is a process that identifies loss exposures faced by an organization and selects

the most appropriate techniques for treating such exposures

is any situation or circumstance in which a loss is

possible, regardless of whether a loss occurs.

o E.g., a plant that may be damaged by an earthquake, or an automobile that may be

damaged in a collision

O prepare for potential losses in the most economical way

O reduce anxiety

O meet any legal obligations

O ensure survival for the firm

o Continue operations

o stabilize earnings

o Maintain growth

o minimize the effects that a loss will have on others and society

Risk Management Process

] Identify potential losses

] evaluate potential losses

] Select the appropriate risk management technique

] implement and monitor the risk management program

] Property/Liability loss exposures

] Business income loss exposures

] Human resources loss exposures

] Crime loss exposures

] Employee benefit loss exposures

] Market reputation and public image of company

Pre-designed checklist enabling a business or individual to answer a series of questions regarding their assets and activities to determine potential exposure

an analysis of the firm’s balance sheet and income statements to determine exposure

helps to identify exposures related to the production process

helps to identify exposure resulting from the involvement with other parties in a

contractual agreement

•  Do I need to purchase insurance when I rent a car?

visiting the various business locations, observing and interviewing various employees

regarding the activities taking place

use past losses to identify and project future losses

refers to the probable number of losses that

may occur during some given time period

refers to the probable size of the losses that

may occur

is the worst loss that

could happen to the firm during its lifetime

is the worst loss that is likely to happen

to techniques that reduce the frequency and severity of losses

O Avoidance

O loss prevention

O loss reduction

means a certain loss exposure is never acquired, or an

existing loss exposure is abandoned

o the chance of loss is zero

o It is not always possible, or practical, to avoid all losses

refers to measures that reduce the frequency

of a particular loss

o E.g., installing safety features on hazardous products

 refers to measures that reduce the severity

of a loss after it occurs

o E.g., installing an automatic sprinkler system, seatbelt, airbag

refers to techniques that provide for the funding of losses.

O Retention

O Non-insurance Transfers

O Commercial Insurance

means that the firm retains part or all of the losses that can result from a given loss

. no other method of treatment is available

. The worst possible loss is not serious.

. losses are highly predictable

The deliberate choice to assume all or part of a loss exposure

The unconscious decision to assume all or part of a loss exposure

. often results from ignorance or laziness

Unfunded retention

o Current net income: losses are treated as current expenses

o Unfunded reserve: losses are deducted from a bookkeeping account

o  credit line: funds are borrowed to pay losses as they occur

: losses are deducted from a liquid fund

Self-insurance is a special form of planned retention

O part or all of a given loss exposure is retained by the firm

o A more accurate term would be self-funding

o widely used for workers compensation and group health benefits

Advantages of retention

o Save Money

o Lower expenses

o Encourage loss prevention

o Increase cash flow

o Possible higher losses

o Possible higher expenses

o Possible higher taxes

is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party

o Examples include: contracts, leases, hold-harmless agreements

o Can transfer some losses that are not insurable

o Save money

o Can transfer loss to someone who is in a better position to control losses

Disadvantages of Non-insurance Transfer

o Contract language may be ambiguous, so transfer may fail

o If the other party fails to pay, firm is still responsible for the loss

o Insurers may not give credit for transfers

is appropriate for loss exposures that have a low probability of loss but for which the

severity of loss is high

is a provision by which a specified amount

is subtracted from the loss payment otherwise payable to the insured

is one which the insurer doesn't participate in the loss until the actual loss exceeds the amount a firm has decided to retain.

o Firm is indemnified for losses

o Uncertainty is reduced

o Insurers may provide other risk management services

o Premiums are tax]deductible

o Premiums may be costly

. Opportunity cost should be considered

o Negotiation of contracts takes time and effort

o The risk manager may become lax in exercising loss control

should be periodically reviewed and evaluated to determine whether the objectives are being attained

refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks

·         The same principles applied to corporate risk management apply to personal risk management