Associate in risk management 54 exam review session april 16 2012 2 00 4 00pm
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Associate in Risk Management 54 Exam Review Session April 16, 2012 2:00 – 4:00PM. Presented by: Rich Berthelsen, Esq., MBA, CPCU, ARM Senior Director of Content for the Institutes 610-644-2100 ext. 7995 [email protected] nstitutes.org. Overview What to Expect. Exam experience

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Associate in Risk Management 54 Exam Review Session April 16, 2012 2:00 – 4:00PM

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Associate in risk management 54 exam review session april 16 2012 2 00 4 00pm

Associate in Risk Management 54 Exam Review SessionApril 16, 20122:00 – 4:00PM

Presented by: Rich Berthelsen, Esq., MBA, CPCU, ARM

Senior Director of Content for the Institutes

610-644-2100 ext. 7995

[email protected]


Overview what to expect

OverviewWhat to Expect

  • Exam experience

  • Top 25 most challenging parts

  • Disclaimer

  • Practice exam questions per chapter are available on-line


Challenging part 1 ch 1 earnings stability

Challenging Part 1 – Ch.1Earnings Stability

Post-Loss Goals:

Six possible post-loss goals include the following:

1. Survival

2. Continuity of operations

3. Profitability

4. Earnings stability

5. Social responsibility

6. Growth


Challenging part 1 ch 1 earnings stability1

Challenging Part 1 – Ch.1 Earnings Stability

Rather than strive for the highest possible level of profits (or surpluses, for not-for-profits) in a given period, some organizations emphasize earnings stability over time. Earnings stability requires precision in forecasting risk management costs, such as insurance or loss prevention.


Challenging part 2 ch 1 internal structure

Challenging Part 2 – Ch.1Internal Structure

Risk Management Department Structure

The head of the risk management department should assess the organization’s operations and the capabilities of the existing risk management staff to determine the proper internal structure that is needed.


Challenging part 2 ch 1 internal structure1

Challenging Part 2 – Ch.1 Internal Structure

In small risk management departments, there may be only one person. The rate at which staff are added depends on the organization’s operations and its management’s attitudes about risk management’s role in the organization. Some organizations pride themselves on having minimal corporate staffing to serve decentralized branches or departments. Others prefer a large staff, centralized to perform many tasks for each branch or department. For a small risk management department, additions to personnel often begin with a safety and loss prevention manager and a claim manager.


Challenging part 2 ch 1 internal structure2

Challenging Part 2 – Ch.1 Internal Structure

In medium-sized risk management departments, more assistance is required when:

  • insurance is used to finance risk

  • more complex aspects of safety and loss prevention emerge

  • volume of claims increase


Challenging part 2 ch 1 internal structure3

Challenging Part 2 – Ch.1 Internal Structure

In large risk management departments, the director becomes less involved in implementing the technical aspects of risk management and more involved in managerial functions. The large department may also contain several positions in safety/loss prevention, health, and specialized claim personnel—some specializing in property claims, others in liability claims, and some in employee benefits. High frequency of particular types of retained losses, such as workers’ compensation claims or products liability claims, increases the need for specifically trained claim personnel.


Challenging part 3 ch 2 financial statements and underlying accounting records

Challenging Part 3 – Ch.2Financial Statements and Underlying Accounting Records

Methods of Identifying Loss Exposures

• Risk assessment questionnaires

• Loss histories

• Financial statements and underlying accounting records

• Other records and documents

• Flowcharts and organizational charts

• Personal inspections

• Expertise within and beyond the organization


Challenging part 3 ch 2 financial statements and underlying accounting records1

Challenging Part 3 – Ch.2 Financial Statements and Underlying Accounting Records

Financial statements include:

  • A balance sheet is a statement of an organization’s financial condition as of a particular date.

  • An income statement (also called a profit and loss statement) is a financial report that shows the profit or loss for a specific period.

  • A statement of cash flows (also called the statement of changes in financial position or the statement of sources and uses of funds) is a financial statement that shows an organization’s cash receipts and cash payments during a specified period.


Challenging part 4 ch 2 separation duplication and diversification

Challenging Part 4 – Ch.2Separation, Duplication, and Diversification

Risk Control Techniques

Risk control is a conscious act or decision not to act that reduces the frequency and severity of losses or makes losses more predictable. Risk control techniques include the following:

• Avoidance

• Loss prevention

• Loss reduction

• Separation, duplication, and diversification


Challenging part 4 ch 2 separation duplication and diversification1

Challenging Part 4 – Ch.2 Separation, Duplication, and Diversification

Separation is a risk control technique that disperses a particular asset or activity over several locations and regularly relies on that asset or activity as a part of the organization’s working resources.

Duplication is a risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve.

Diversification is a risk control technique that spreads loss exposures over numerous projects, products, markets, or regions.


Challenging part 5 ch 3 economic value

Challenging Part 5 – Ch.3Economic Value

Methods of Valuing Property

After indentifying the property exposed to loss, its value needs to be determined using one of these approaches:

• Historical cost

• Tax-appraised value

• Book value

• Replacement cost

• Reproduction cost

• Functional replacement cost

• Market value

• Actual cash value

• Economic value


Challenging part 5 ch 3 economic value1

Challenging Part 5 – Ch.3 Economic Value

Economic value is the amount that property is worth based on the ability of the property to produce income. Unlike other valuation methods, economic value is not affected by the cost of the property or the expense that would be incurred to repair or replace it.


Challenging part 6 ch 3 bailee s interest

Challenging Part 6 – Ch.3Bailee’s Interest

Legal Interests in Property

Can be categorized as:

• Ownership interest

• Secured creditor’s interest

• Seller’s and buyer’s interest

• Bailee’s interest

• Landlord’s interest

• Tenant’s interest


Challenging part 6 ch 3 bailee s interest1

Challenging Part 6 – Ch.3Bailee’s Interest

A bailee is a person or entity who receives property from another (the bailor) under a bailment contract.

A bailment contract requires the bailee to keep the property in safekeeping for a specific purpose and then to return the property to the bailor when the purpose has been fulfilled. Bailments frequently arise in business transactions involving repair, storage, or transport of personal property.


Challenging part 7 ch 4 elements of negligence

Challenging Part 7 – Ch.4Elements of Negligence

Legal Liability Based on Torts

A tort is a wrongful act or omission, other than a crime or breach of contract, for which the remedy is money.

Torts can be classified into three types: (1) negligence, (2) intentional torts, and (3) strict liability torts.

Negligence is the failure to exercise the degree of care that a reasonably prudent person would have exercised under similar circumstances to avoid harming another.


Challenging part 7 ch 4 elements of negligence1

Challenging Part 7 – Ch.4 Elements of Negligence

A plaintiff must prove all four elements of negligence:

1. The defendant owed a legal duty of care to the plaintiff.

2. The defendant breached the legal duty of care owed to the

plaintiff.

3. The defendant’s breach of duty was the proximate cause of

the plaintiff’s injury or damage.

4. The plaintiff suffered actual injury or damage.


Challenging part 8 ch 5 legal duty owed

Challenging Part 8 – Ch.5Legal Duty Owed

Basis for Premises and Operations Liability

The basis for this liability usually stems from negligence. Property owners and occupiers (renters) have a legal duty owed to other persons on the premises.


Challenging part 8 ch 5 legal duty owed1

Challenging Part 8– Ch.5 Legal Duty Owed

The degree of care a property owner or occupier owes to others depends on their reason for being on the property. Individuals who enter onto the property of others fall into one of three categories:

1. Business invitees

2. Licensees

3. Trespassers


Challenging part 8 ch 5 legal duty owed2

Challenging Part 8 – Ch.5 Legal Duty Owed

A business invitee is an individual who has permission to be on the property of another for the purpose of doing business.

Business invitees are owed the highest degree of care. It is not sufficient simply to warn the invitee of unsafe conditions. The law requires a reasonable effort to discover and correct hazardous conditions before they cause injury. Discovery of a hazardous condition can be by actual or constructive notice.


Challenging part 8 ch 5 legal duty owed3

Challenging Part 8 – Ch.5 Legal Duty Owed

A licenseeis an individual who has permission to go onto the property of another for his or her own purposes. Although licensees have permission to be on the property they do not necessarily have a specific invitation.

Licensees generally must accept the condition of the property as it exists, and are owed a degree of ordinary care, such as warnings of known dangers.


Challenging part 8 ch 5 legal duty owed4

Challenging Part 8 – Ch.5 Legal Duty Owed

A trespasseris an individual who intentionally goes onto the property of another without permission or any legal right to do so.

The only duties owed to trespassers are to not intentionally harm them. Generally, a trespasser assumes the risks inherent in entering the land, except:

• When young children are lured onto the land by an

attractive nuisance

• When the land possessor knows and tolerates trespassers


Challenging part 9 ch 5 breach of warranty

Challenging Part 9 – Ch.5Breach of Warranty

Products Liability Loss Exposures

Arise out of injuries or damage that result from a defective product. The liability loss exposures faced by product manufacturers, distributors, and sellers arise from the following three sources:

1. Breach of warranty

2. Negligence

3. Strict liability in tort


Challenging part 9 ch 5 legal duty owed

Challenging Part 9 – Ch.5 Legal Duty Owed

Breach of warranty - The failure to adhere to an express or implied warranty regarding the title, quality, content, or condition of the goods sold.

Implied warranty - An obligation that the courts impose on a seller to warrant certain facts about a product even though not expressly stated by the seller.

Implied warranty of merchantability - An implied warranty that a product is fit for the ordinary purpose for which it is used.


Challenging part 9 ch 5 legal duty owed1

Challenging Part 9 – Ch.5 Legal Duty Owed

Implied warranty of fitness for purpose - An implied warranty that a product is fit for a particular purpose; applies if the seller knows about the buyer’s purpose for the product.

Express warranty - A statement or representation about a product’s quality or suitability for its intended use.


Challenging part 10 ch 6 persons and employments covered

Challenging Part 10 – Ch.6Persons and Employments Covered

Employers’ Liability Under Statutes

The following features in the U.S. workers’ compensation laws affect the scope of workers’ compensation loss exposures:

• Choice of law

•·Persons and employments covered

• Injuries and diseases covered

• Benefits provided

• Procedures for obtaining benefits


Challenging part 10 ch 6 persons and employments covered1

Challenging Part 10 – Ch.6Persons and Employments Covered

As a general rule, an employer’s legal obligations for occupational injury or disease extend to employees only, not to independent contractors.


Challenging part 10 ch 6 persons and employments covered2

Challenging Part 10 – Ch.6Persons and Employments Covered

  • An employee is one the employer fixes the hours of employment, provides the tools to do the work, and supervises the results of the work, as well as the methods and means of doing the work.

  • An independent contractor is one the employer does not typically fix the hours of employment and may provide the tools to do the work. The employer defines the results of the work but does not supervise the methods and means of doing the work.


Challenging part 10 ch 6 persons and employments covered3

Challenging Part 10 – Ch.6Persons and Employments Covered

Exception to the general rule is a statutory employee which is an independent contractor’s employee who, because the independent contractor has not maintained workers’ compensation insurance, is considered to be an employee of the principal employing the independent contractor.


Challenging part 11 ch 6 statute

Challenging Part 11 – Ch.6Statute

Environmental Liability Causes of Loss

An organization can incur environmental liability under tort, contract, or statute.


Challenging part 11 ch 6 statute1

Challenging Part 11 – Ch.6 Statute

The majority of environmental statutes regulate materials that are reactive, corrosive, toxic, or flammable. These statutes contain provisions that can lead to injunctions, fines, and other penalties for noncompliance, such as revocation of permits and criminal prosecution of corporate officers.


Challenging part 11 ch 6 statute2

Challenging Part 11 – Ch.6 Statute

Continued on next 2 slides


Challenging part 11 ch 6 statute3

Challenging Part 11 – Ch.6 Statute

Continued on next slide


Challenging part 11 ch 6 statute4

Challenging Part 11 – Ch.6 Statute


Challenging part 12 ch 7 duty of care

Challenging Part 12 – Ch.7 Duty of Care

Directors and officers have the duty of care (also called the duty of diligence) in the performance of their corporate functions. A definition of “duty of care” is that directors must discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.


Challenging part 12 ch 7 duty of care1

Challenging Part 12 – Ch.7 Duty of Care

Business judgment rule is a legal rule that provides that a director will not be personally liable for a decision involving business judgment, provided the director made an informed decision and acted in good faith.


Challenging part 13 ch 7 duties and liabilities of employee benefit plan fiduciaries

Challenging Part 13 – Ch.7Duties and Liabilities of Employee Benefit Plan Fiduciaries

Employee Retirement Income Security Act of 1974 (ERISA)

The federal law that governs retirement and other benefit plans. It was enacted in response to abuses and underfunding in many benefit plans.


Challenging part 13 ch 7 duties and liabilities of employee benefit plan fiduciaries1

Challenging Part 13 – Ch.7 Duties and Liabilities of Employee Benefit Plan Fiduciaries

  • Care. ERISA specifies that a fiduciary must act with the care, diligence, and skill that would be exercised by a reasonably prudent person in the same or similar circumstances.

  • Loyalty. A fiduciary must act in the best interests of the plan and all of its participants and beneficiaries.

  • Diversification. A fiduciary must ensure that the plan’s investments are sufficiently diversified to minimize the risk of large losses.

  • Obedience. A fiduciary must act according to the plan documents and applicable law.


Challenging part 14 ch 8 value maximization and social responsibility

Challenging Part 14 – Ch.8Value Maximization and Social Responsibility

Role of Corporate Governance

Shareholders of for-profit corporations generally want managers to make risk management and other decisions that maximize the value of their shares, which in turn generally requires maximizationof the corporation’s total economic value.


Challenging part 14 ch 8 value maximization and social responsibility1

Challenging Part 14 – Ch.8Value Maximization and Social Responsibility

Role of Corporate Governance

In part because of corporate scandals, increased media and regulatory attention has focused on whether the goal of maximizing a corporation’s economic value (value maximization) appropriately serves the overall interests of society.


Challenging part 15 ch 8 corporate financial reporting

Challenging Part 15 – Ch.8Corporate Financial Reporting

Key Issues in Corporate Governance

Five corporate governance issues that affect long-term economic value creation:

1. Pressures from shareholder expectations and behavior

2. Executive incentives and compensation

3. Accountability of directors

4. Corporate financial reporting

5. Importance of integrity


Challenging part 15 ch 8 corporate financial reporting1

Challenging Part 15 – Ch.8Corporate Financial Reporting

Corporate Financial Reporting is concerned with the extent external (independent?) auditors of corporate financial reports accommodated deceptive reporting practices in recent corporate scandals.

Also, is the U.S. rules-based accounting system preferable to principles-based systems practiced in the United Kingdom?


Challenging part 16 ch 9 trends affecting personnel loss exposures

Challenging Part 16 – Ch.9Trends Affecting Personnel Loss Exposures

Forecasting personnel losses requires attention to demographic trends that affect employee morbidity, mortality, retirement, or employee separations. One of the most significant demographic trends in the U.S. is the aging of the population, particularly the baby boomers.


Challenging part 16 ch 9 trends affecting personnel loss exposures1

Challenging Part 16 – Ch.9 Trends Affecting Personnel Loss Exposures

Continued on next slide


Challenging part 16 ch 9 trends affecting personnel loss exposures2

Challenging Part 16 – Ch.9 Trends Affecting Personnel Loss Exposures


Challenging part 17 ch 10 financial consequences of business interruption

Challenging Part 17 – Ch.10Financial Consequences of Business Interruption

To assess the financial consequences of a net income loss from a business interruption, a risk management professional should consider the following factors that affect the severity of a net income loss:

1. Length of business interruption

2. Degree of business interruption

3. Changes in revenues

4. Changes in expenses

5. Restoration to normal income


Challenging part 18 ch 10 methods of assessing net income loss exposures

Challenging Part 18 – Ch.10Methods of Assessing Net Income Loss Exposures

The methods for assessing any loss exposure (see Slide 9) are also useful in assessing an organization’s net income loss exposures. The methods are as follows:

1. Risk assessment questionnaires

2. Loss histories

3. Financial statements and underlying accounting records

4. Other records and documents

5. Flowcharts and organizational charts

6. Personal inspections

7. Expertise within and beyond the organization


Challenging part 19 ch 11 trend analysis

Challenging Part 19 – Ch.11Trend Analysis

Trend Analysis identifies patterns in past losses and then projects these patterns into the future. The two most common types of trend analysis are time trends and regression analysis.


Challenging part 20 ch 11 regression analysis

Challenging Part 20 – Ch.11Regression Analysis

  • Regression analysis definition: “A statistical technique used to estimate relationships between variables”

  • Why calculate it? To find the equation for the line that best fits the data points and to project this line to forecast the number of future losses.

  • How to calculate it? y = a + bx


Challenging part 20 ch 11 regression analysis1

Challenging Part 20 – Ch.11Regression Analysis

The equation for regression analysis is y = a + bx

y = the dependant variable, which is the variable being forecast (losses).

x = the independent variable, which is the variable that determines the value of the variable being forecast (years)

a = the y intercept

b = the slope


Challenging part 20 ch 11 regression analysis2

Challenging Part 20 – Ch.11Regression Analysis

Continued on next slide


Challenging part 20 ch 11 regression analysis3

Challenging Part 20 – Ch.11Regression Analysis


Challenging part 20 ch 11 regression analysis4

Challenging Part 20 – Ch.11Regression Analysis


Challenging part 21 ch 12 alternative probabilities

Challenging Part 21 – Ch.12Alternative Probabilities

An alternative probability is the probability that any one of two or more events will occur within a given period.

The formula for calculating alternative probabilities is determined by whether the events involved are mutually exclusive or non-mutually exclusive.


Challenging part 22 ch 12 mutually exclusive events

Challenging Part 22 – Ch.12Mutually Exclusive Events

For mutually exclusive events, the probability that any one of them will occur is the sum of their separate probabilities:

p(A or B) = p(A) + p(B).

For example, the probability of rolling either a three or a five on one roll of one die is:

p(3 or 5) = 1/6 + 1/6 = 2/6 (or 1/3).


Challenging part 23 ch 12 non mutually exclusive events

Challenging Part 23 – Ch.12Non-Mutually Exclusive Events

When two events can occur at the same time, they are not mutually exclusive. The probability that at least one, and possibly both of them, will occur is the sum of their separate probabilities minus the joint probability that they will both occur, this can be expressed as:

p(A or B or both) = p(A) + p(B) – p(A and B).


Challenging part 23 ch 12 non mutually exclusive events1

Challenging Part 23 – Ch.12Non-Mutually Exclusive Events

For example, the probability of drawing a five from a deck of cards is 1/13, the probability of drawing a club is 1/4, and the probability of drawing the five of clubs is 1/52. Therefore, the probability of drawing a five or a club is calculated as:

p(five or club) = p(five) + p(club) – p(five and club)

= 1/13 + 1/4 – 1/52

= 4/52 + 13/52 – 1/52

= 16/52

= 4/13.


Challenging part 24 ch 13 net present value npv method

Challenging Part 24 – Ch.13Net Present Value (NPV) Method

  • Net present value definition: “The present value of all

    future net cash flows (including salvage value) discounted

    at the cost of capital, minus the cost of the initial

    investment, also discounted at the cost of capital.”

    Or stated another way:

    NPV = PV (sum of future net cash flows) – (initial

    investment)

  • Why calculate it? Ranking capital investment proposals

  • How to calculate it? See remaining slides for this

    challenging part.


Challenging part 24 ch 13 net present value npv method1

Challenging Part 24 – Ch.13Net Present Value (NPV) Method

Find the:

  • Amount of initial investment

  • Useful life of asset invested in

  • Differential annual after-tax cash flow

  • Minimum acceptable rate of return

  • Salvage value

    Continued on next slide


Challenging part 24 ch 13 net present value npv method2

Challenging Part 24 – Ch.13Net Present Value (NPV) Method

6. Present value of all differential cash in flows:

- if equal inflows each year use the PVF in Appendix B,

p.13.34

- if unequal inflows each year use a different PVF per year

in Appendix A, p. 13.32

7. Subtract the initial investment from the present value of all differential inflows (is the result positive or negative?)


Challenging part 24 ch 13 net present value npv method3

Challenging Part 24 – Ch.13Net Present Value (NPV) Method

Continued on next slide


Challenging part 24 ch 13 net present value npv method4

Challenging Part 24 – Ch.13Net Present Value (NPV) Method


Challenging part 25 ch 14 considering uncertainty in cash flow analysis

Challenging Part 25 – Ch.14Considering Uncertainty in Cash Flow Analysis

  • What happens if the risk management professional must account for costs that cannot be measured with much precision but are expected to reduce future cash flow? You have the cost of uncertainty

  • Why calculate it? To give management a more complete estimate of a proposal's cost.


Challenging part 25 ch 14 considering uncertainty in cash flow analysis1

Challenging Part 25 – Ch.14Considering Uncertainty in Cash Flow Analysis

  • How to calculate it?

    1. Assign a subjective estimate of the cost of uncertainty to each risk management technique

    2. Deduct the assigned cost of uncertainty from the after-tax net cash flow

    3. Calculate the NPV and the IRR using the net cash flow adjusted for the assigned costs of uncertainty


Challenging part 25 ch 14 considering uncertainty in cash flow analysis2

Challenging Part 25 – Ch.14Considering Uncertainty in Cash Flow Analysis

Continued on next 2 slides


Challenging part 25 ch 14 considering uncertainty in cash flow analysis3

Challenging Part 25 – Ch.14Considering Uncertainty in Cash Flow Analysis

Continued on next slide


Challenging part 25 ch 14 considering uncertainty in cash flow analysis4

Challenging Part 25 – Ch.14Considering Uncertainty in Cash Flow Analysis


Wrap up questions

Wrap UpQuestions?

  • Ask me now before you leave or

  • Call 610-644-2100 ext.7995 or

  • Email [email protected]


Associate in risk management 54 exam review session april 16 2012 2 00 4 00pm

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