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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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-4
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-5
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-6
Chapter 1Introduction to Traditional Risk Management
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-7
Chapter 1Introduction to Traditional Risk Management
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)
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-8
Chapter 1Introduction to Traditional Risk Management
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-9
Chapter 1Introduction to Traditional 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.
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-10
Chapter 1Introduction to Traditional Risk Management
The Risk Management Process
Supplement
1. Develop a Risk Management Program
2. Risk Analysis
3. Solution Analysis
4. Decision Process
5. System Administration
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-11
Chapter 1Introduction to Traditional Risk Management
The Risk Management Process
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.
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-12
Chapter 1Introduction to Traditional Risk Management
The Risk Management Process
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).
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-13
Chapter 1Introduction to Traditional Risk Management
The Risk Management Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-14
Chapter 1Introduction to Traditional Risk Management
The Risk Management Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-15
Chapter 1Introduction to Traditional Risk Management
The Risk Management Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-16
Chapter 1Introduction to Traditional Risk Management
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-17
Chapter 1Introduction to Traditional Risk Management
Steps in the Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-18
Chapter 1Introduction to Traditional Risk Management
Steps in the Process
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?
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-19
Chapter 1Introduction to Traditional Risk Management
Steps in the Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-20
Chapter 1Introduction to Traditional Risk Management
Steps in the Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-21
Chapter 1Introduction to Traditional Risk Management
Steps in the Process
Step 4 – Implement
• To implement – first decide on the portfolio of treatment options
• Next, get support from all stakeholders
• Then, get sufficient resources allocated
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-22
Chapter 1Introduction to Traditional Risk Management
Steps in the Process
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-23
Chapter 1Introduction to Traditional Risk Management
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-24
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-25
Chapter 1Introduction to Traditional Risk Management
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-26
Chapter 1Introduction to Traditional Risk Management
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
©2009 The National Underwriter Company Dr. James Kallman, ARM 1-27
Chapter 1Introduction to Traditional Risk Management
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
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