Introduction

to Risk
Management
Basic areas:

- defining risk management

- objectives of risk management
- the risk management process
- personal risk management
program
Meaning of Risk Management
Definition of Risk Management
A systematic process for:

-the identification and evaluation of

pure loss exposures faced by an
organization or individual

-and for the selection and

administration of the most appropriate
technique for treating such exposures.
Not the Same as Insurance Management
Risk management is a broader concept.

Insurance is one of several methods the

risk manager can use to treat loss
exposures.

Risk management provides for the

periodic evaluation of all techniques for
meeting losses, not just insurance.
Types of Pure Risks
1- Personal Risks

2- Property Risks

3- Liability Risks
Major personal risks include the following:

 Death or total disability of one or both

parents and the subsequent loss of
tuition support
 possible injury while skiing or surfing
 catastrophic medical bills and loss of
income if Jennifer becomes seriously ill
or totally disabled
 involuntary loss of part-time job and a
subsequent reduction in total income
Major property risks include the following:

 Physical damage to personal

property because of a fire, tornado,
or other cause
 Theft of personal property
 Physical damage or theft of the
sports car
 Theft of the trumpet which could
jeopardize her position in the college
band
Major liability risks include the following:

 Driving an automobile while under the

influence of alcohol
 Legal liability arising out of injury to
another skier or surfer
 Legal liability arising out of activities
as a student that accidentally cause
property damage or bodily injury to
others
Objectives of Risk Management
A risk management policy statement offers
several advantages.

Such a policy statement is necessary in

order to have effective administration of the
risk management program.

The policy statement states the risk

management objectives of the firm and
company policy with respect to treatment of
the loss exposures.
In addition, a risk management statement
has the advantage of educating top-level
executives in the firm about the risk
management process.

Also, the written policy statement enables

the risk manager to have greater authority
throughout the firm.

Finally, the policy statement provides a

standard for judging the risk manager's
performance.
Pre-loss Objectives:
- Economy goal

- Reduction of anxiety

- Meet any legal obligations

Post-loss Objectives:
-Survival of the firm

-Continued operation

-Stability of earnings

-Continued growth

-Social responsibility
Risk Management Process
Steps in the Risk Management Process
Identifying Potential Losses
Types of potential losses:
- Property loss exposures
- Liability loss exposures
- Business income loss exposures
- Human resources loss exposures
- Crime loss exposures
- Employee benefits loss exposures
- Foreign loss exposures
Major loss exposures and techniques
for handling the loss exposure include
the following:
 Physical damage to a bus in an
accident

(can be handled by a commercial auto

policy, by retention of part of all of the
loss exposure, and by loss control
activities to reduce the possibility of an
accident)
Suits arising out of injuries to children
in a bus accident

(can be handled by a commercial auto

policy, by loss control such as a
defensive driving course, and by
avoiding hiring drivers with poor
driving records)
 Suits arising out of bodily injury or
property damage to other motorists or
pedestrians

(can be handled by a commercial auto

policy, by loss control such as a
defensive driving course, and by
avoiding hiring drivers with poor driving
records)
 Physical damage losses to the three
garages from natural disasters or other
perils

(can be handled by a commercial

property insurance policy and by
retention of part of the exposure by a
sizable deductible)
Loss of business income if the firm is
unable to operate

(can be handled by business income

insurance that covers the loss of
business income and extra expenses
that continue during the shutdown
period and by loss control activities to
reduce the possibility of a loss)
 Workers compensation claims if a bus
driver or other employees are injured in
a work-related accident

(can be handled by workers

compensation insurance and by self-
insurance)
 Death or disability of a key executive

(can be handled by loss control, such

as an annual physical exam, and by
having other employees trained to take
over the duties of the key executive)
Tools for recognizing loss exposures:
- Risk analysis questionnaires
- Physical inspection
- Flow charts
- Financial statements
- Historical loss data
Evaluating Potential Losses
Two concepts:
- Loss frequency
- Loss severity
This is important so that the various
loss exposures can be ranked
according to their relative importance.

In addition, the relative frequency and

severity of each loss exposure must be
estimated so that the risk manager can
select the most appropriate technique,
or combination of techniques, for
treating the loss exposure.
Guidelines for measuring severity:
 - Maximum possible
loss
- Maximum probable
loss
 The maximum possible loss is
the worst loss that could possibly
happen to the firm during its
lifetime.
The maximum probable loss is the
worst loss that is likely to happen.
Selecting the Appropriate Technique
Risk control
Risk control refers to techniques that
reduce the frequency and severity of
accidental losses.
- Avoidance
- Loss control
Risk financing
Risk financing refers to techniques that
reduce the frequency and severity of
accidental losses.
 -Retention
(can be used if no other method of
treatment is available, the worst possible loss is
not serious, and losses are highly predictable)
Sources of funds to pay losses if
retention is used in a risk management
program include the following:

 Pay losses out of current cash flow.

 Establish a funded reserve.
 Borrow from a bank by arranging a
credit line in advance of a loss.
 The company may be able to join a
trade association that owns a
captive insurer.
 -Non-insurance transfers
(contracts, leases, and hold-harmless
agreements)
-Commercial insurance
Factors to be considered
a. selection of insurance coverages
b. selection of an insurer or insurers
c. negotiation of terms of the insurance
contract
d. dissemination of information to others in
the firm concerning the insurance
coverages
e. periodic review and evaluation of the
insurance program
The major advantages of commercial
insurance include:

- indemnification after a loss occurs,

- reduction in uncertainty,
- availability of valuable risk
management services,
-and the income-tax deductibility of the
premiums.
The major disadvantages of
commercial insurance include:

-the cost of insurance,

-time and effort that must be spent in
negotiating for insurance,
-and a possible lax attitude toward
loss control.
Implementing the Program
Policy statement
Cooperation with other departments
Periodic review
Personal Risk Management