Introduction to Risk Management & Related Legal Issues Flashcards
Learning Objectives 5-1: Explain the steps of the risk management process and their importance. 5-2: Explain a rule of risk management. 5-3: Explain the elements of an insurable risk. 5-4: Explain the purpose of the underwriting process and its implications for the client. 5-5: Apply methods of handling risk in a given situation. 5-6: Identify the advantages and disadvantages of self-insurance. 5-7: Explain an essential legal liability term. 5-8: Analyze a given situation to identify th (62 cards)
Concepts of Risk & Definition
Risk
the possibility of an adverse outcome (loss) e.g., damage to house
Peril
the cause of loss e.g., fire
Hazard
increases the likelihood of loss e.g., placing lit candles too close to curtains
The Risk Management Process
- Identify risk management goals
- Gather pertinent data to determine risk exposures
- Analyze and evaluate the information to identify risk exposures facing the client
- Construct a risk management plan
- Implement the plan
- Monitor/Update the plan
Define 1. Identify risk management goals
Decide precisely what the client wants from the risk
management program and set clearly defined objectives
Define 2. Gather pertinent data to determine risk exposures
Use data sheets, policy checklists, risk analysis questionnaires, and financial statements to learn as much as possible about the sources of risk exposure faced by the client
Define 3. Analyze and evaluate the information to
identify risk exposures facing the client
Examine each of the client’s assets, contracts, and
activities, looking for exposures
Define 4. Construct a risk management plan
Consider alternative risk treatment approaches for each exposure and select which should be used for each risk
Define 5. Implement the plan
Encourage the client to make a decision about your
recommendations and act on them
Define 6. Monitor/Update the plan
As the client’s circumstances change, review and
update the plan
Rules of Risk Management
-Don’t risk more than you can afford
to lose
• Transfer potentially devastating losses whose severity cannot be reduced (i.e., the large-loss principle).
Rules of Risk Management
-Consider the odds
The higher the probability of loss, the
less appropriate is risk transfer.
Rules of Risk Management
-Don’t risk a lot for a little
• There should be a reasonable
relationship between the cost
of transferring risk and the
value to the transferor.
Elements of an Insurable Risk
Law of large numbers:
1. There must be a sufficiently large number of homogeneous exposure units to make the losses reasonably predictable.
The loss produced by the risk must be: 2. definite and measurable 3. fortuitous or accidental 4. not catastrophic
Which of the following are elements of an insurable risk for an insurance company? I. The loss must be catastrophic. II. The loss must be measurable. III. The loss must be accidental. IV. The loss must be inevitable.
a. I and II only
b. I and IV only
c. II and III only
d. II and IV only
e. II, III, and IV only
Purpose of the Underwriting Process
The underwriting process is meant to:
• assure that any risks insured will retain their
compliance with the elements of an insurable
risk after insuring.
• control adverse selection.
• assure that the risks considered for insurance
either:
o conform to the degree of risk priced,
o pay sufficient additional premium to make up for
risk brought to the pool in excess of that priced,
o are rejected if they fall too far outside
underwriting guidelines.
Implications of the Underwriting Process for the Client
- Underwriting guidelines are just that—guidelines.
o If there is a good reason your client should be
insured in spite of an apparent lack of compliance with a guideline, make this reason
known to the underwriter.
o With sufficient additional information, insurance
may be offered in spite of apparent noncompliance.
Implications of the Underwriting Process for the Client
- There are definite limits on what insurance can
be obtained for the client, regardless of what the client is willing to pay.
The Underwriting Process: 5 Sources of Information
- Application containing the proposed insured’s
statements - Recommendations of the agent or broker
- Investigations from an inspection company
- Cooperative information bureaus
- Physical examinations orinspections of properties
Methods of Handling Risk regarding Avoidance
Avoid the cause
Example: Don’t go skiing
Methods of Handling Risk Regarding Reduction
- Prevent control the loss
- Share risk (bearing only a portion of the risk through pooled resources
Example: Ski marked trails in protective gear
Incorporation (risk limited to financial participation)
Methods of Handling Risk Regarding Retention
Keep the risk
Example: Ski ( or other activity); insurance deductibles
Methods of Handling Risk Regarding Transfer
Transfer to another
Example: Buy insurance policy
Circumstances of Handling Risk on High Severity:
High Frequency of High Severity Risk:
Risk Avoidance or Risk Reduction
Low Frequency of High Severity Risk:
Risk Transfer
Circumstances of Handling Risk on Low Severity:
High Frequency of Low Severity Risk:
Risk Retention or Risk Reduction
Low Frequency of Low Severity Risk:
Risk Retention
Self-Insurance Advantages
- Control of investment fund
- Elimination of selling costs and insurer profit
- Elimination of state premium taxes
- Incentive to control and prevent losses
- Losses incurred are deductible
