Risk Management Concepts, Pooling of Risks, & Principles of Insurance

Dr. John F. Fitzgerald, JrCLU, CPCU, CIC

RISK MANAGEMENT CONCEPTS

Importance of Risk Management

• Early history of insurance management• RIMS• Risk manager of the year- Business

Insurance• Interest in risk management• Need for risk management

Commercial Risk Management Defined

The identification, measurement, control, and administration of potential loss-causing events, given limited resources, in order to accomplish the financial goals of the entity.

Risk Identification

• The physical survey• Analysis of contracts• Flow charts• Analysis of financial statements• Checklists

Measure Loss Potential

• Loss frequency• Loss severity• Maximum possible loss• Maximum probable loss

Control of Risk-Tools of Risk Management

• Avoid• Prevent• Reduce• Retain–Unfunded– Funded

Control of Risk (cont.)

• Transfer–Property–Risk–Contractual– Insure

• Pooling• Combination

Risk Characteristics as Determinants of the Tool

High LowHigh Avoidance TransferLow Retention & Control Retention

Seve

rity

of L

osse

s

Frequency of Losses

Risk Administration

• Policy statement• Location of risk manager in the

organization• Disaster plan• Evaluating risk management decisions-

the importance of feedback

Case Studies of Commercial Risk Management

• Precious metals firm• Hospital• Municipality• Amusement park• Major sports event• Concert

2011 Emerging Liabilities

• EMF• Nano Scale Materials• Genetically Modified Plants and Animals• Weather Patterns• Hydrofracking Social Media

Pooling of Risks

Pooling of Risks

• Pooling technique• Pooling of losses• Long term care- policies have pooled benefits• Reinsurance facility- pool for high risk drivers• Reinsurance pools for aircrafts• Natural disaster pools

Principles of Insurance

Requisites of an Insurable Risk

• Large number of homogeneous units• Fortuitous loss– Accidental and unintentional

• Definite and measurable loss• No catastrophic loss• Economically feasible

How Insurers Control Risk

• Loss prevention• Loss reduction• Deductibles• Coinsurance• Copayments• Limits of liability• Exclusions

Characteristics of Insurance

• Risk transfer• Pooling concept• Law of large numbers• Reduces uncertainty• Exchange

Costs

• Operation–Cost of doing business

• Fraud• Inflated losses

Benefits

• Indemnification• Reduction- worry & fear• Source of investment funds• Loss prevention• Enhanced credit• Encourages innovation