Chapter 3 Introduction to Risk Management Meaning of risk management Objectives of risk management Steps in the RM Process Benefits of risk management Personal rm Corporate RM Corporate Value of ERM (FMEA ENTERPRISE RISK MANAGEMENT The Next step in Business Management 3-1
3-1 Chapter 3 Introduction to Risk Management • Meaning of Risk Management • Objectives of Risk Management • Steps in the RM Process • Benefits of Risk Management • Personal RM • Corporate RM – ERM （FMEA）
Meaning of Risk Management Risk Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques Tor treating such exposures A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs E.g., a manufacturing plant that may be damaged by an earthquake or an automobile that may be damaged in a collision 3-2
3-2 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 • A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs – E.g., a manufacturing plant that may be damaged by an earthquake, or an automobile that may be damaged in a collision
Objectives of risk Management Risk management has objectives before and after a loss occurs Pre-loss objectives Prepare for potential losses in the most economIcal way Reduce anxiety Meet any legal obligations 3-3
3-3 Objectives of Risk Management • Risk management has objectives before and after a loss occurs • Pre-loss objectives: – Prepare for potential losses in the most economical way – Reduce anxiety – Meet any legal obligations
Objectives of risk Management Post-loss objectives Ensure survival of the firm Continue operations Stabilize earnings Maintain growth Minimize the effects that a loss will have on other persons and on society 3-4
3-4 Objectives of Risk Management • Post-loss objectives: – Ensure survival of the firm – Continue operations – Stabilize earnings – Maintain growth – Minimize the effects that a loss will have on other persons and on society
Risk Management Process Identify potential losses Evaluate potential losses Select the appropriate risk management technique Implement and monitor the risk management program 3-5
3-5 Risk Management Process • Identify potential losses • Evaluate potential losses • Select the appropriate risk management technique • Implement and monitor the risk management program
Exhibit 3. 1 Steps in the risk Management process Identify loss exposures Analyze the loss exposures Select the appropriate techniques for treating the loss exposures 1. Risk control Avoidance Loss prevention · Loss reduction 2. Risk financing Retention Noninsurance transfers Implement and monitor the risk management program 3-6
3-6 Exhibit 3.1 Steps in the Risk Management Process
Identifying Loss EXposures (1)Property loss exposures (2)Liability loss exposures (3 Business income loss exposures (4)Human resources loss exposures (5) Crime loss exposures (6 Employee benefit loss exposures (7 Foreign loss exposures 8)Market reputation and public image of company 9)Failure to comply with government rules and regulations 3-7
3-7 Identifying Loss Exposures • (1) Property loss exposures • (2) Liability loss exposures • (3) Business income loss exposures • (4) Human resources loss exposures • (5) Crime loss exposures • (6) Employee benefit loss exposures • (7) Foreign loss exposures • (8) Market reputation and public image of company • (9) Failure to comply with government rules and regulations
Important Loss Exposures: I Property loss exposures Building, plants, other structures Furniture, equipment, supplies Electronic data processing(EDP) equipment computer software Inventory Accounts receivable, valuable papers and records Company planes, boats, mobile equipment 3-8
3-8 Important Loss Exposures: I • Property loss exposures • Building, plants, other structures • Furniture, equipment, supplies • Electronic data processing (EDP) equipment; computer software • Inventory • Accounts receivable, valuable papers and records • Company planes, boats, mobile equipment
Important Loss Exposures: Il Liability loss exposures Defective products Environmental pollution (land, water, air, noise Sexual harassment of employees discrimination against employees, wrongful termination Liability arising from company vehicles Misuse of the Internet and e-mail transmissions transmission of porno material Directors and officers liability suits InherentVirtue or Inevitable Evil: The Effects of Directorsand Officers'Ins urance on Firm Value, Derrick WH Eung and Jason.H Yeh, 03 September2018,https:lldoiorg/10.1111/mir12104 3-9
3-9 Important Loss Exposures: II • Liability loss exposures • Defective products • Environmental pollution (land, water, air, noise) • Sexual harassment of employees, discrimination against employees, wrongful termination • Liability arising from company vehicles • Misuse of the Internet and e-mail transmissions, transmission of porno material • Directors’ and officers' liability suits – Inherent Virtue or Inevitable Evil: The Effects of Directors' and Officers' Insurance on Firm Value, Derrick W. H. Fung and Jason J. H. Yeh, 03 September 2018, https://doi.org/10.1111/rmir.12104
Important Loss Exposures: III Business income loss exposure Loss of income from a covered loss Continuing expenses after a loss EXtra expenses Contingent business income losses 3-10
3-10 Important Loss Exposures: III • Business income loss exposure • Loss of income from a covered loss • Continuing expenses after a loss • Extra expenses • Contingent business income losses