Part 1
1. Discuss why loss data must be collected and analyzed.
2. Identify the specific types of loss data that should be collected.
3. Discuss why collecting and reviewing exposure data is as important as collecting and reviewing loss data.
4. Discuss the components and statistical credibility of loss data.
5. Explain the types of analyses that use loss data.
6. Describe when to use benchmarking in risk management.
I. Why Loss Data is Collected and Analyzed
A. Identify the causes of loss frequency and severity
B. Identify trends in loss experience
C. Focus management's attention on the organization's total cost of risk
D. Evaluate potential costs and benefits of loss control alternatives to gain support
E. Evaluate potential costs and benefits of alternative methods for financing losses
1. Decide between full insurance and retention
2. Choose deductibles and limits
3. Select a cash flow plan
F. Establish a basis for allocating premiums and/or loss costs
1. Create incentives or disincentives for loss control actions
2. Establish an objective basis for sharing the total cost of risk
3. Determine optimum retention level for each location vs. amount of loss the organization as a whole is capable of retaining
G. Establish a method for evaluating performance
1. Operating units' management
2. Vendors - carriers, TPA's, brokers (external)
3. In-house claims adjusters
4. Benchmarking loss experience
5. Employee safety incentive programs
H. Address product/service development and pricing
1. Include total cost of risk in pricing of products and services
2. Redesign products or services based on expected losses
I. Gain ability to respond to legal or regulatory actions
1. Litigation
2. OSHA Survey of Occupational Injury
3. Consumer Product Safety Commissions
4. Environmental Protection Agency
5. Federal Drug Administration
J. Satisfy insurance underwriting requirements
1. Premium negotiation
2. Determine coverage restrictions and exclusions
3. Set appropriate reserves for loss-sensitive programs
4. Establish collateral amounts, e.g., letter of credit, surety bond
II. Sources of Loss Data
A. Internal sources - the organization's loss experience
1. Accident or incident reports
2. First aid logs
3. OSHA logs
4. Insurance carrier or TPA loss runs
5. Litigation records
6. Accounting entries on financial statements
Part 2
1. Discuss the risk-taking appetite and ability of an organization and its importance to an effective risk management program.
2. Identify the key financial and non-financial factors used to determine per-occurrence and aggregate retention amounts.
3. Discuss how loss stratification helps determine per-occurrence retentions. Learning Objective #1: Discuss the risk-taking appetite of an
organization and its importance to an effective risk management program.
I. Alternatives for Treating Loss Exposures
A. Loss exposures are either:
1. Avoided
2. Transferred
3. Financed
B. Insurance is not a "transfer," in spite of several risk management theorists' proclamation otherwise. Insurance is a financing technique; a type of loan in which the premium is the interest and the limit of coverage is the amount borrowed, but only if a covered loss occurs. The contingent nature of the insurance contract does not require repayment of the principal borrowed (unlike an ordinary loan) as the "interest"
of the fortunate many that do not have a loss repays it on behalf of the unfortunate ones who do.
C. An uninsured loss is a retained loss.
D. Most insured losses require the insured to retain part of the loss, either in the form of a deductible or a self-insured
retention.
II. Risk-Taking Appetite
A. Risk-taking appetite is the organization's willingness to accept or tolerate risk.
1. Internal factors affecting an organization's risk-taking appetite
a. History of risk-taking
b. Long-term organizational objectives
c. Stage in organizational life cycle
1) Start-up stage
2) Growth stage
3) Mature stage
4) Declining stage
d. Financial stability (assets, income and cash flows)
e. Management's willingness to take risk vs. the organization's financial ability to assume risk
2. External factors affecting an organization's risk-taking appetite
a. Market maturity
b. Competition and the need to take business risk
c. Public image
d. Stakeholders' attitudes (owners, creditors, government, beneficiaries, etc.)
III. Risk-Taking Ability
A. Risk ability is the financial capacity for assuming risk
1. Likelihood of loss (frequency and severity)
2. Predictability of loss (variance of actual from expected)
3. Cash flows
4. Income levels
5. Asset levels and liability levels
B. Importance of a risk-taking appetite and ability in a risk management program
1. Willingness to assume risk without the financial capacity to assume risk is an empty promise.
2. Financial capacity to assume risk without the willingness to assume risk is underutilized capacity.
C. The risk manager, working with the CFO and other senior management, must determine the organization's risk-taking appetite as well as its financial ability to assume risks by using both financial and non-financial measurements to effectively manage the organization's risks.
D. The risk management definition of retention is the acquisition of funds to pay losses.
Note: the definition does not address if the funds are needed to pay the first portion of the loss (sometimes called a deductible), part of each loss (sometimes called co-payment corridor or co-insurance), the amount of the loss in excess of policy limits (something usually not thought about), or the entire amount of the loss (often called a retention).