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ARM 54

Chapter 1-3

Risk Uncertainty about outcomes that can be either negative or positve.
Risk Management The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization.
Business Risk Risk that is inherent in the operation of a particular organization, including the possibility of loss, no loss, or gain.
Hazard Risk Risk from accidental loss, including the possibility of loss and no loss.
Loss Exposure Any condition that presents a possibilty of loss, whether or not an actual loss occurs.
Enterprise Risk Management An approach to managing all of an organization's key business risks and opportunities with the intent of maximizing sharholder value.
Identify the possible meanings of risk apart from uncertainty about outcomes that can be either negative or positive. The possible meanings of risk include the following: -The subject matter of an insurance policy -The insurance applicant (the insured) -The possibility of a loss or injury - A cause of loss (or peril) - Variavility associated with a future outcome.
List the six steps in the risk management process. (1) Identify loss exposures (2) Analyz loss exposures (3)Examin the feasibility of RM techniques (4) Select the appropriate RM techniques (5) Implementing the selected RM techniques (6) Monitor results and revising the RM program
Explain why risk management is an ongoing process. RM is an ongoing process because past choices of RM techniques must continueally reevaluated in light of changes in the following. -Relative costs, Legal requriements, goals, economic environment, resources and activities.
How does hazard risk differ from business risk? Hazard risk results in only two outcomes: Loss or no loss. Business risk can result in either loss, no loss, or gain.
Explain how enterprise risk management differs from traditional risk management. -ERM is both hazard risk and business risk: TRM focuses on hazard risk. - ERM seeks to enable an organization to fulfill its greatest productive potential; TRM seeks to rstore an organization to its former pre-loss condition.
Describe the four categories of risk used by some enterprise risk management models. (1)Strategic risk - uncert. w/long-term goals & management. (2) Operational risk - uncert. w/operations (3) Financial risk - uncert. w/finacial actitives (4) Hazard risk - Uncert. w/redcuction in value resulting from the effects of accidental losses.
Using the enterpirse RM model described in the ch. categorize the following risks. a. Cost of materials increases. b. Regulatory sanctions block the launch of new product. c. Securities and Exchange Commission investigate accounting practices. a. Cost of materials increases - opertional risk b. Regulatory sanctions block the launch of a new product - strategic risk. c. Securities and Exchange Commission investigate accounting practies - strategic risk.
Using the enterpirse RM model described in the ch. categorize the following risks. d. Computer hackers steal confidential information. e.Competitor hires key employees. f.Customer files for bankruptcy. g. Some consumers experience an allergic reactio d. Computer hackers steal confidential information - hazard risk e. Competitior hires key employees - strategic risk f.Customer files for bankruptcy - strategic risk. g. Some consumers experience an allergic reaction - hazard risk
Using the enterpirse RM model described in the ch. categorize the following risks. h. Manufacturing facilities in Iraq are threatened by insurgents. i. US dollar falls against the euro, making the organization's debt more expensive to pay h. Manufacturing facilities in Iraq are threatened by insurgents - strategic risk i. US dollar falls against the euro making the organization's dollar more expensive to pay - financial risk
Using the enterpirse RM model described in the ch. categorize the following risks. j. Union calls for a "sick-out" k. Merger plans fall through l. Pollution m. Credit ratings reduced by a credit rating agency, resulting in increased cost of borrowing. j. Union calls for a "sick-out" - stategic risk k. Merger plans fall through - strategic risk. l. Pollution - Hazard risk m. Credit rating is reduced by a credit rating agency resulting in increased cost of borrowing - finacial risk.
Cost of risk The total cost incurred by an organization because of the possibility of accidental loss.
Identify the three broad categories of costs imposed by accidental losses. (1) Reduction in property value, income, earning capacity, or quality of life because of damage, destruction, or injury. (2) Loss of net benefits that could have been gained from deterred actitives. (3)Cost of resources devoted to managing accidental loss
Identify what is included in an organization's cost of risk. -Costs of accidental losses not reimbursed by insurance. -Insurance preminum or expenses incurred for noninsurance indemnity -Costs of risk control techniques to prevent or reduce the size of accidental losses -Cost of administering RM activites.
Identify the benefits of risk management for the entire economy. - Reduce waste of resources - min.the waste & need to use productive resources to restore damage from accidential loss. - Improved allocation of productive resources -improves willingness of management to undertake risky activities that might max. profit
Calculate the cost of risk. RM department budget - $1.2 mil Retained losses - $10.5 mil Insurance Premiums - $20 mil Risk control techniques - $5 mil $1.2 mil + 10.5 mil + 20 mil + 5 mil = 36.7 mil
Risk Management Program A system for planning, organizing, leading, and controlling the resources and activites that an organization needs to protect itself from the adverse effects of accidental losses.
Pre-loss goals Risk management goals that should be in place even if no significant losses occur.
Post-loss goals Risk management goals that should be in place in the event of a significant loss.
Describe four pre-loss goals of risk management program. (1) Ecomomy of operations- operate RM economically and efficiently (2) Tolerable uncertainty-keep managers' uncertainty about accidental loss tolerable (3) Legality- ensure legal obligations are satisfied (4) Social responsibility- promote ethical cond
How might the economy of risk management program be measured? The economy of a risk management program might be measured by comparing the organization's riskmanagement costs with those of similar organizations, then relating these cost to revenue.
Describe six post-loss goals of a risk management program. (1) Survival (2) Continuity of operations (3) Profitablity (4) Earnings stability (5) Social responsibility (6) Growth
organization's resources. The essential goals of a risk management program, such as survival and continuity of operations, generally require smaller resource commitments than do the desirable goals, such as social responsibility and growth.
Identify the steps an organization should take to forestall an intolerable shutdown. -Identify activities whose interruptions cannot be tolerated -Identify types of accidents that could interrupt such activities -Determine resources that are available to counter the effects of these accidents -Ensure availability of standby resources
Explain why continuity of operations is considered an essential goal for all public entites. Continuity of operations is considered an essential goal for all public entites because any sustained interruption in services is likely to have serious consequences and interfere with the well-being of citizens and the community.
The RM professional of the Barnton Corporation is periodically consumed with anxiety regarding the effectiveness of the RM program. Explain which of the program's pre-loss goals best addresses this RM professional's concern. The RM professional's concerns are best addressed by the pre-loss goal of tolerable uncertainty. The RM program should anticipate and plan for accidental losses so that they will be effectively treated, thereby reducing uncertainty about accidental loss
Give an example of how each of the following risk management program goals conflict with the pre-loss goal of economy of operations. a. Tolerable uncertainty b. Legality c. Social responsibility a. Tolerable uncertainty might conflict because of the cost of RM efforts. b. Legality might conflict because safety standards require expense to implement. c. Social responsibility might conflict because obligations (charitable contributions raise cost
Describe how a risk management department changes as an organization grows. Small organizations often begin w/a RM director, a safety and loss prevention manager, and a claim manager. As more complex aspects of safety emerge and the number of claims increase, departmental expansion occurs - adding risk financing personnel.
Identify departments that might provide information support to the RM professional. Accounting- provides historical cost information Information Systems-tracks loss exposures Legal-advice on liability claim management Human Resources-identify essential personnel Production-informs on essential processes Marketing- informs on product
Identify the types of information that might be communicated into and out of an organization's RM department. Loss exposure reports, Bulletins on new loss exposures, Briefs from trade asociations, reports from gov. agencies, info from seminars, data reported to trade associations or gov. agencies, facts or procedures shared at meetings, direction on reporting.
Identify the ten ways that the quality of information can be described. (1)Accessible (2) Comprehensive (3) Accurate (4) Appropriate (5) Timely (6) Clarity (7) Flexible (8) Verifiable (9) Free from bias (10) Quantifiable
Baby Crib Manufactuer is concerned that its RM department is not getting all the info it needs to make sound decisions. Describe the info the RM professional may expect from the following department regarding RM issues. a. Legal b. Marketing c. Account a.Legal dept - US Consumer Product Safety Commission guidelines, case law, past court cases involving baby cribs. b.Marketing dept. - consumer reaction to crib safety features. c. Accounting dept - vendor of models sold and where each model is being sol
Identify the four generic categories of RM professionals' duties that are usually not delegated to others. (1) Risk management program (2) Risk assessment (3) Risk control (4) Risk financing
Identify the responsibilities of the RM professional in an organization's RM program. -Guide senior management in establishing the RM program. -Plan, organize, lead, and control the resources & activites of the RM dept. -Establih responsibility and communication regarding RM matters -define the responsibilities and motivate.
Identify the responsibilites of the risk management profesional in an organization's risk control efforts. Identifying the benefits and measuring and controlling the costs of alternative risk control techniques. -Reconizing hazards and implement apropriate risk control techniques -Advize senior mangt how to emphasize safety -advise how to prevent accidents
Identify the tasks the risk management professional must complete in an organization's risk financing program. -work w/finanical and senior executives to determine the extent to which the organization should retain losses and transfer potential losses. - Decide which retention and transfer techniques should be used to finance losses from specific loss exposures.
Through a leveaged buyout,Regional Department Store has purchased National Department Store. Explain how the risk management department of Regional Department Store may need to be restructured as a consequence of this organizational change. As a consequence of its acquisition the RM department will be expanded. The roles of insurance manager, safety and loss prevention manager, claim manager, and security manager will be greater and will have personnel reporting to them.
Risk Management Policy statement A tool for communicating the goals of the risk management program and the roles that people throughout the organization have in achieving the organization's risk management goals.
What does a risk management policy statement communicate? A RM policy statement communicates the goals of the RM program and the roles that people throughout the organization have in achieving the organization's RM goals.
Describe the purpose of a written risk management policy statement. -Establish goals of the organization's RM function. -Define responsibilities of the RM personnel. -Coordinate tx of loss exposures -Establish and improve communication channels -provide program continuity & facilitate transition during personnel chang
Identify the typical content of a written risk management policy statement. -General description of risk management and its importance to the organization - Risk management department's internal structure -Senior management's risk management goals -Decision rules for selecting risk management techniques.
Results Standards Stadards that focus on achievements regardless of the efforts they require.
Activity Standards Standards that focus on activity undertaken to achieve a particular results regardless of the success of that activity.
Identify how results standards can be measured. Results standards can be measured using dollars, percentages, ratios, or numbers of losses or claims. These standards focus on achievements regardless of the efforts required.
Describe three results that may occur when actual performance is compared with performance standards. -Meets established standards -Falls below established standards - corrective action is needed; performance is raised or more realistic standard is set. -Exceeds established standards - indicates exceptiional performance or that the standards are too low
What conclusions might be drawn when performance substantially exceeds a standard? When performance substantially exceeds a standard, an organization might conclude that the standard was set too low, the standard was incomplete or that the standard is appropriate and the performance is exceptional.
Suggest a standard that a RM professional might use to gauge performance: a. Shipments to customers are damaged in transit. b.Customers are injured when premises are wet. c. Vehicles are damaged in backing incident d. EE's are injured while cutting m a. less than 5 percent of all shipments damaged in transit. b. no customer injury claims when premises surfaces are wet. c. less than 5 percent of vehicle accidents resulting from backing up. d. no employee injuries while cutting sheet metal.
Describe what the risk management process does for an organization. The RM process provides a methodology for assessing and treating accidental loss exposures to enable an organization to meet its pre-loss and post-loss goals.
Created by: cmaldonado
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