HW 2

Phan Đức Anh

1. What is the meaning of risk management?
- Risk Management is a process that identifies loss exposures faced by an
organization and selects the most appropriate techniques for treating such
exposures.

2. Explain the difference between risk management and insurance

management.

- Risk management is the broader process of identifying, assessing, and

mitigating risks across various areas of an organization, while insurance
management is a specific subset of risk management that focuses on
using insurance to protect against certain risks. Risk management
involves strategies like risk avoidance, reduction, and sharing, whereas
insurance management centers on selecting and managing insurance
policies to transfer risk to insurers.

3. What are the steps in the risk management process?

Risk Management Process:
+ Identify potential losses
+ Measure and analyze the loss exposures
+ Select the appropriate combination of techniques for treating the loss
exposures
+ Implement and monitor the risk management program

Among all the steps in the risk management pro-cess, which is considered
the most critical or important?
- In my opinion, among all the steps in the risk management pro-cess, I
think Identify potential losses is the most important step.

4. Describe the major categories of potential loss expo-sures that a risk

manager should consider and identify.

• Property loss exposures: This includes damage or destruction to asset

• Liability loss exposures: This risk from financial loss such affect to
financial health of company.
• Business income loss exposures : due to interruption of operations or
incidents that prevent the company from continuing normal business.
• Human resources loss exposures:
• Crime loss exposures
• Employee benefit loss exposures
• Foreign loss exposures
 • Intangible property loss exposures
• Failure to comply with government rules and regulations
5. a. Explain the meaning of risk control.
- Risk control refers to techniques that reduce the frequency and severity of
losses
b. Explain the following risk-financing techniques.
- Retention: Paying for losses directly out of the organization's own funds.
- Noninsurance transfers: Transferring the risk to another party through
contracts, such as hold-harmless agreements.
- Insurance: Transferring the risk to an insurance company in exchange for
paying premiums.
7. Explain the advantages and disadvantages of retention as a risk-financing
technique.
Advantages:
• Save on insurance premiums: Retention can be less expensive than insurance
in the long run.
• Encourage loss prevention: Bearing the financial burden of losses can
incentivize organizations to implement strong risk control measures.
• Increase cash flow: Funds that would have been used for insurance premiums
can be invested elsewhere.
Disadvantages:
• Potential for catastrophic losses: A single large loss could severely strain the
organization's finances.
• Opportunity cost: Funds set aside for retention could be used for other
purposes.
• Difficult to predict losses: It can be challenging to accurately estimate the
frequency and severity of future losses.

8. a. What are the reasons for creating a captive insurer?

• Reduced insurance costs: Captives can often provide insurance at lower costs
than commercial insurers.
• Improved cash flow: Premiums paid to a captive can be invested and earn
interest until they are needed to pay claims.
• Increased control over insurance program: Organizations have more flexibility
in designing their insurance coverage with a captive.
• Coverage for difficult-to-insure risks: Captives can provide coverage for risks
that commercial insurers may be unwilling to insure.
• Tax advantages: In some jurisdictions, premiums paid to a captive may be tax
deductible.
b. What is the difference between a single parent captive and a group captive?
• Single parent captive: Owned by a single parent company and insures only
the risks of that parent company and its subsidiaries.
• Group captive: Owned by multiple parent companies and insures the risks of
all the owner companies.
9. a. What is self-insurance?
Self-insurance is a form of risk retention where an organization sets aside funds
to pay for losses instead of purchasing insurance. It involves a planned and
deliberate decision to assume financial responsibility for certain risks.
b. What is a risk retention group?
A risk retention group is a type of group captive formed under the Liability Risk
Retention Act of 1986 in the United States. It allows businesses with similar
insurance needs to pool their risks and form an insurance company to provide
liability coverage for their members.
10. Use a risk management matrix to illustrate how to choose risk management
techniques depending on loss exposures.
A risk management matrix helps visualize and select appropriate risk
management techniques based on the frequency and severity of potential
losses.
Frequency/Severity Low Frequency, Low Severity High Frequency, Low
Severity Low Frequency, High Severity High Frequency, High Severity

Risk Retention Loss Insurance Avoidance

Management Prevention
Technique
Example Minor Shoplifting Natural Highly
property disasters hazardous
damage activities
Risk Retention Loss Insurance Avoidance
Management Prevention
Technique

Application questions (1-5) - Chap 3

1. Kind Sicherheit's Risk Control Techniques
Kind Sicherheit can implement these risk control techniques to mitigate product
liability losses:
• Quality Control: Implement rigorous quality control procedures throughout
the manufacturing process. This includes:
o Regular inspections of raw materials and components.
o Strict adherence to manufacturing standards and specifications.
o Comprehensive product testing at various stages of production.
o Employee training and certification programs to ensure quality workmanship.
• Product Design: Focus on designing inherently safe products. This can
involve:
o Using durable, high-quality materials.
o Incorporating safety features that minimize the risk of misuse or accidents.
o Conducting extensive product testing to identify and address potential
hazards.
o Staying updated on industry best practices and safety standards.
• Warnings and Instructions: Provide clear and comprehensive warnings and
instructions with each product. This includes:
o Clearly labeling potential hazards and risks associated with product use.
o Providing detailed instructions for proper assembly, use, and maintenance.
o Using multiple languages to cater to a wider audience.
o Making warnings and instructions easily accessible and understandable.
2. Silver Drive's Partial Retention Program
a. Factors to Consider:
• Financial Capacity: Assess the company's financial ability to absorb potential
losses.
• Loss History: Analyze past loss data to predict future loss frequency and
severity.
• Risk Tolerance: Determine the company's willingness to accept risk.
• Administrative Costs: Evaluate the costs of managing a retention program.
• Availability of Insurance: Explore the availability and cost of commercial
insurance.
b. Methods to Pay for Losses:
• Current Net Income: Deduct losses from current earnings.
• Unfunded Reserve: Allocate a portion of earnings to an unfunded reserve
account.
• Funded Reserve: Set aside funds in a separate account specifically for losses.
• Credit Line: Secure a bank credit line to cover potential losses.
• Captive Insurer: Establish a captive insurance company to fund losses.
c. Risk Control Measures:
• Driver Training: Provide comprehensive driver training programs to reduce
accidents.
• Vehicle Maintenance: Implement a strict vehicle maintenance schedule to
prevent breakdowns and ensure roadworthiness.
3. Avoidance as a Risk Control Technique
a. Major Advantage:
The primary advantage of avoidance is the complete elimination of a specific
loss exposure. By not engaging in a particular activity or avoiding a certain risk,
the possibility of incurring losses associated with that exposure is removed.
b. Feasibility of Avoiding All Losses:
No, it is not possible or practical for a firm to avoid all potential losses. While
avoidance can be effective for certain risks, many business activities inherently
involve some level of risk. Avoiding all risks would mean ceasing all operations,
which is not a viable option for most organizations.
4. Implementing and Monitoring a Risk Management Program
a. Benefits of a Risk Management Policy Statement:
• Provides Direction: Clearly outlines the organization's objectives and
commitment to risk management.
• Promotes Awareness: Increases awareness of risk management throughout
the organization.
• Facilitates Implementation: Guides the implementation of risk management
practices.
• Enhances Accountability: Establishes clear roles and responsibilities for risk
management.
b. Important Departments in Risk Management:
• Finance: Manages financial resources and assesses financial risks.
• Legal: Provides legal counsel and manages liability exposures.
• Human Resources: Addresses employee-related risks and safety concerns.
• Operations: Implements risk control measures in daily operations.
• Information Technology: Manages cybersecurity and data security risks.
5. James and Emily's Personal Risk Management
a. Steps in Personal Risk Management:
1. Identify potential risks and loss exposures.
2. Analyze the frequency and severity of those risks.
3. Select appropriate risk management techniques (risk control and risk
financing).
4. Implement the chosen techniques.
5. Monitor and review the risk management plan regularly.
b. Major Pure Risks:
1. Personal Loss Exposures:
• Premature Death: Loss of income and financial hardship for the surviving
family members.
• Illness/Disability: Medical expenses and potential loss of income.
• Unemployment: Loss of income and financial instability.
2. Property Loss Exposures:
• Damage to Home: Fire, theft, vandalism, natural disasters.
• Damage to Personal Property: Theft, damage, or destruction of household
contents.
• Damage to Vehicles: Accidents, theft, vandalism.
3. Liability Loss Exposures:
• Legal Liability: Injury to others on their property or due to their negligence.
• Auto Liability: Accidents causing bodily injury or property damage to others.
c. Appropriate Risk Management Techniques:
• Personal Loss Exposures:
o Life Insurance: Provides financial protection for the family in case of
premature death.
o Health Insurance: Covers medical expenses and provides income protection
in case of disability.
o Disability Insurance: Replaces lost income in case of disability.
• Property Loss Exposures:
o Homeowners/Renters Insurance: Protects against property damage and
liability.
o Auto Insurance: Provides coverage for vehicle damage and liability.
• Liability Loss Exposures:
o Liability Coverage: Included in homeowners/renters and auto insurance
policies.
o Umbrella Insurance: Provides additional liability coverage beyond the limits of
other policies.