Pure risk
Two possible outcomes; no change or loss; insurable, loss or no loss
Speculative risk
Investing money, $10,000 you can have a gain a loss or no change so it is not insurable
Static risk
Unchanging risk that has and will always exist; natural disasters
Dynamic risk
Generally created by changes in society; credit cards
Fundamental risk
A lot of people affected by one event
Particular risk
Only affects few people: example-fire at home
Objective risk
Looking at true number of mortalities that occur example-death/jumps
Subjective risk
A person's personal assessment of how risky investment is
sources of pure risk
-personal risk
-property risks
-liability risks
personal risks
premature death, insufficient retirement income, poor health, unemployment
real property risk
land and any attachments
personal property risk
anything you can pick up and move
direct property risk
fire, accident
indirect property risk
caused by the direct loss
liability risks
premises hazards, product liability, professional liability, contractual liability, environmental impairment liability, employment-related practices liability
burden of risk on society
adverse impact of risk
-emergency funds
-loss of goods or services
-fear and worry
emergency funds
can lose your job, injure yourself, die prematurely-leaves financial burdens on others
loss of goods or services
can happen when a product creates too much liability
fear and worry
life insurance, disability insurance
if you are the bread winner, you worry if something happens to you, the burden it will put on your family
peril
actually causes the loss
hazard
can increase the likelihood of the loss or the severity of the loss
types of hazards
physical, moral, morale, legal
physical hazard
rain impacts how far you can see in front of you
moral hazard
doing something intentionally to cause a loss or increase the value of claim after the loss; insurance fraud, house break-in
morale hazard
not intentional, indifference or carelessness; leaving car on could cause hazard-increase likelihood of loss
legal hazard
lawsuits, see a case and want to sue for similar issues that happened to you; McDonald's coffee too hot
car accident example
-peril is the collision with the other vehicle and light post
-hazards:
drinking and driving-moral hazard
no headlights on-physical hazard
speeding-physical hazard
texting and driving-morale hazard
traditional risk management process
-pure risks
enterprise risk management process
more holistic approach to managing risk
-pure risks
-operational risks
-financial risks
-strategic risks
operational risks
loss of earnings, assets damages (destroyed or stolen), assets become obsolete, employee-related risks, legal liability, political risks
financial risks
input price risk
output price risk
interest rate risk
credit (counterparty) risk
currency or foreign exchange rate risk
input price risk
agreed upon a price, have to stay with it regardless of changes
output price risk
produced product, selling to distributors, something changed in the market and could potentially sell it for more but cannot because of the agreement on this
credit (counterparty) risk
always run the risk of default and people not paying
strategic risks
macroeconomics and other primarily external influences and trends
3 strategic risks
loss of market share/competition
decisions regarding products:
-products don't meet sales productions
-technology issues...products become obsolete
-economic risks that impact sales and/or costs
merger/acquisition doesn't pay off
objectives of risk management-things to consider
personal/organizational goals
risk tolerance
trade-off between risk and costs
types of objectives of risk management
pre-loss objectives
post-loss objectives
pre-loss objectives
liability insurance: designed to protect someone else or someone else's property that you might injure/destroy in accident-external obligation
(insurance is required on a vehicle in state of Florida)
post-loss objectives
most important objective is to survive
steps to the risk management process
-identify exposures
-evaluate exposures-potential impact of risk
-select appropriate technique-which technique to use to manage exposures
-implement/periodically review and revise
step 1: identification
crucial because if you have an exposure you not identify than you will not go through the process so essentially you have retained financial responsibility for the loss; want to do due diligence identifying all potential exposures (if you don't go through
categorizing potential losses
a part of the first step of the risk management process where you can choose from: property, liability, loss of income, reputation, human resources, crime, employee benefit, foreign loss exposures, regulation
useful tools for identification in risk management process
-communicate with other departments, loss exposure checklist, financial statements, flowchart, contract analysis, physical inspection, questionnaires, past loss experience
-consultants: larger companies have in-house RM departments, smaller ones outsource
step 2: evaluation
figure out the impact of risk on your firm
evaluation
-frequency and severity
-probability distribution
-central tendency
-variation
-law of large numbers
frequency and severity
-how many times might the loss occur in a year
-what's the financial impact of the loss
-maximum possible loss vs. maximum probable loss
Example: own a vehicle for $10,000 so that the maximum loss...probable loss is more likely to happen, less than total
probability distribution
combining frequency and severity
central tendency
averages, means, modes
variation
greater variation comes greater risk
other techniques
-quantitative risk measures
-qualitative risk measures
-risk mapping
quantitative risk measures
-net present value (NPV) or internal rate of return (IRR)
-value at risk (VaR)
-if benefit outweighs the costs, go forward with decision
qualitative risk measures
-scenario planning
-brainstorming
-decision tree analysis
scenario planning
logical process, thinking through
decision tree analysis
consider all outcomes and solutions
-create probability distribution for all options, get costs and evaluate the totals
-can also be used to make decision on how to manage specific exposure
-strategic business decision: look at your range of options withi
example of qualitative risk measures
hurricane insurance:
-purchase
-don't purchase
-mitigation techniques: shutters
-mitigate and buy insurance
once you add numbers it becomes quantitative
risk mapping
upon completion of the analysis process, the firm should be able to quantify all risks identified objectively or subjectively and then risks in the order of priority
two approaches of risk mapping
IRM-AIRMIC-ALARM approach
risk mapping
IRM-AIRMC-ALARM
prioritizes risks based on their individual impact on firm value and probability of occurrence
risk mapping involves
the graphical positioning of events in terms of financial impact and probability
step 3: selection
how am I going to manage those exposures?
-risk control
-risk finance
risk control techniques
avoidance, loss prevention, loss reduction
avoidance
-no longer engaging in the activity that is creating risk
-not always possible, cannot avoid death
-try to avoid when severity is high and have a high frequency; potential loss is very high
loss prevention
frequency control
aimed at reducing frequency
reduce probability of loss occurring
loss reduction
-severity control
-aimed at reducing severity, reduce financial impact of loss
example of both loss prevention and loss reduction
alarm system
risk financing techniques
-basic idea is that you remain financially responsible for the loss or you try to transfer your risk to someone else
-full retention, hybrid transfer, full transfer
full retention
if loss occurs, you or your company pays for loss
hybrid transfer
you are shifting all or some portion of the financial responsibility to another party; can do it through insurance or some other tools
-lease, non-insurance transfer: hold harmless/indemnity
categorizing potential losses
a part of the first step of the risk management process where you can choose from: property, liability, loss of income, reputation, human resources, crime, employee benefit, foreign loss exposures, regulation
useful tools for identification in risk management process
-communicate with other departments, loss exposure checklist, financial statements, flowchart, contract analysis, physical inspection, questionnaires, past loss experience
step 2: evaluation
figure out the impact of risk on your firm
evaluation
-frequency and severity
-probability distribution
-central tendency
-variation
-law of large numbers
step 2: evaluation
figure out the impact of risk on your firm
evaluation
...
step 2: evaluation
figure out the impact of risk on your firm
evaluation
...
step 2: evaluation
figure out the impact of risk on your firm
step 2: evaluation
figure out the impact of risk on your firm
evaluation
...
step 2: evaluation
figure out the impact of risk on your firm
step 2: evaluation
...
step 2: evaluation
...
categorizing potential losses
a part of the first step of the risk management process where you can choose from: property, liability, loss of income, reputation, human resources, crime, employee benefit, foreign loss exposures, regulation
useful tools for identification in risk management process
...
categorizing potential losses
a part of the first step of the risk management process where you can choose from: property, liability, loss of income, reputation, human resources, crime, employee benefit, foreign loss exposures, regulation
useful tools for identification in risk management process
...
categorizing potential losses
a part of the first step of the risk management process where you can choose from: property, liability, loss of income, reputation, human resources, crime, employee benefit, foreign loss exposures, regulation
categorizing potential losses
...
categorizing potential losses
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categorizing potential losses
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categorizing potential losses
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Identification
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Identification
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liability risks
premises hazards, product liability, professional liability, contractual liability, environmental impairment liability, employment-related practices liability
burden of risk on society
adverse impact of risk
liability risks
premises hazards, product liability, professional liability, contractual liability, environmental impairment liability, employment-related practices liability
burden of risk on society
adverse impact of risk
liability risks
premises hazards, product liability, professional liability, contractual liability, environmental impairment liability, employment-related practices liability
burden of risk on society
...
liability risks
premises hazards, product liability, professional liability, contractual liability, environmental impairment liability, employment-related practices liability
liability risks
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liability risks
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liability risks
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liability risks
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