Dr. James Kallman, ARM 3-1 Advanced PowerPoint Presentation ©2009 The National Underwriter Company

Dr. James Kallman, ARM 3-2 This Advanced PowerPoint Presentation accompanies the “Tools & Techniques of Risk Management & Insurance” textbook. Each of the 28 chapters in the textbook are presented here in the following sections:  Outline  Key concepts  Major sections  Chapter summary ©2009 The National Underwriter Company

Dr. James Kallman, ARM 3-3 Contents Techniques of Risk Management & Insurance Ch 1 Introduction to Traditional Risk Management…………..1-5 Ch 2 Enterprise Risk Management…………………………….2-1 Ch 3 Risk Assessment: Identification…………………………..3-1 Ch 4 Risk Assessment: Quantification…………………………4-1 Ch 5 Overview of Risk Treatment Alternatives………………. 5-1 Ch 6 Non-insurance Transfer of Risk…………………………. 6-1 Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1 Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1 Ch 9 Global Risk Management…………………………………9-1 Ch 10 Loss Control Techniques……………………………… Ch 11 Emergency Response Planning……………………… Ch 12 Business Continuity Planning………………………… Ch 13 Claims Management…………………………………… Ch 14 Monitoring Claims for Financial Accuracy…………… Ch 15 Insurance Companies and Risk Management……… Ch 16 Working with an Agent or Broker……………………….16-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-4 Contents Tools of Risk Management & Insurance Ch 17 Commercial General Liability Insurance……………….17-1 Ch 18 The Workers’ Compensation System………………….18-1 Ch 19 Commercial Property Insurance……………………… Ch 20 Directors and Officers’ Liability Insurance…………… Ch 21 Employment-Related Practices Liability Insurance… Ch 22 Business Automobile Insurance……………………… Ch 23 Crime Insurance………………………………………….23-1 Ch 24 Capital Markets Risk Transfer Tools………………… Ch 25 Loss Control Tools……………………………………….25-1 Ch 26 The Certificate of Insurance…………………………….26-1 Ch 27 Surety Bonds…………………………………………… Ch 28 Claim Reviews……………………………………………28-1

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-5 Chapter 3 Risk Assessment: Identification Outline What is it? Step One: Categorizing Owned and Non-owned Assets Step Two: Identifying Third-Party Liability Step Three: Choosing the Resources Advantages & Disadvantages Where Can I Find Out More About It? Chapter Summary

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-6 Chapter 3 Risk Assessment: Identification What is it? Risk assessment has two activities: Risk identification (this chapter) Risk quantification (chapter 4) The ability to assess risks is related to : the quality of management controls the effectiveness of the business plan the culture driving the management philosophy ERM risk assessment requires: a global perspective using risk maps

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-7 Chapter 3 Risk Assessment: Identification What is it? All loss exposures derive from two major sources: Owned and non-owned assets Third party liability Risk Identification has three steps: Categorize owned and non-owned assets Identifying third-party liability Choosing the resources

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-8 Chapter 3 Risk Assessment: Identification What is it? Supplement Current ERM risk assessment now contains three separate and distinct activities: Risk Identification Risk Measurement (quantitative and qualification), and Risk Portfolio Evaluation

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-9 Chapter 3 Risk Assessment: Identification What is it? Supplement Risk Identification using the seven proven methods (see page 25) describing the five attributes that determine the essential quality of the risk Three must be described at this point in the process: description of the subject (the exposure or project) source of the change in value (peril or opportunity) factors that modify the likelihood or impact (hazards or drivers) Descriptive analysis of risk is critical first step: forces risk analyst to clearly explain the three dimensions of the risk enables better understanding of the variation

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-10 Chapter 3 Risk Assessment: Identification What is it? Supplement Risk Measurement (quantitative and qualification) discussed in Chapter 4 Risk Portfolio Evaluation requires risk manager to identify and measure the interaction effects of combining risks into a portfolio risk manager should attempt to express the associations and relationships between risks. interaction between two risks can be beneficial or adverse

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-11 Chapter 3 Risk Assessment: Identification Step One: Categorizing Owned and Non-owned Assets Financial assets can be: Financial records Legally negotiable Instruments Intellectual capital Employees are the most important asset Some employees are critical to survival Intangible Assets Goodwill Relationships with vendors Public infrastructure

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-12 Chapter 3 Risk Assessment: Identification Step One: Categorizing Owned and Non-owned Assets Assets are categorized into 4 groups : Physical assets, Financial assets, Intellectual capital (people), and Intangible assets Each asset can sustain: Direct losses, and/or Indirect losses (consequential or contingent) Physical assets can be: Real or Personal Owned or Non-owned

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-13 Chapter 3 Risk Assessment: Identification Step One: Categorizing Owned and Non-owned Assets Supplement Four categories of traditional (pure) exposures: Assets (real and personal, including financial and intangible assets Third-party liabilities (legal obligations to others) Human resources (including their intellectual capital) Net income (earnings losses, decreased revenues, or increased expenses)

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-14 Chapter 3 Risk Assessment: Identification Step Two: Identifying Third-Party Liability Five major categories of third-party liability Premises liability Operations liability (off premises) Product liability Professional liability Employee liability Premises liability From the ownership or use of a premises Visitors to the premises include: Trespassers Licensees Invitees Children

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-15 Chapter 3 Risk Assessment: Identification Step Two: Identifying Third-Party Liability Operations liability (off premises) Installation Construction Services Product liability Bodily injury or property damage caused by distributing goods to the public Some goods are inherently dangerous e.g., lawn mowers, automobiles, dynamite Does not apply to efficacy or warranty issues

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-16 Chapter 3 Risk Assessment: Identification Step Two: Identifying Third-Party Liability Professional liability Reasonable person rule not applied A professional is held to a higher standard of care A professional and the public are not equals e.g., A risk manager has specialized knowledge Employee liability In some cases may be third-party liability In most cases this is second-party liability All states (except Texas) usually require workers’ compensation insurance to fund this exposure

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-17 Chapter 3 Risk Assessment: Identification Step Two: Identifying Third-Party Liability Supplement Additional categories – public liability exposures Statutory obligations, such as compliance and governance or conduct Social obligations and public policy Stakeholder obligations – those owed a higher duty of care

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-18 Chapter 3 Risk Assessment: Identification Step Three: Choosing the Resources Management realizes it must assume risk to be successful An optimal risk threshold must be determined There are 7 methods to identify risks: Surveys and questionnaires Financial documents Contract analysis Risk management committees Flow charts Company documents Physical inspections

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-19 Chapter 3 Risk Assessment: Identification Step Three: Choosing the Resources Surveys and questionnaires Surveys can be customized to the operation Surveys are used in two ways: to collect and document risk financing information to collect and document practices and procedures Financial documents Reveals capital allocated to manage risks Identifies assets (and surplus for losses) Identifies financial obligations (debt) Documents may be internal or external Internal eg: 10Q, balance sheet, income statement External eg: D&B report, Yahoo Finance, Bloomberg

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-20 Chapter 3 Risk Assessment: Identification Step Three: Choosing the Resources Sales and Other Contracts Identifies transfers of liability e.g., contractual liability transfer, hold harmless agreement, additional insured clause Risk Management Committees Key members of staff: finance, legal, human resources operations: logistics, IT, production, sales Risk manager facilitates quarterly meetings

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-21 Chapter 3 Risk Assessment: Identification Step Three: Choosing the Resources Flow Charts Identifies relationships between key stakeholders e.g., manufacturing and sales, company and suppliers, company and governments Charts may be internal only or for all stakeholders Company Documents Identifies operational liabilities Examples: employee handbook, SOP, sales literature Corporate board minutes, business plans Includes company statistical reports: e.g., loss histories, industry histories, incident reports

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-22 Chapter 3 Risk Assessment: Identification Step Three: Choosing the Resources Physical Inspections Identifies risks not identified with other methods Allows verification of published materials e.g., Construction materials Operations and procedures Protective devices Environmental exposures Provides opportunity to meet with local managers discuss loss trends discuss safety concerns get feedback enhances cooperation in managing risks

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-23 Chapter 3 Risk Assessment: Identification Step Three: Choosing the Resources Supplement Additional identification techniques Experts – internal and external Loss history reports Job analysis, incident analysis reports Physical inspections, or surveys, audit documents, litigation records Loss control cost evaluations

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-24 Chapter 3 Risk Assessment: Identification Advantages & Disadvantages Advantages Identify risks Get information not readily shared Integrates risk management with operations Disadvantages May require a great deal of time Difficult to physically inspect all locations

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-25 Chapter 3 Risk Assessment: Identification Chapter Summary Exposures derive from two major sources: Owned and non-owned assets & Third party liability Risk Identification has three steps: Categorize owned and non-owned assets, Identifying third- party liability, & Choosing the resources Step One: Categorize Owned and Non-owned Assets Physical, financial, intellectual capital, & intangible assets Each asset can sustain: direct and/or Indirect losses Physical assets can be: real, personal, owned or non-owned

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-26 Chapter 3 Risk Assessment: Identification Chapter Summary Step Two: Identifying Third-Party Liability Five liability categories: premises, operations, product, professional, & employee liability Visitors: trespassers, licensees, invitees, & children Operations liability includes installation, construction, & services Product liability is BI or PD caused by distributing goods Some goods are inherently dangerous Does not apply to efficacy or warranty issues Step Three: Choosing the Resources 7 methods to identify risks: Surveys and questionnaires, financial documents, contract analysis, risk management committees, flow charts, company documents, physical inspections Advantages & Disadvantages

©2009 The National Underwriter Company Dr. James Kallman, ARM 3-27 Chapter 3 Risk Assessment: Identification Chapter Summary Advantages & Disadvantages Advantages Identify risks Get information not readily shared Integrates risk management with operations Disadvantages May require a great deal of time Difficult to physically inspect all locations