Risk Assessment

1
Risk Assessment

• Chapter 14
• Applying Cash Flow Analysis

2
Selecting the best risk management technique

• Step 1
• Define criteria that measure how well and how
  cost effective of each risk management technique
• Step 2
• Forecast the effects of the available
  techniques
• Step 3
• Apply criteria and select the best alternative

3
Effectiveness and economy

• Effectiveness
• To achieve desired goals
• Pre-loss goals tolerable uncertainty, legality
  and social responsibility
• Post-loss goals survival, continuity of
  operations, profitability, earning stability,
  growth, and social responsibility
• Economy
• The least expensive option

4
Risk management techniques

• Recognizing expected losses (exh. 14-1, 14-2)
• Loss exposure avoidance
• Prevention or reduction of losses (exh. 14-3,
  14-4)
• Separation of loss exposures
• Loss transfer
• A captive insurer
• An unrelated insurer (exh. 14-5)
• Hold-harmless agreement (exh. 14-6)
• Hedging (exh. 14-7, 14-8)
• Loss retention
• Current funding
• Pre-funding
• Post-funding

5
Hedging example

• Call contract a Contract that gives the holder
  the Right to Buy a certain quantity of an
  security from the writer of the option, at a
  specified price (the strike price) Up to a
  specified date (the Expiration date).