Risk Management and Auditing Essentials

Risk-Based Auditing

• Prioritizes use of limited internal audit resources in areas posing greatest risk to the organization
• Emphasizes auditing to business objectives, focusing on materiality of risk, and identifying threats to business goals.

Risk Management and Organizational Alignment

• Provides insurance and risk management solutions to control or contain losses and satisfy customers.
• Common objectives include balancing risk and reward, supporting decision-making, achieving goals such as tolerable uncertainty, legal and regulatory compliance, survival, business continuity, earnings stability, profitability, growth, and social responsibility

Underwriting

• Helps insurers develop and maintain a profitable book of business by minimizing adverse selection, ensuring adequate policyholder's surplus, and enforcing underwriting guidelines
• Underwriters select insureds, classify accounts, price accounts, recommend coverage, manage a book of business, support producers, insureds and support marketing objectives

Staff Underwriters

• Research the market, formulate underwriting policies, revise underwriting guidelines, evaluate loss experience, develop coverage forms, review rates, arrange reinsurance, assist with complex accounts, and conduct underwriting audits.

Underwriting Policy

• Provides a guide to individual and aggregate policy selection that supports an insurer's mission statement

Essential Knowledge for Underwriters

• Successful underwriters possess knowledge of insurance principles, practices, loss exposures and pricing, insurance rates, loss analysis and internal/external information sources

Rating

• (Information omitted, page contains only rating header)

Rating (Page 2)

• Involves applying an applicable rate and rating plan to an exposure, and performing necessary calculations to determine the policy premium.

Moral Hazard (Page 2)

• A condition increasing the likelihood of intentional loss or exaggeration

Property Application (Page 2)

• Underwriters examine crucial information, including loss history, COPE elements and property values.

Supplemental Information (Page 2)

• Information like risk management programs, financial statements, risk control reports, and property valuation guides further assesses a property account's quality.

COPE and Loss Run (Page 2)

• COPE elements include construction, occupancy, protection, and external exposures, analyzed by commercial property underwriters
• Loss run: a report detailing an insured's claims history over a specific period

Morale Hazard (Page 2)

• A condition of carelessness or indifference increasing the frequency or severity of loss

Fire Protection and Division (Page 2)

• Underwriters analyze loss exposures posed by immediate neighboring properties or the surrounding area.
• A fire division is a section of a structure protected to prevent fire spread to another section.

Public and Private Fire Protection (Page 2)

• Public fire protection: equipment and services available from the government.
• Private fire protection: measures taken by property owners to protect their assets.

Residential and Occupational Loss Exposures (Page 3)

• Underwriters evaluate residential losses considering guest hazards.
• Personal insurance applications contain questions about occupation or employment to determine potential loss frequency and severity.

Rating Plan (Page 3)

• A set of directions specifying criteria for determining premiums for a particular line of insurance, based on exposure base, exposure unit, and rate per exposure unit.

Combined Ratio (Page 3)

• A ratio of less than 100 indicates underwriting profit.
• A ratio of more than 100 indicates underwriting loss.

Nonfinancial Measures (Page 3)

• Used to monitor underwriting results including selection, pricing, product /line of business mix, retention ratio, hit ratio, and customer service.

Retention Ratio (Page 3)

• The percentage of expiring policies an insurer renews.
• Higher retention rates indicate profitability due to existing relationships.

Hit Ratio (Page 3)

• Compares policies written with applications quoted to evaluate underwriter performance in meeting sales goals.

Physical Controls (Page 3)

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Technical Controls (Page 4)

• Logical controls in the computing environment, e.g. operating systems, application programs, database frameworks, and firewalls

Directive Control (Page 4)

• Specifies expected employee behavior, often in the form of policies and guidelines, e.g., acceptable use policy.

Deterrent Control (Page 4)

• Discourages individuals from violating policies due to the effort to circumvent them and the associated consequences, e.g., CCTV monitoring

Preventative Control (Page 4)

• Stops a security incident, e.g., background screenings

Compensating Control (Page 4)

• Implemented when the system can't provide all required policy protection; to reduce risk down to an acceptable level, e.g., an agreed exceptional process.

Detective Control (Page 4)

• Alerts security professionals to attempted security violations

Corrective Control (Page 4)

• Responds to security violations to reduce or eliminate impact, e.g., escorting unauthorized persons offsite

Hazard (Page 4)

• A condition or activity with potential harm

Risk (Page 4)

• Probability of injury, loss, or hazard

Incident (Page 4)

(Information omitted, Page contains only incident header)

Risk Response Strategies (Page 5)

• Avoidance, Transfer, Retention, and Reduction

ALARA and ALARP (Page 5)

• As Low As Reasonably Achievable
• As Low As Reasonably Practical

Loss Control Measures (Page 5)

• Examples include Hazcom training, machine guards, and confined space programs

Domino Theory (Page 5)

• All accidents caused by a chain of events, removing any chain prevents accident.

Petersen's Accident/Incident Theory (Page 5)

• Accident/incident causes due to human error and/or system failure.

Risk Analysis vs. Risk Management (Page 5)

• Risk Analysis: estimates risk scientifically
• Risk Management: determines whether risk is acceptable and establishes strategies for reduction.

Hazard Analysis Categories (Page 5)

• Three categories (omitted, page contains header only)

Environmental Issues (Page 6)

• Issues causing stress, hazards and failures.

Primary Methods for Reducing Accidents (Page 6)

• Prevention (loss control)
• Financial (cost reduction)

Objectives of Risk Management (Page 6)

• Reducing anxiety before a loss.
• Meeting corporate responsibility.
• Continued growth after loss.

Poka-Yoke (Page 6)

• Lean manufacturing technique preventing or detecting errors.
• Mistake-proofing methods to ensure fail-safe systems minimizing human error.

Kaizen (Page 6)

• Japanese term for continuous improvement.
• 5-S an effective housekeeping technique: Sort, Straighten, Scrub, Standardize.

Risk Management Techniques (Page 6)

• Risk control: measures preventing or reducing losses
• Risk financing: insurance to help pay for losses.

Risk Management (Page 6)

• Feasibility assessment (omitted, page contains only risk management header)

Financial Considerations (Page 7)

• Forecasted losses, insurance types, deductibles

Non-Financial Considerations (Page 7)

• Business operations, customer and employee safety, and reputation

Risk Management Techniques Techniques (Page 7)

• Risk financing methods implemented by risk management professionals
• Risk control methods implemented by operations managers, requiring communication and training

Insurance (Page 7)

• Rating plan: criteria for exposure base, exposure unit, and rate per exposure unit to determine premiums
• Combined ratio: ratio of less than 100 indicates underwriting profit; ratio more than 100 indicates no underwriting profit
• Non-financial measures to monitor underwriting results: selection, product/line of business mix, pricing, retention ratio, hit ratio, and customer service

Retention Ratio (Page 7)

• Percentage of expiring policies an insurer renews

Underwriting (Page 7)

• Details percentage of renewal policies compared to new business
• Underwriting elements: limits of liability, deductibles, underlying insurance, loss severity

Reinsurance (Page 7)

• Transferring risk to another insurer through contract
• Facultative reinsurance: primary insurer submits loss exposures for individual review and acceptance by reinsurer.

Underwriting Guidelines (Page 7)

• Written manual guiding policy decisions, specifying attributes of insurable accounts.

Qualitative and Quantitative Risk Assessment (Page 7)

• Qualitative uses non-numeric values to estimate risk
• Quantitative uses numerical data from historical events or instances of risk.
• Including methods like Delphi Methods, Facilitated Risk Analysis Process (FRAP), and Operationally Critical Threat, Asset and Vulnerability Evaluation (OCTAVE)

(Remaining notes are too long to extract as bullet points and are best read as a whole, as many depend on preceding ones)

This quiz covers the fundamentals of risk-based auditing, risk management, and underwriting. It emphasizes the importance of prioritizing audit resources based on risk and aligning organizational objectives with risk management strategies. Test your knowledge on key principles and practices that ensure effective risk control and business continuity.