Principles of Risk Management and Insurance Chapter 3

Risk Management
A Process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.
Loss Exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
Pre-Loss Objectives
A: Firm should prepare for potential losses in the most economical way. B: Reduction of Anxiety. C: Is to meet any legal obligations.
Post-Loss Objectives
A: Survival of the Firm B: To continue Operating. C: Stability of Earnings. D: Continued Growth of the Firm. E: Social responsibility to minimize the effects that a loss will have on society.
Risk Management Process.
1: Identify Loss Exposures 2: Measure and Analyse the lost exposures. 3: Select appropriate techniques for treatment of loss exposures- A: Risk Control (Avoidance, Loss prevention, Loss Reduction) B: Risk Financing-provides funding for losses (Retention, Noninsurance transfers, commercial insurance) 4: Implementation and monitoring of risk management program.
Loss Frequency
Refers to the probable number of losses that may occur during some given time period.
Loss Severity
Probable size of the loss that may occur.
Retention Level
Dollar amount of losses that the firm will retain.
Captive Insurer
An insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures. (Rent A Center)
Single Parent Captive (pure captive)
Insurer owned by one parent such as a corporation.
Association or group captive
Owned by multiple parent captives
Non-insurance Transfers
Methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. (Via leases, contracts, and holdharmless agreements..)
Provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured.
Excess Insurance
A plan in which the insurer does not participate in the loss until the actual loss exceeds the amount the firm has decided to retain.
Risk management policy statement
Outlines a policy statement, outlines RM objectives of the firm, company policy with respect to treatment of loss exposures.
Risk management manual
Describes in some detail the RM program of the firm.
Costs of risk
A RM tool that measures certain costs. Costs include premiums paid, retained losses, outside RM services, financial guarantees, taxes, fees, and other expenses.
Personal Risk Management
Refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks. Same principles that apply to corporate risk management apply to personal risk management.

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