CPCU 500 Foundations of Risk Management and Insurance Chapter 1 Introduction to Risk Management Presented by Cathy Jo Morris, CPCU, FLMI, ACS Educational Objectives (EO) 1. Describe each of the following in the context of risk: Uncertainty Possibility Possibility compared with probability 2. Explain how the following classifications of risk apply and how they help in risk management: Pure and speculative risk Subjective and objective risk Diversifiable and nondiversifiable risk Quadrants of risk (hazard, operational, financial, and strategic) 1
Educational Objectives (EO) 3. Describe the three financial consequences of risk. 4. Describe the basic purpose and scope of risk management in terms of the following: How risk management is practiced by individuals and organizations The basic distinction between traditional risk management and enterprise-wide risk management 5. Describe the following elements for property, liability, personnel, and net income loss exposures: Assets exposed to loss Causes of loss, including associated hazards Financial consequences of loss Educational Objectives (EO) 6. Describe the benefits of risk management and how it reduces the financial consequences of risk for individuals, organizations, and society. 7. Summarize pre-loss and post-loss risk management program goals and the conflicts that can arise as they are implemented. 8. Describe each of the steps in the risk management process. 2
EO#1 Describe the Components of Risk What are the two elements of risk? Uncertainty of Outcome Possibility of a Negative Outcome EO#1 Just because it can happen, doesn t mean it will Possibility (May occur / Verifies Risk Exists) vs Probability (Measurable 0 1; decimal, percentage, fraction) 3
EO#2 Definitions You Need to Know Pure Price Subjective Diversifiable Market Definitions: Speculative Credit Objective Non Diversifiable (Systemic) Liquidity Quadrants of Risk: Hazard Operational Financial Strategic EO#2 Let s Review What are the quadrants of risk? Why do subjective and objective risk differ? Classify as: pure/speculative, subjective/objective, diversifiable/systemic: Damage to a building from a hurricane Reduction in value of retirement Products liability claim against a manufacturer 4
EO#3 Financial Consequences of Risk Three components: Expected Cost of Losses or Gains Cost of Risk Management Cost of Residual Uncertainty EO#4 Which brings us to Risk Management Decisions to minimize risk to the organization A plan to assess, control and finance risk Traditional vs Enterprise 5
Let s take 10 minutes EO#5 We re back to Definitions Memorize the following Elements of a loss exposure: An asset exposed to loss Cause of loss (perils) Financial consequences Types of loss exposure: Property Liability Personnel Net Income 6
EO#5 Assets Tangible property Real property Personal property Intangible property Patents, copyrights, trademarks Unique skill set EO#5 Causes of Loss Perils (cause of loss) Lightning, hail Tornadoes, winds Water Theft Snow or ice Fire Moral vs Morale Hazards Physical vs Legal Hazards 7
EO#5 Financial Consequences Loss of the value of the property Loss of net income Loss of people Other losses: Goodwill Reputation failure to perform Missed opportunity EO#6 Benefits of Risk Management Group Individuals Lower Losses Less Uncertainty Example? Save money for other uses Organizations Save $for other uses Increase attractiveness of business for investors Society Saves$ for other uses Less anxiety Improves the ability to engage in business activities by minimizing risk. Increased productivity 8
EO#7 Pre & Post Loss Goals Pre-Loss Goals: Economy of operations Tolerable uncertainty Legality Social responsibility Sometimes pre and post goals conflict Post-Loss Goals Survival Continuity of operations Profitability Earnings stability Social responsibility Growth EO#8 Steps in Risk Management 1. Identifying loss exposures 2. Analyzing loss exposures 3. Examining feasibility of risk management techniques 4. Selecting appropriate technique 5. Implementing selected technique 6. Monitoring results 9
Manage your own risks as well as you would like others to manage theirs. Doing so would make the world, including our corner of it, a far better place. Dr. George Head 10