Chapter 6 Risk Identification PDF

CHAPTER 6 RISK IDENTIFICATION Enterprise Risk Management  Ultimate Objective of ERM is to handle risks that is harmonious with the strategic plan.  Making pre-loss arrangements for post-loss resources.  Need for loss identification and risk identification.  Employment  The staff varies bas...

CHAPTER 6 RISK IDENTIFICATION Enterprise Risk Management  Ultimate Objective of ERM is to handle risks that is harmonious with the strategic plan.  Making pre-loss arrangements for post-loss resources.  Need for loss identification and risk identification.  Employment  The staff varies based on size and responsibility.  All firms and people engage in risk management.  Career opportunities internally to firms and externally, like consultants and brokers.  Occupation is professionally recognized – RIMS – Risk and Insurance Management Society.  Useful Methods  Identify & Measure (evaluate).  Choose most efficient tool(s) for Control.  Implement and review. Step 1 - Identify  How to identify  What to identify: Balance sheet External/Internal Income statement Pure/ Speculative Other records Direct losses Checklists Indirect losses Flow charts Key personnel Questionnaires Operations  Measure (evaluation)  Maximum possible loss  The absolute maximum dollar amount of damage  Maximum probable loss  A conservative estimate of what is likely to occur in a worst case loss  Relative Frequency  An estimate (numerical or verbal) as to the number of times the loss will occur  Property Risks  Tangible Property: Real Property. Business Property.  Intangible Property: Patents. Human Capital. R&D. Reputation. Brand Awareness.  Property Risks  Damage to the Property of Others: Supply chains are interconnected.  through Joint-Ventures or in joint R&D. Disruption or outright failure can occur at a firm. Will affect other firm(s) in supply chain. Valuing Property  Replacement value versus book value versus actual cash value versus market value.  Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company.  Market value is the company's worth based on the total value of its outstanding shares in the market, which is its market capitalization. Valuing Property (cont.)  Market value tends to be greater than a company's book value since market value captures profitability, intangibles, and future growth prospects.  Replacement value is the amount of money that could be obtained by replacing the existing asset at the current market price with an equivalent asset in a similar condition and kind.  International operations and exchange rate problems.  The impact of inflation on values.  Liability Legal Grounds  The (English Common Law) American legal system is based on the notion that a person should be responsible for the damage caused to others Liability Risks  Examples of loss sources: Breach of contract Bodily injury or personal injury Intentional damage to reputation Wrongful hiring, firing, sexual harassment, invasion of privacy, age discrimination Vicarious liability (Employers can be held liable for the unlawful actions of employees) Products, environmental, workers’ compensation 12 Torts (offences)- An Insurance Categorization  Deliberate or Intentional Interference  Assault, battery, liable, false arrest  Can result in civil as well as criminal actions  Liability Without Fault (Strict and Absolute Liability)  Laws or court precedent mandate liability in some circumstances: explosives, dangerous animals  Worker’s compensation, pure no-fault  workers on the no-fault compensation program will receive benefits that are due to them speedily. There will be no lengthy lawsuits or fights over who is to blame for any accidents that led to a worker injury.  Torts - An Insurance Categorization  Negligence  Failing to use reasonable care according to a “reasonable man” standard  A reasonable person thinks before speaking or acting, and is honest and moderate in all activities  Question of fact  Other parties can be held liable ◼ Vicarious liability ◼ Joint-and-several liability Establishing Negligence  Plaintiff must show:  Legal duty  Failure of the duty  Injury  Causal connection between the injury and the failure  Jury must weigh the facts based upon “the preponderance of evidence” not “beyond all or reasonable doubt” Types of Damages  Compensation for Personal Injuries  Includesmedical, lost wages, future wage loss, and pain and suffering  Punitive Damages  Compensation to punish a defendant for outrageous acts  Punitive damages against insurers  When insurers act in bad faith in resisting an insured’s legitimate claim  Other Damages  Hedonic damages - loss of life’s pleasures  Mental anguish “Res Ipsa Loquitur”  Tactic used in court to shift a legal burden to the defendant  Requires:  The defendant has exclusive use of the instrument or process that caused the loss and the plaintiff did not  Use of the instrument or process does not normally cause injury unless there was negligence  Human Resource Risks  Loss of Key Person  Disability – physical (medical) or mental Short or long term Permanent or temporary  Loss of health  Unplanned retirement  Results in loss of income, business continuation problems, replacement and training issues  Remember: Review and Update  Regularly review and update the process New assets or disposal of assets Valuation changes New products, processes, and operations New personnel Law changes Currency fluctuations New contractual relationships