Transcript Topic 2. Risk and Risk Management

Topic 2. Risk and Risk
Management
Bus 200
Introduction to Risk Management and Insurance
Jin Park
Overview
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Terminology
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Risk
Perils, Hazards
ERM, IRM
Risk Management process
Terminology
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Risk
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Deviation from expectation
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Uncertainty concerning a loss
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Worse than expected
Better than expected
Uncertainty
Loss (cf. Loss exposure)
Pure vs Speculative
Fundamental vs Particular
Systematic vs Nonsystematic (Diversifiable)
Objective vs Subjective
Terminology
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Pure Risk
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Loss or no loss
Fire
Risk management &
Insurance
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Speculative Risk
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Loss or gain
No loss/gain
Investment
Finance
Enterprise Risk Management deals with
managing both risks in a firm
Terminology
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Perils
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(Immediate) Causes of loss
Hazards
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Physical hazards
Moral hazards
Morale hazards
Risk Management
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Risk management
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A systematic process for managing (pure) risks
faced by an individual or organization.
Pre-loss risk management
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Should prepare for potential loss in the economical
way possible
Post-loss risk management
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Survival of the organization
Continuation of operation
Stability of earnings
Risk Management Process
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Identify risks or exposures to loss
Evaluate risks or exposures to loss
Identify and select risk management
techniques
Implement and monitor
Identify Risks
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Organization
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Property
Liability
Business income
Death or disability of
key persons
Job-related injuries or
disease
Fraud, dishonesty,
crime
International operation
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Individual
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Property
Liability
Premature death or
disability
Unemployment
Sickness
Liability
Identify Risks
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Physical inspection
Questionnaire
Financial statement analysis
Flowchart
Contract analysis
Statistical analysis of past losses
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Risk management information system
(RMIS)
Evaluate Risks
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Risk management matrix
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Frequency
Severity
High
Frequency
Low
Low
Severity
High
Evaluate Risks
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Risk mapping
High
Frequency
Low
Low
Severity
High
Identify and select
RM techniques
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Risk avoidance
Risk retention (Risk assumption)
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Risk reduction (control)
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Loss prevention – frequency
Loss reduction – severity
Risk transfer
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Self-insured
Captive
Insurance
Non-insurance
Example: Sprinkler, Hold-harmless agreement, ignorance,
safety education, smoke alarm, deductible, warm-up, rent
Identify and select
RM techniques
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Risk mapping
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Critical issue tolerance boundary or risktolerance boundary
Prioritize risks
Implement and Monitor
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Are techniques implemented correct?
If not, …
Insurance
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Advantages
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Uncertainty is reduced
Insurers can provide.
their expertise such as
loss control services.
Insurance premium is
tax-deductible.
Insurance proceeds are
tax-free.
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Disadvantages
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Insurance premium may
be a major cost.
Moral and morale
hazards may be
created.
Time and effort have to
be spent.
Insurance may not be
renewed.
Others
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CAT bonds
Forward/Future
Swaps
Options
Securitizations
CDO, CMO, CBO, CLO
Enterprise risk management
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Integrated risk management
The process of planning, leading and controlling
the activities of an organization to minimize the
effects of risk on earnings and capital
A holistic approach to risks faced by a firm
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Risk management has to be integrated among various
players in a firm
Requires a (strategic) risk management policy
Needs support from the top level of a firm
The Three Faces of Risk
Management
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Although most companies have their bases covered
should they meet with fire, theft or flood, such hazards
represent …
Explains about ERM
 allows organizations to examine all the risks they face
 measure the potential impact of those risks on the
long-term viability of the company
 take the appropriate steps to manage or mitigate those
risks.
 "The goal is to ensure the continuity of the enterprise“
 "This is an opportunity to get to know your risks better
than your competitors. It can also leave you in a
position to be able to take on more risk — the type of
risk that can help improve company performance."
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An example of an electronics manufacturer
Top Cops
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Explains about CRO
Explains about ERM
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"We're building the capability internally to identify all
risks, analyze and quantify them, and then determine the
optimum means of mitigating, absorbing, or transferring
them.”
“When that's done, we will decide on an ongoing basis which
risks to keep and which to transfer. Then we can effect the
transfer through our trading desks, financial markets,
insurance carriers, integrated risk policies, OTC [over-thecounter] transactions, or a contractual transfer to another
party entirely.“
other CROs are working closely with insurance brokers,
accounting firms, and risk management consultants to lead
the way,
Illinois Power
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The Risk Register
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a comprehensive risk-assessment system
a formal process that identifies,
quantifies and categorizes the risks
facing Illinois Power, develops costeffective methods to control them and
positions the company to achieve its
stated goals
Illinois Power
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Benefits of the Risk Register
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aware of the catastrophic risks
aware of the fact that its pre-loss risk
management was not adequate
developed a more efficient and effective
post-loss risk management program
built risk-related database
Illinois Power
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IDENTIFYING THE RISKS
 regardless of insurability
CONSIDERING CONTROL TECHNIQUES
 disregarding cost or appropriateness of
any method
SELECTING RISK CONTROLS
 subjected to a reasonableness test and a
thorough economic evaluation
IMPLEMENTATION
MONITORING
UPS
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Why small firms?
Why not large firms?
Why not pharmaceutical firms?
Lessons
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"Use more than one delivery company.“
"August is a good time for a strike,
because there is not a lot of stuff being
done."
Domino effects
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???
Next- Loss Exposures
ETTI: Chapter 1, pp. 16 – 18
ETTI: Chapter 8, pp. 162 – 164, 170 – 172, 173 – 176
ETTI: Chapter 9, pp. 180 - 203
1. Business continuity planning: Preparing for the worst, KPMG
Insiders, June 10, 2002
2. U.S. firms underestimate IT risks, Insurance Day, June 14,
2002
3. Prudent Man with a Plan, CFO Magazine, June 18, 2002.
4. Warning: A batman cape won’t help you fly, New York Times,
March 5, 1997.
5. Jury awards $12 million in voice-mail hang-up, Chicago
Tribune, April 3, 2003.
6. $36 million awarded to heirs of 2 killed in freak accident,
Chicago Tribune, date unknown.