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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 1

Chapter 3:

Risk Management

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 2

Risk Management

What is Risk Management (RM)?

Making pre-loss arrangements for post-loss

resourcesThe logical approach to financing and

controlling loss exposures

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 3

The RM Function

The staff varies based on size and responsibility

All firms and people engage in risk management

Career opportunities in profit and non-profit

organizations

Occupation is professionally recognized RIMS

Risk and Insurance Management Society

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 4

RM Statement of Objectives and

PrinciplesDistinguish between pre-loss and post-loss

objectives

Pre-loss objectivesSurvival and growth

Compliance with government regulations

Efficiency

Procedures and principles are implemented andfollowed

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 5

RM Statement of Objectives and

PrinciplesPost-loss objectives

Survive the loss

Provide a foundation to grow and prosperBehave responsibly as a good corporate citizen

Risk Management Manual

Written to articulate goals, standards, how tomeasure results and provide benchmarks

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 6

Steps in the Pre-loss Risk

Management Process Identify & Measure (evaluate)

Choose most efficient tool(s) forLoss Control

Loss Financing

Implement and review

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

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Step 1 - Identify

What to identify:

Direct losses

Indirect lossesKey personnel

Operations

How to identify

Balance sheet

Income statementOther records

Checklists

Flow chartsQuestionnaires

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 8

Measure (evaluation)

Maximum possible loss

The absolute maximum dollar amount of damage

Maximum probable loss

A conservative estimate of what is likely to occur in aworst case loss

Relative Frequency

An estimate (numerical or verbal) as to the number of

times the loss will occur

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 9

Valuing Property

Replacement value versusbook value

versus actual cash value versus market

value International operations and exchange rate

problems

The impact ofinflation on values

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Instructors Manual with Transparency Masters

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2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 10

Loss of Income

Definition

Sources of Loss

ProblemsCan be seasonal in nature

Difficult to measure

Best measurement still can only be an estimate

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 12

Losses to Key or other Personnel

Death

Disability physical (medical) or mental Short or long term

Permanent or temporary

Loss of health

Unplanned retirement

Results in loss of income, business continuation

problems, replacement and training issues

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Instructors Manual with Transparency Masters

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and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 13

A ---- Avoid

R ---- RetainT ---- Transfer

Insurance

Non-insurance

Step 2 -Decide How to Handle

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2008 by Pearson Prentice Hall.

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Selecting the Risk Management

TechniqueFrequency

Se

v

e

r

it

y

Low High

Lo

w

H

ig

h

Assume

loss preventionloss reduction

Avoid

loss preventionloss reduction

Insure

risk transferloss reduction

loss prevention

Loss Prevention

loss reductionassume risk

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 15

Loss Control - Prevention

Loss Prevention

Take various steps to reduce the probability of

losses occurring

How do you value the loss of life in the cost

/ benefit equation?

Always engage in, if beneficial

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 16

Government and Loss Prevention

Occupational Safety and Health Act of 1970(OSHA)

Consumer Product Safety Act of 1972 (CPSA)

Comprehensive Environmental Response,Compensation Liability Act of 1980 (CERCLA)(Superfund)

Food and Drug Administration (FDA)

The Clean Air Act

The Water Pollution Control Act

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Instructors Manual with Transparency Masters

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and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

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Loss Control - Reduction

Loss ReductionSteps designed to reduce the severityTake steps to reduce the damage before and after

a loss

Always engage in, if beneficial

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

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Self-insurance - loss financing

What is self-insurance?

Why do companies self-insure?

Save money

Better control

Loss prevention incentives

Improved claims settlement

Profitability and investment earnings

Difference between self-insurance and risk

assumption

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 19

Captive Insurance Companies

A method of self-insuring

A company formed to write insurance for aparent company

Motives for starting a captiveSave the overhead and profits of the insurance

company

Earn investment income on the premiumTaxadvantages

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Instructors Manual with Transparency Masters

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and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

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Other Risk Management

ConceptsFinite risk programs

Multiple year insurance contract

Premiums equal to the aggregate policy limitpaid in installments over the contracts years.

If losses exceed aggregate limit, loans are made

for excess and future premiums repay loans

If losses are less than aggregate, there is a

refund.

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Instructors Manual with Transparency Masters

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2008 by Pearson Prentice Hall.

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Other Risk Management Tools

Risk TransferHold harmless agreements - transfer of risk

through a contract

Hedging - take equal but opposite position on aneven based on chance

Financial risk management - techniques to deal

with interest rate, currency value, and crop pricechanges

Leases - transfers risk of obsolescence

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Instructors Manual with Transparency Masters

to Accompany Introduction to Risk Management

and Insurance, 9E - Dorfman

2008 by Pearson Prentice Hall.

Upper Saddle, NJ 07458 22

Step 3 Review and Update

Regularly review and update the processNew assets or disposal of assets

Valuation changes

New products and processes, materials

New personnel

Law changes

Currency fluctuationsNew contractual relationships