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sec_2_qualitative_analysis.pptQualitative Analysis
Learning Objectives
Discuss the purposes of qualitative and quantitative analysis and characteristics of each.
Explain measurement scales and areas of qualitative analysis.
Discuss the assessment of broad loss exposures that may have a financial impact on the organization but may be difficult to quantify.
Learning Objectives
Explain the purpose, characteristics of quality loss data and the basic ways loss data can be organized for analysis.
Discuss risk mapping and how it is used as a key risk management tool.
Skills Application Case
Diamond Creek Resorts International, Inc. (DCRI)
Learning Objective #1:
Discuss the purposes of qualitative and quantitative analysis and characteristics of each.
I. Qualitative Analysis
Purposes
The “what” analysis
Identification and evaluation of loss exposures that cannot be easily measured by traditional statistical or financial methods
Qualitative Analysis
Attempts to assign relative values to determine implications and scope of effects risks have on an organization; does not try to assign hard financial values to assets, expected losses and cost of controls
Helps management understand the potential impact of the organization’s ultimate risks on performance
Qualitative Analysis
Characteristics
Conducted using questionnaires, surveys, task forces, workshops and collaboration with a variety of internal and external knowledgeable groups related to an organization
Frequently addresses the following questions:
Should we do this?
What is the impact on the organization’s reputation or morale?
II. Quantitative Analysis
Purposes
The “how much” analysis
Attempts to accurately measure risks by using acceptable traditional methodologies to calculate relative numerical values
Quantitative Analysis
Characteristics
Conducted by using analysis of losses, exposures, costs, benefits and financial statements
Frequently addresses the following questions:
Can we do this?
What is the financial impact of this?
III. Reasons to use both Qualitative and Quantitative Analyses
Valid answers are needed, e.g., predicted losses, value of claims
Costs and benefits are primary factors of decision making
Non-monetary factors are part of the decision-making process, e.g., reputation, morale and citizenship
Learning Objective #2:
Explain measurement scales and areas of qualitative analysis.
II. Measurement Scales of Qualitative Risk Exposures
Identification methods should be used to analyze those qualitative risks that could have a potentially harmful impact on the organization, although they are not subject to financial measurements
Measurement Scales
Measurement scales depict relative values that are not easily quantified
Critical risks – assigned to a level to capture their critical nature to the organization, e.g., losses that could bankrupt the organization, threaten survival or stop operations
Important risks – could result in losses that would require the organization to borrow external funds to continue operations
Measurement Scales
Less important risks – could result in losses with a low financial impact that would not harm operations or could be paid from existing cash flows
Measurement Scales
Severity level measurement scales
High severity
Moderate severity
Low severity
Measurement Scales
Probability or frequency level measurement scales
High likelihood of occurrence
Moderate likelihood of occurrence
Low likelihood of occurrence
III. Areas of Qualitative Analysis
Management’s appetite for risk
Company history
Long-term objectives
Growth mode or stage in growth cycle
Financial stability
Market maturity
Competition and the need to take risks
Public image
Appetite for risk vs. financial ability
Areas of Qualitative Analysis
Innovation, product development, and marketing
Criticality to the organization
Market positioning and market share
Competition
State-of-the-art product development
Areas of Qualitative Analysis
Business interruption exposure
Technology
Production capacity
Degree of automation/Internet marketing
Nature of operations, e.g., inherently hazardous
Areas of Qualitative Analysis
Contractual
Enforceability of hold harmless and indemnification agreements under applicable jurisdictions
Willingness and financial ability of other party to perform
Financial capability and attitude of insurers providing additional insured status and contractual liability
Areas of Qualitative Analysis
Compliance and regulatory requirements
Industry subject to heavy regulation
Management awareness of regulatory governmental requirements
Possible industry and voluntary regulation
Penalties, fines, and public image
History of enforcement
Areas of Qualitative Analysis
Safety (internal and external)
Union concerns related to safety
Ergonomic audits
Existence of safety programs
Level of management support for safety programs
Ability to recruit and retain work force
Areas of Qualitative Analysis
Implications on employee productivity
Crisis management plan
Disaster recovery
Security plan
Possibility of terrorism
Areas of Qualitative Analysis
Social responsibility and citizenship
Industry profile – high or low
Management’s concern with reputational risks
Effect of negative press
Use of outside auditors
Areas of Qualitative Analysis
Internal policies
Audit and oversight
Internal
External
Board involvement
Areas of Qualitative Analysis
Employment issues
Leasing
Contract
Seasonal
Mobile workforce
Employment Practices Liability (EPL)
Areas of Qualitative Analysis
roduct guarantees
Product recall
Ethics policies and procedures
Learning Objective #3:
Discuss the assessment of broad loss exposures that may have a financial impact on the organization but may be difficult to quantify.
IV. Financial Assessment
Purpose – to identify and evaluate those broad loss exposures that may have a financial impact on the organization and are difficult to quantify
Financial Assessment
Revenue growth
Relative to increase in expenses and fixed costs
Improvement of market share compared to overall growth in market
Compared to competition either in industry or trade area
Financial Assessment
Profitability
Criticality
Importance of profitability to the organization
Organization’s profit margin
Nature of organization
Stage of growth cycle
Shutdown
Financial Assessment
Adequacy of return, e.g., total dollars, earnings per share, profit margins
Management’s overall expectations
Budget
Enough return on its investments to fund other opportunities
Financial Assessment
Industry standard – comparison to the industry and competitors
Stockholder expectations
Management implications – bonuses, stock options
Financial Assessment
Financial capacity – the organization’s ability to fund projects, activities, etc.
Current needs vs. future opportunities
Retention vs. transfer options
Liquidity and cash flow
Financial Assessment
Long-term debt and cost of capital
Credit rating
Borrowing costs
Outstanding letters of credit
Retained earnings
Learning Objective #4:
Explain the purpose, characteristics of quality loss data and the basic ways loss data can be organized for analysis.
V. Loss Data Analysis
Purpose – application of various methods of analyzing loss data to identify and understand the potential impact those losses may have on the organization’s risk management program and the total cost of risk
Characteristics of quality loss data – without a reliable degree of comfort in each of the following areas, the credibility of loss analyses suffer
Loss Data Analysis
Completeness
Enough loss data (frequency); a rule of thumb is at least 5 years of data, preferably 10+ years and at least 30 data points per year
Adequate details about each data record
Understanding components of paid and reserve amounts
Loss Data Analysis
Consistency
Same types of data should be provided for each data record
Consistent policy year, data record year, or calendar year
Consistent recording methodology
Loss Data Analysis
Integrity
Data should be current
Data should be checked for accuracy related to the type of information and reserves from its sources
Loss Data Analysis
Relevancy Data should be current
Data that yields information on matters about which the organization is concerned
Discontinued or divested operations
Acquired operations
Commingling of data
Data not relevant to the loss
Loss Data Analysis
Organizing loss data
Four classifications of types of losses
Property
Real property vs. personal property
Location of property
Loss Data Analysis
Perils causing loss
Human perils, e.g., arson, pollution
Economic perils, e.g., strikes, obsolescence, inflation
Natural perils, e.g., hail, earthquake, hurricanes
Large loss report
Loss Data Analysis
Human resources
Employee injuries
Length of employment when injured
Accident repeaters
Cause of injury
Type of injury
Body part injured
Loss Data Analysis
Evaluation of time intervals
Location of accident (whether company location or another location, etc.)
Any other appropriate, relevant or meaningful categorization
Termination
Retirement
Loss Data Analysis
Liability
Litigation report
Large loss report
Net income
Net income losses – decrease of net income or increase of expenses
No loss reports/information for net income losses
Loss Data Analysis
Frequency and severity
Pareto Principle – 80/20 rule – 20% of the causes will result in approximately 80% of the problems
Loss Data Analysis
Number and cost of losses
In each severity range
At each location
By line of coverage
By type of loss
By type of injury
By length of employee’s service
Other demographic data
Learning Objective #5:
Discuss risk mapping and how it is used as a key risk management tool.
VI. Risk Mapping
Risk mapping – a visual analytical tool from which all risks of an organization can be identified and the potential impact can be understood
Risk maps are useful in the following ways:
Serve as a powerful representation of an organization’s vulnerability to unforeseen loss exposures and may be simple or complex
Used to convey important risk information in concert with the risk manager’s recommendations to senior management
Risk Mapping
Support certain risk control decisions
Assist with risk financing decisions
Model the effects of potential exposure scenarios that might develop in the future
Track risk reduction results
Monitor changes in exposures over time
Risk Mapping
A simple risk map consists of a graph divided into four quadrants, each reflecting a different blending of frequency and severity characteristics for each risk
A Simple Risk Map
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VII. Summary
Non-quantifiable risks are subject to identification and analysis
Qualitative risks that are not analyzed can cause significant losses
Qualitative risk analysis requires a different type of thought process from that of quantitative risk analysis
Qualitative risk analysis techniques should be used in conjunction with quantitative risk analysis techniques
Review of Learning Objectives
- Discuss the purposes of qualitative and quantitative analysis and characteristics of each. (p. 4)
- Explain measurement scales and areas of qualitative analysis. (p. 7)
- Discuss the assessment of broad loss exposures that may have a financial impact on the organization but may be difficult to quantify. (p. 14)
Review of Learning Objectives
- Explain the purpose, characteristics of quality loss data and the basic ways loss data can be organized for analysis. (p. 17)
- Discuss risk mapping and how it is used as a key risk management tool. (p. 24)
Thank you!
Qualitative Analysis
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