genral insurance

FIN 3610 General Insurance

Chapter 3: Introduction to Risk Management

Lecture Overview – Comments from Professor Zietz

 

Welcome back to General Insurance and now to Risk Management Topics!

            In this chapter we will define the meaning of risk management (RM); explain the objectives of risk management; explain the steps in the risk management process; expand on the benefits of risk management; and explain how the risk management process can be used on a personal level.

 

You have probably discovered by now that the field of insurance and risk involves much more than just paying an insurance agent to cover your losses. Insurance involves a great deal of mathematics and structured arrangements to operate successfully. I mentioned in Chapter 1 that there are several definitions of risk. Risk definitions are often broken down in dichotomies of risk such as Pure vs Speculative and Objective vs Subjective. The study of risk and its management is definitely a science.

 

In this chapter we expand on the management of risk by going through the basic risk management process. On slide 3 you will see an important definition:

Risk Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.

 

You will note that the above definition includes two steps in the RM process: 1) identifying loss exposures; and 2) selecting the most appropriate technique. There are also two other steps, so let’s put these steps all in order:

1.      Identifying potential losses

2.      Analyzing and measuring the loss exposures

3.      Selecting the appropriate combination of techniques for treating the loss exposures; and

4.      Implementing and monitoring the RM program.

 

It is important to memorize those steps as you move forward to understanding what tasks and skills are needed to successfully complete the RM process.

 

Keep in mind that not all organizations have the same goals. Obviously, you know of for-profit companies whose goal is to maximize the value of its owners. Non-profits may have a myriad of goals, including serving under-privileged children or spreading a religious message. Regardless of the ultimate goal, the objectives of the risk manager may vary throughout the RM process.

An interesting observation may be found by a little role playing. Imagine for a moment that you are the RM of a large airline. Let’s presume your company is a publicly held company and your job is to help manage risk so as to maximize the value of company to the shareholders. This would include incorporating the risk appetite of your Board of Directors into your decisions. Perhaps your company has very little or no debt and can afford to absorb a certain level of risk. Your sub-goal may be to keep up with the growth of the company by observing how risks change.

Now, let’s say that you became the RM back in August of 2001. Imagine that one of your planes was involved in the tragic events of 9/11. What was your immediate goal on 9/12? Keeping up with growth of the company was definitely NOT your immediate concern. I spoke to an airline RM a month after 9/11 who commented that their immediate goal was to “keep planes in the air.” In other words, to keep the company moving and surviving.  You’ll note on slides 4 and 5 that these goals will definitely be fluid with changes that occur in the firm. A good risk manager needs to be able to handle aggregate risk for their organization while many of the variables will be changing. There is no time for a Risk Management to become complacent!

 

This chapters provides more details on the processes involved with completing each RM

step. Pay careful attention to the specific RM techniques as those will be used throughout the RM process.