Dr. James Kallman, ARM 1 - 1 Advanced PowerPoint Presentation ©2009 The National Underwriter Company

Dr. James Kallman, ARM 1-1

AdvancedPowerPointPresentation

©2009 The National Underwriter Company

Dr. James Kallman, ARM 1-2

This Advanced PowerPoint Presentation accompanies the “Tools & Techniques of Risk Management & Insurance” textbook. Each of the 28 chapters in the textbook are presented here in the following sections:

OutlineKey concepts (Key words are italicized) Major sectionsChapter summary

©2009 The National Underwriter Company

©2009 The National Underwriter Company Dr. James Kallman, ARM 1-3

Contents

Techniques of Risk Management & InsuranceCh 1 Introduction to Traditional Risk Management……………1-5

Ch 2 Enterprise Risk Management…………………………….2-1

Ch 3 Risk Assessment: Identification…………………………..3-1

Ch 4 Risk Assessment: Quantification…………………………4-1

Ch 5 Overview of Risk Treatment Alternatives………………. 5-1

Ch 6 Non-insurance Transfer of Risk…………………………. 6-1

Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1

Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1

Ch 9 Global Risk Management………………………………….9-1

Ch 10 Loss Control Techniques………………………………..10-1

Ch 11 Emergency Response Planning………………………..11-1

Ch 12 Business Continuity Planning…………………………..12-1

Ch 13 Claims Management……………………………………..13-1

Ch 14 Monitoring Claims for Financial Accuracy……………..14-1

Ch 15 Insurance Companies and Risk Management………..15-1

Ch 16 Working with an Agent or Broker……………………….16-1


Contents

Tools of Risk Management & Insurance

Ch 17 Commercial General Liability Insurance……………….17-1Ch 18 The Workers’ Compensation System………………….18-1Ch 19 Commercial Property Insurance………………………..19-1Ch 20 Directors and Officers’ Liability Insurance……………..20-1Ch 21 Employment-Related Practices Liability Insurance…..21-1Ch 22 Business Automobile Insurance………………………..22-1Ch 23 Crime Insurance………………………………………….23-1Ch 24 Capital Markets Risk Transfer Tools…………………..24-1Ch 25 Loss Control Tools……………………………………….25-1Ch 26 The Certificate of Insurance…………………………….26-1Ch 27 Surety Bonds……………………………………………..27-1Ch 28 Claim Reviews……………………………………………28-1


Chapter 1Introduction to Traditional Risk Management

Outline

• Understanding the Nature of Risk

• A Brief History of Risk Management

• The Risk Management Process

• Steps in the Process

• Importance of Risk Management to the Organization

• The Risk Management Policy Statement

• Traditional Risk Management vs. Enterprise Risk Management

• Chapter Summary

• Glossary: at the end of each chapter – key words to learn



Understanding the Nature of Risk

• Risk can be managed and controlled

• Event risks (fortuitous risks) are insurable risks

• Business risks (uninsurable) are just another cost of doing business

• Key point: risk is a type of volatility

• Risk is independent of who pays for losses.

Supplement

• Objective risk is the variation from an expected outcome over time

• Objective risk enables the measurement of three key variables:

• expected outcome

• variation

•time



Understanding the Nature of Risk• Risk can be illustrated as the dispersion from the expected outcome at some time. The red risk at time 1 is less risky (volatile) than the blue risk at time 3.

time

E(X)1

E(X)2

E(X)3

Expected values

P(x)



A Brief History of Risk Management

• Risk Management has been a viable discipline since the 1960s

• Earlier work was in insurance purchasing

• Insurance companies provided risk transfers capacity

and loss control engineering activities

• Risk management pioneers include Robert Hedges & George Head

• The centerpiece of their research was to develop

a risk management process

• Today’s emphasis is on Enterprise Risk Management



The Risk Management Process

• The risk management process focuses on the firm’s ability to recognize and correct dangerous occurrences that could lead to catastrophic losses

• Risk management is proactive – it is a pre-loss exercise, not only post-loss

• The scope of risk management activities are defined by the firm’s goals. The goals must be clearly understood before moving on.




Supplement

1. Develop a Risk Management Program

2. Risk Analysis

3. Solution Analysis

4. Decision Process

5. System Administration




Supplement

1. Develop a Risk Management Program

a. Plan – create and synchronize strategic, operational, and tactical goals

b. Organize – coordinate risk associates with the risk management department. Place the risk function within the organizational chart.

c. Write – articulate the organization’s risk philosophy (tolerance and appetite), and prepare a risk management standard operating procedures manual, update, and adjust.




Supplement

2. Risk Analysis

a. Identify – all possible risks—speculative and pure

b. Measure – using quantitative and qualitative analysis tools

c. Evaluate – create a portfolio of risks and consider interaction effects (correlations).




Supplement

3. Solution Analysis

a. Identify – all possible opportunities to modify the risks, including first risk control and then risk financing

b. Measure – using quantitative and qualitative analysis tools

c. Evaluate – the holistic impact of the portfolio of solutions




Supplement

4. Decision Process

a. Decision models – consider all possible models, including benchmarking, financial analysis, experience, ethics, and multi-attribute models

b. Support – leadership in gaining stakeholder buy-in and participation

c. Implement – allocate resources of people, time, and money; prepare budgets and time allocation charts; including managing and training employees




Supplement

5. System Administration

a. Monitor – use a modern Enterprise Risk Management Information System

b. Judge – evaluate the success of the solution portfolio using statistical quality control tools (such as six-sigma)

c. Communicate – prepare documents and reports to comply with stakeholder and regulatory demands



Steps in the Process

• Step 1. Identify risks

• Step 2. Quantify and analyze risks

• Step 3. Evaluate potential treatments

• Step 4. Implement selected treatments

• Step 5. Monitor the effectiveness and make adjustments




Step 1 - Risk Identification

• That which cannot be identified cannot be managed

• The two major sources of risk are: Assets and Operations

• Most asset risks are first party risks

•Most operations risks are third party risks

• Third party risks are generally represent the greatest threat

• Risks that must be financed or transferred are baseline risks




Step 2 – Quantitative Analysis

• Determine the maximum and expected loss for each risk

• The maximum should be the probable maximum loss (MPL)

• For third party risks, ask 2 questions:

1) How much of a loss can we withstand?

2) How much of a loss can we withstand and be financially viable?




Step 3 – Evaluating Risk Treatment Options

• Most risk management plans include a financing & control option

• Financing options are either on-balance sheet or off-balance sheet

• On-balance sheet financing options are called retention

• Off-balance sheet financing options are transfers, such as insurance

• Active loss retention is also called self-funding

• Passive loss retention is being uninsured




Step 3 – Evaluating Risk Treatment Options

• Controlling risk means controlling the variation, expected outcome, or timing of losses

• Financial transfers is not risk control – it only shifts the payment

• Risk control is the most important risk management activity

• Risk control can be either prevention and/or reduction

• Loss prevention decreases the probability of losses

• Loss reduction decreases the severity of losses




Step 4 – Implement

• To implement – first decide on the portfolio of treatment options

• Next, get support from all stakeholders

• Then, get sufficient resources allocated




Step 5 – Risk Administration

Monitoring and Adjusting

• Nothing is static – plan on continuous adjustments

• Continuous monitoring requires a structured approach

• Monitoring is done with a Risk Management Information System



Importance of Risk Management to the Organization

• Risk management is an essential part of overall management

• Simply transferring all risks is not a viable option (why not?)

• Excessive use of insurance is expensive and inefficient

• The primary duty of a risk manager is to design and execute a plan

• Risk management should be a part of an organization’s culture

• Risk management should be considered in every major decision

• Risk management balances sales with growth and stability

• Risk management must contribute a positive NPV – it is an investment

•Senior managers should view risk management as a long-term investment


Chapter 1Introduction to Traditional Risk ManagementThe Risk Management Policy Statement

• Goals and objectives must be clearly defined

• And communicated

• A risk management policy statement reflects the organization’s stated values relative to risk

• The risk management policy statement is a strategic issue

Supplement

• It should articulate its broad risk philosophy

• risk appetite

• risk tolerance



Traditional Risk Management versus Enterprise Risk Management

• Traditional risk management evolved from the insurance industry

Supplement

• ERM employs three distinct forms of risk management:

1) Strategic risks – the variation to long-term projects, or events that have long-term impacts

2) Operational risks – the variation to short-term projects ; also called business or hazard risk

3) Economic risks – the variation to financial conditions and to other macro-economic conditions

e.g., political or regulatory environments



Traditional Risk Management versus Enterprise Risk Management

• ERM has created the convergence of Securitization & Insuritization

• Securitization – A type of structured financing in which the firm separates its credit (sales) and debit (funding) activities

• e.g., Cash securitization – a bank pools its loans and sells portions (tranches) of the pooled asset

• Insuritization – A type of hedge in which the firm offers catastrophe bonds or Insurance derivatives to stabilize outcomes

• e.g., An insurance call option gives the insurer the right to buy reinsurance at a specified price



Chapter Summary

• Understanding the Nature of Risk

• Variation from the expected outcome over time

• A Brief History of Risk Management

• Insurance Loss control RM process ERM

• The Risk Management Process

• Proactive focus on goals and catastrophic events

• Steps in the Risk Management Process

• Identify risks Analyze Treatments Implement Monitor• Importance of Risk Management to the Organization

• Risk management contributes to shareholder value

• The Risk Management Policy Statement

• Defined, communicated, strategic risk management goals

• Traditional Risk Management vs. Enterprise Risk Management

• Hazard risks vs. Strategic+ Operational+Financial risks, managed with securitization and insuritization

Documents

Dr. James Kallman, ARM 1 - 1 Advanced PowerPoint Presentation ©2009 The National Underwriter Company