fund
• Non-insurance transfers
• Loss Control

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Risk Map Implications
Prevent Share
Avoidance
Likelihood (Frequency)
Reduction Transfer
Retention
Impact (Severity)
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Enterprise Risk Management

• Expand and coordinate identification and
  management of all firm risks pure, speculative,
  strategic, operational.
• Examples fire, liability suits, economic
  changes, new competition.
• Emphasis on risk financing as well as risk
  transfer range of tools.
• Consider interdependence of risks opportunities
  to diversify, hedge.
• New insurance products to stabilize performance,
  e.g., profits, revenues.

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Risk Transfer-Finance Methods
Minimize Cost
Small Risks
Cash-Flow Financing
Insurable
Optimize Security/Costs
Insurance
Medium Risks
Insurable
Financing
Non-Insurable
Optimize Security
Insurance
Insurable
Large Risks
Other Financing
Non-Insurable
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Personal Risk Management

• Personal Risks
• loss of income due to premature death
• insufficient income/assets during retirement
• catastrophic medical bill/income loss due to
  disability
• loss of income from unemployment

• Property Risks
• direct physical damage to property
• indirect losses
• theft
• Liability Risks
• personal acts
• libel, slander, etc.
• negligence
• business related
• legal costs

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Risks Faced by Firms

• Property Exposures
• Direct
• Indirect
• Liability Exposures
• product
• premises and operations
• managerial errors omissions
• Personnel Exposures
• employee benefits
• Financial Exposures
• Strategic Exposures

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Firestone Tire Recall

• What risks do Firestone Ford face?
• What risk management techniques are applicable?
• How well have they managed their risk?