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The Risk Management Process Chapter 2

Risk Management Process
The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization. Mitigates Pure Risk events.
Cost of Risk
The total cost incurred by an organization because of the possibility of accidental loss. Example medical malpractice which is a liability pure risk. Also referred to as Economic Burden of Risk
Loss of Goodwill
A reputation loss, less customers therefore loss of revenue
Loss mitigation tools
safety and training programs that mitigates the loss. The core of Pure Risk Management
Techniques to finance the loss
buy insurance or alternative risk financing like budgeting for a loss.
Too risky
no one will insure you
Risk Manager
Functional area of a firm. Manages pure risk events that the organization faces and applies the risk management decision making process.
Managing risk
Proactive risk management adds value to a company by minimizing the cost of risk. Increases the bottom line to a company.
Crisis Management
Think about the worse peril and ask yourself if there is a plan in place to handle the risk.
Steps in the Risk Management Process
1. Identify loss exposures
2. Measure Probability and Severity
3. Identify possible Risk Management Strategies
4. Select Risk Management options
5. Implement Chosen option from step 4
6. Periodically Evaluate chosen Strategy
Identify Exposures to loss
Step 1 in the Risk Management Process. Most important step.
Measure Frequency and Severity
Step 2 in the Risk Management Process. Use historical data. Natural disasters are hard to predict; Rare.
Identify Possible Risk Management options/alternatives
Step 3, Risk control options; safety and training programs, rehabilitation programs. Risk Finance options like insurance or risk control options like avoidance or separation.
Select Risk Management Options
Step 4, select safety program, self insurance pool. A Risk managers appetite influences the decision rule. This is the Subjective Risk stage of the process. Attitude toward risk of the key decision maker. Example: should we buy insurance or self insure? Should we use separation of exposure units or should we only duplicate?
Implement Chosen Option
Step 5, implement the chosen option of step 4.
Periodically Evaluate Chosen Option
Conduct cost-benefit analysis. Does it remain appropriate?
Loss Exposure
possibility of a financial loss that a particular entity faces as a result of a particular Peril striking a particular thing of value thats exposed to the loss.
Loss Exposure Questions
1. what is the financial loss
2. who faces it
3. what is the Peril
4. what is the thing of value
Hold Harmless Agreement
a contract under which one party ( the indemnitor) agrees to assume the liability of a second party ( the indemnittee)
Pre-loss Goals
Goals to be accomplished before a loss, involving social responsibility, externally imposed goals, reduction of anxiety, and economy.
Post-Loss Goals
Risk Management Goals that should be in place in the event of a significant loss (such as: Survival, Continuity of ops, Profitability, Earnings Stability, Social Responsibility, Growth.)
Economy of Operations
Pre-Loss Goal, a risk management program should operate economically and efficiatly, the organization generally should not incur substantial costs in exchange for slight benefits
Social Responsibility
A pre-loss and post-loss goal for many organizations, includes acting ethically and fulfilling obligations to the community and society as a whole.
Resuming operations to some extent after an adverse event.
Continuity Of Operations
The goal of continuity of operations is more demanding. No loss can be allowed to interrupt the organization’s operations for any appreciable time.
3 Elements of a Loss Exposure
1. An asset exposed to loss
2. Cause of loss
3. Financial consequences of that loss
Goals of Risk Control
1. lower frequency of the loss
2. lower severity of the loss
3. improve the predictability of losses
4. lower variability in losses
5. lower Coefficient of Variation
Decision Rule
Attitude toward risk of the key decision maker
Methods of Exposure Identification
1. Financial Statement Approach
2. Surveys or Questionnaires
3. Physical Inspection
4. Ask Employees or managers
5. Look at past information
6. Contract Analysis
7. Flow Chart approach
This is step one in the Risk management process

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