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Topic 5. Risk Management and Risk Management Process

Topic 5. Risk Management and Risk Management Process

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Topic 5. Risk Management and Risk Management Process

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  1. Topic 5. Risk Management and Risk Management Process Bus 200 Introduction to Risk Management and Insurance Jin Park

  2. Overview • Risk Management • Risk Management process

  3. Risk Management • Risk management • A systematic process for managing (pure) risks faced by an individual or organization. • Pre-loss risk management • Should prepare for potential loss in the economical way possible • Post-loss risk management • Survival of the organization • Continuation of operation • Stability of earnings

  4. Risk Management Process • Identify risks or exposures to loss • Evaluate risks or exposures to loss • Identify and select risk management techniques • Implement and monitor

  5. Organization Property Liability Business income Death or disability of key persons Job-related injuries or disease Fraud, dishonesty, crime International operation Individual Property Liability Premature death or disability Unemployment Sickness Identify Risks

  6. Identify Risks • Physical inspection • Questionnaire • Financial statement analysis • Flowchart • Contract analysis • Statistical analysis of past losses • Risk management information system (RMIS)

  7. Evaluate Risks • Risk management matrix • Frequency • Severity High Frequency Low Low High Severity

  8. Identify and select RM techniques • Risk avoidance • Risk retention (Risk assumption) • Risk reduction (control) • Loss prevention – frequency • Loss reduction – severity • Risk transfer • Insurance • Non-insurance • Example: sprinkler system, hold-harmless agreement, ignorance, safety education, smoke alarm, deductible, warm-up, rent, fire drill, top salaries for key employees, good housekeeping

  9. Evaluate Risks • Risk mapping 50% Frequency 1% $1 Mil $1 Severity

  10. Identify and select RM techniques • Risk mapping • Risk Map • A graphical presentation of potential frequencies and severities of identified loss exposures faced by individual/organization • Critical issue tolerance boundary or risk-tolerance boundary • Prioritize risks

  11. Implement and Monitor • Are techniques implemented correct? • If not, …

  12. Advantages Uncertainty is reduced Insurers can provide. their expertise such as loss control services. Insurance premium is tax-deductible. Insurance proceeds are tax-free. Disadvantages Insurance premium may be a major cost. Moral and morale hazards may be created. Time and effort have to be spent. Insurance may not be renewed. Insurance

  13. Others • CAT bonds • Forward/Future • Swaps • Options • Securitizations • CDO, CMO