C72 – Introduction to Risk Management and Commercial Lines Sherri Stuebing FCIP, CRM, MBA, CAIB stuebings@hotmail.com

Introductions Sherri Stuebing, FCIP, CRM, MBA, CAIB Contact Information: Home: (7 Days a week but not after 10pm or before 7am MST) Email: stuebings@hotmail.com Phone: (587) 578-2159 Work: (403) 267-7828

Introduction to Risk Management Scope of Risk Management Shift to Risk Management Objectives of Risk Management Elements of a Loss Exposure The Risk Manager’s Role

Objectives Explain how producers and underwriters use the principles of risk management Discuss the traditional methods used by brokers to compete for an account Discuss the objectives of risk management before and after a loss occurs Describe the elements of a loss exposure Describe the risk manager’s role

Introduction Loss Exposure is a situation or physical circumstance that makes an individual or an organization vulnerable to loss, damage or injury and will lead to financial loss (expense). S I D L Example: Pg. 2

Risk Management Managing pure risk exposures has developed into its own niche area of study Risk Management. Risk managers include those responsible for managing pure risk exposures within an organization. Pure risk exposures traditionally refer to accidental losses rather than so-called “business risks” or “speculative risks” All organizations have pure risk exposures. More than buying insurance. www.thisismoney.co.uk

Scope of Risk Management Minimize effects of loss exposure Using experience and common sense to prevent, to minimize and manage loss. Risk management affects everyone!

Shift to Risk Management Traditionally – quote on policies using existing coverages or what the insurer is willing to provide. But what about the client? Is protection adequate or relevant? Survival of an organization may be threatened by merely replacing a policy. Frustration and legal battles may occur. Unpleasant situation for all! Clients need help to identify the risks to insure and then to determine the limits of coverage necessary for adequate protection.

Shift to Risk Management OPPORTUNITY Producers can work with the client instead of selling to the client. The Risk Management Process is used to: Determine the exposures clients need to manage; Provide a plan of action to manage those risks; Recommend insurance coverage for those risk best served by insurance coverage.

Commercial Insurance Commercial Insurance is categorized as insurance for: Professionals B Organizations and G

Objectives of Risk Management What are the fundamental goals of an organization? The risk management program needs to support the goals of the organization. The objectives of risk management can be broken into two components: P

Pre-loss Objectives Social Responsibility: Improve public image “good corporate citizen” – high value on human safety. Externally imposed obligations: Set out in statute, in contract or simply as a commitment to a customer (making sure a client complies is a proactive step). “Peace of Mind”: Each organization has a different tolerance level for uncertainty (threshold beyond which they will not survive financially). Cost of risk: Operate economically – all cost associated with managing pure risk are known as “cost of risk”. Budget for risk management must compete with budgets for other organizational objectives.

Post-loss Objectives Social Responsibility: Consider employees and communities Survival: As a going concern. Avoid bankruptcy or liquidation. Operational Continuity: Is the business indispensable? Will you lose market share? Higher costs Reciprocal agreements Maintain stable earnings: Cut Expenses? Sustain Growth

Conflicts Among Objectives Economy vs. Continuing Operations Objectives can conflict! Priorities must be examined to develop a plan that is consistent with overall goals. The plan must be analyzed comparing costs to benefits. Social Responsibility vs. Continuing Operations Social responsibility rarely has immediate benefit – survival is priority. Compromise possible?

Elements of a Loss Each loss exposure has three distinct elements: Item subject to loss Potential cause of the loss (peril) Financial consequences of the occurrence

1. One may categorize the items subject to loss into: Physical assets – any tangible property (building) Loss of use of those assets – incurred when a physical asset is damaged or destroyed, its use is impaired (Business Interruption). Legal liabilities – arises from negligent acts or omissions arising from the legal duty to take care in ones relationship with others so as not to cause injury. Including contractual obligations. Personal health and earning capacity (human assets) – illness, disability or premature death or organization members. Key person insurance – organization will survive death of owner or senior executive

2. Losses are caused by perils. Perils can be grouped by origin into three general categories: Human – caused by human behaviour Natural – caused by natural forces in the weather and the earth. Economic – changes in consumer tastes, currency fluctuations, depreciation, expropriation, stock market declines and technological advances. Generally “business risks” are not insured

3. The third element in a loss exposure is the financial consequences of the loss. When an item is damaged the organization will be affected by: The reduced value of an asset; The decreased income derived from an asset; The increased expenses to keep the asset operating.

The Risk Manager’s Role The duties of a risk manager are likely to include: Identifying loss exposures, preventing loss, reducing loss, loss financing, educating other corporate managers and acting as a resource to other managers. Major decisions should be supported by senior management Risk managers and producers MUST have a good working relationship The producer must first understand the basics of the risk management process and provide the client with the best service.

Questions?