Week 1 - Intro to Risk Control & Risk Control Fundamentals Flashcards
Define risk
Types of risk: Pure & Speculative
Definition of Risk: Uncertainty concerning loss arising out of a given set of cirmsctances.
Risk may take form of:
- probability
- degree of uncertainty
- varing outcomes
- a variance from a forecast or prediction
ID 6 (six) general classes of risk
- ** ECONOMIC** - operations, market place, financial or entrepreneurial risks (wall street melt down)
- LEGAL - compliance or statutory liability (fines, codes, OSHA, international, etc)
- POLITICAL - changes in LAW or POLICY
- SOCIAL - public relations, loss of reputation, cultural problems or social direction
- PHYSICAL -property, people or information (bridge collapse)
- JURIDICIAL - jury or judge’s decision OR from court or jury attitudes
Define Risk Management
Process of protecting an organization’s assets through Risk Management Process:
- exposure identification
- exposure analysis
- control exposures
- f_inance losses_ w/ external & internal funds
- administration - implementation & monitoring of risk mgmt porcess
ID 5 (five) Steps of Risk Management Process
- Risk Identification - most important
- Risk Analysis
- Risk Control
- Risk Financing
- Risk Administration
ID 4 (four) logical classifications of exposures
- Property
- Human Resource
- Liability
- Net Income
Define Risk Identification
The process of identifying and examining exposures of an organization
Risk Management Process - STEP 1 - Risk Identification
Identify TEN methods of exposure identification
(bit 10 List)
- checklist & survey
- flowchart
- insurance policy review
- physical inspections
- compliance review
- policies & procedures review
- contract review
- experts
- financial statement analysis
- loss data analysis
define risk analysis
the assessment of the potential impact of various exposures to an organization
Define 2 (two) types of Risk analysis methods
Qualitative analsis - used to ID and access loss exposures that cannot be easily measured by traditional statistical or financial methods and to understand their impact on the organization’s ultimate risks and performance. the WHAT analysis process
- risk assessment
- financial assessment
- loss data assessment
Quantitative analysis - attempts to accurately measure risks using acceptable traditional methodologies which calculate relative values. The HOW MUCH analysis process.
- projections or forecasts
- cost benefit analyses CBA
- cash discounting and NPV calculations
- cost of risk calculations & analyses
define risk control
Risk control - any conscious action or inaction to minimize, at optimal cost, the probability, frequency, severity or unpredictability of loss
define general theories of risk control
General theories of risk control:
- _ Human approach_ - people cause accidents (domino theory)
- _ Engineering approach_ - things & pent-up energy cause accidents
identify 5 (five)** risk control techniques**
avoidance
Prevention (less volatile fuel)
Reduction (pre & post loss (fire suppression)
Segregation, separation, duplication (build separate units/buildings)
Transfer (contractual, physical or both)
Note: most risk control efforts will use more than one risk control technique.
define risks financing & identify risk financing methods
Risk Financing - acquisition of internal and external funds to pay losses at the most favorable cost
Risk Financing Methods
- RETENTION - internal funds used to pay losses
-
TRANSFER - external funds used to pay losses
- non-insurance transfer
- insurance transfer (note this is a financiing technique, not risk transfer
Define cost of risk and describe its components and use as a key risk management tool
Cost of Risk Definition: sum of all qualified costs and expenses associated with the risk management function of an organization
cost of risk =
** insurance costs**
+ retained losses & ALAE (active & passive)
+ risk management departmental costs
+ outside service fees (actuarial, legal)
+ indirect costs (disruption costs; goodwill)
identify Risk Manager’s objective in the risk management process
Risk Manager’s Objective:
to minimize the cost of risk by identifying those factors from each components that can be more effectively controlled.
List uses of TCOR as a risk management tool
Cost of Risk Uses:
- assist making effective RM decisions
- measure progress toward RM objectives
- focus & promote safety/loss control
- Provide mgmt & employee incentives
- assist with accurate pricing of products & services
- Assist with effective management of financial budgets
Explain basic tenets of risk management
Risk Management Tenets
- don’t retain more than you can afford to lose
- Don’t risk a lot for a litle
- don’t treat insurance as a substitute for risk control
- consider likelihood of events & their potential impact
- REMEMBER, no such thing as uninsured loss; uninsured loss = retained loss
- use at least one risk control technique & one risk financing technique for each exposure identified
Define Risk Control
definition: any conscious action or inaction to minimize loss (probability, frequency, severity, or unpredictability) at the optimal cost
Risk Control Focus: id & implement solutions that will prevent or reduce actual harm or the cost of loss
- It is not to provide for funds to be paid in compensation (funding is risk finance)
Risk Control is a people process - individuals must be involved in all aspects of an effective risk control program
What is the role of Risk Control in the Risk Management Process?
identification methods (the big 10)
incident analysis
cost-benefit analsis
Role of Risk Control - Step 1: Risk Identification Methods
ID Risk Control Identification Methods (Big 10)
- Checklists and sureys (IDs phsical hazards, admin processes & procedures; best practices, etc)
- Flowcharts (process mapping)
- Insurance Policy review (covered/not covered)
- Physical Inspections
- Compliance review
- Policies & Procedures review (IDs possible exposures)
- Contract review (obligations & compliance assumed)
- Experts (specialized training)
- Financial statement analysis (revenue sources; cashflows, business & fiancial partners; assset protection needs)
- Loss data analysis (frequence/severity; ID loss data integrity issues
identify methods/purposes for incident analysis
**Incident Analysis: **Frequency & severity matrix studies
by tracking & analyzing incidents, risk control techniques can be applied:
- more timely or proximate to the evnent
- to preempt, avoid or minimize chance of incident
- reinforce risk control issues involved or related to employees
- demonstrate due diligence or reasonable investigation in defense of subsequent claiim or loss
An effective RMIS can improve incident analysis process
Identify CBA strengths and weaknesses
Cost-Benefit analysis strengths & weaknesses
- fiinancial decision making tool for risk control alternatives
- comparison of costs/cash flows with benefits (reduction in losses and other cash inflows) over time to measure rate of return
- Losses, probabilities, interest rates & cash flows require assumptions that may vary from expected
- Solution with best rate of return may not be compatible with philosophy or goals of management
NOTE: NEVER use CBA when a LIFE SAFETY issue is iinvolved (ie - Ford Pinto)
Identify 5 (five) primary risk control techniques
- avoidance - risk totally elimiinated
- ** prevention** - reduce frequency
- reduction - reduce severity; applies both pre & post loss activities
- segregation/separation/duplication - reduce overall severity.
- segregation - isolation of exposure from other exposures
- separation - spread exposurs over multiple locations
- duplication - DR; backups
- transfer - reduce risk by transfering some or all; may be physical or contractual (hold harmless)
list examples of contracts commonly containing hold harmless agreements
- construction agreements
- service contracts
- purchase orders
- leases & rental agreements
- usage permits
