RMI 2101 TOPIC 2

TRM loss exposures

property, net income, personnel, liability

Loss exposure

-ownership of financial or physical assets

- Theft/damage - property loss

-Direct loss - cost of replacing the asset

Property Loss Exposure

If the property suffers a loss, the person who owes or benefits from it suffers a loss financially

Ownership interest

-The most common type of interest

- Can be Present or Future

Future Ownership Interest

when you borrow money ( Loan or Mortgage)

Secured Creditor

-The bank or lender when you take a loan

- Secured creditor holds the title (they own it)

Buyer and sellers interest

- for shipping products ( Boats/Tractor trailors

Bailee interest

-A bailee is an entity who receives property from another under a contract of bailment

-Interest for the bailee is a legal liability to return or cost to replace the property.

Tennant Interest

-continued use interest

-responsible for returning property in reasonable condition

Net income loss exposures

- "Business interruption"

- A firm suffers a primary (usually property) loss - as the result suffers a secondary loss.

- Indirect losses

- Extra losses

- Loss of Income

Net Income Forumla

Revenues - Expense

the normal productive process of a firms interrupted

- Decrease in revenue

- Increase in expenses

- Impacts your bottom line (net income)

Example of events causing net income losses

- Damage to property

- Delivery Truck is stolen

Personnel loss exposures

risk that organization will suffer losses due to key employee suffering a loss (illness, death, disability, etc)

Employees suffer loss

HUMAN CAPITAL RISK

Due to loss of key employee the company suffers...

revenue decreases

expenses increases

Negligence & Legal Liability

-Wealth losses from liability exposure

- Money loss from being sued

-Legal fees

Legal Liability

is established when there was negligence or there was an actual damage or loss

What constitutes negligence

failure of a person to exercise the proper degree of care

-burden of proof is on the injured party

Absolute/Strict Liability

The legal responsibility for damage or injury, even if you are not at fault or negligent.

Measurement Issue

-usually easy to establish injury or damage occurred

-establishing the amount of damage is usually difficult

Measurement of losses

•Property losses

oRelatively simple to calculate

•Bodily injury

oSpecial damages

•Compensate for measurable losses

•Medical expenses

•Loss of income

•Easy to calculate

General damages

-pain and suffering

- Mental Anguish

- Compensate of intangible losses

- Very difficult to estimate and measure

Punitive Damage

-Amounts assesed as a form of punishment

-Gross negligence is involved

-very difficult to estimate and measure why

What is the assumption of risk defense?

Defense where the injured party voluntarily accepts the risks involved.

What is the comparative/contributory negligence defense?

Defense where the injured party's own negligence is compared to the defendant's negligence.

Give an example of voluntarily encountering risk.

Skydiving or attending a hockey game.

Rep Ipsa Loquitur

the thing speaks for itself

presumption of negligence

happens when a bailee fails to return the property in its former condition

burden shifts to the bailee to explain exactly what happened and to demonstrate how the loss occurred without his fault.

Vicarious Liability

Legal responsibility placed on one person for the acts of another.

Vicarious liability example

employers are held responsible for actions of their employees

Joint and Several Liability

negligence of two or more parties contributes to the injury or damage

injured part may recover the entire amount of compensation from any negligent party who is able to pay

Search for deep pockets

poor people do not get sued

Product liability

manufactures of faulty product that injures someone or damages property may be liable

Product Liability losses

-cost of defending and paying claims for injury

-cost of recalling any batches of products suspected of being defective

-damage to your name

Premises Liability

-owner of tenant may be held liable for damage if someone is injured

-if the property of others is damaged as result of a condition in or arising out of the premises

Trespasser

Must warn any hidden dangers

Licensee

No purpose or benefit of owner

Comes onto property with knowledge of owner

Door to door sales people

police

Liqour liability

- Businesses that manufacture, sell and serve alcohol

-Injuries resulting to patron/guest from selling alcohol

dram shop law

a business that sells liquor can be held liable for damages that may result from the sale of liquor

Social Host liability

Social host liable for injuries caused by guests who are served alcohol at a social function underage

Animal liability

Exotic animals (strict liability)

Dogs (some states have strict liability, some states - if a dog never bit before - could escape liability)

Traditional Risk Management

-4 loss exposures: Property, Net Income, Personnel, and Liability

-Silo Approach

Pure insurable risks

Silos

-Property/Liability pure risk (hazard risks): Risk manager

-Personnel risk: human resources

-Operation risk: COO/Business units

-Financial Risk: CFO

-Strategic Risk: CEO/Board of directors

Enterprise Risk Management (ERM)

-manage risk and seize opportunity

-risk based approach to managing an enterprise

-very strategic, scientific approach

1. hazard risks

2. financial risks

3. operational risks

4. strategic or business risk (SWOT)

Hazard Risk

Fire - Floods - Property

Issues with key employees-Personnel

Law suits (liability)

Net Income losses

Typically pure risk

Financial Risk

-Inflation

-Foreign Exchange Rates

- Stock Market

- Interest Rates

- Volatility

- Liquidity

- Credit

- Debt Rating

-Most Speculative Risk

- Not net income risk!

Operational Risk

Risk that arises out of business operations

Combination of Pure and Speculative

Operational Risk Example

Manufacturing products

-Supply chain issues

- service provider system failure

- product recall

Operational Risk Example 2

Regulatory Issues

Employment practices/company policies and procedures

Discrimination

Workplace violence and sexual harassment

Strategic or Business Risk

-Customer service issues, public relations, reputation, competition, bad business decisions (like Blockbuster), intellectual property, ethics, union issues

TRM vs ERM (TRM)

TRM

-TRM is a silo or departmentalized approach

-TRM focuses mainly on hazard type risks (flood, fire, etc)

-Financial type risks handled by CFO, finance, or accounting

-no teamwork

ERM

-integrated approach

-occurs at enterprise level instead of individual departments

-risk management activities heavily impact business decisions

-designed to facilitate comparison and evaluation

-teamwork

TRM VS ERM (ERM)

ERM

-integrated approach

-occurs at enterprise level instead of individual departments

-risk management activities heavily impact business decisions

-designed to facilitate comparison and evaluation

-teamwork

CRO - Chief Risk Officer

looks at all of the risk and decides what is best for the organization

have the ability to change business strategy seize opportunites

CRO is critical

How to identify exposures

1. inspections of plant and facility (walk arounds)

2. contract analysis

3. look at past information

4. share loss information with other similar firms through trade associations

5. checklists/standardized surveys from insurance companies

6. flow chart approach

7. ask employees/managers in the firm

8. financial statement approach

Contributory negligence

Plaintiff was partially to blame

Res Ipsa Loquitur

"the thing speaks for itself"; the doctrine that suggests negligence can be presumed if an event happens that would not ordinarily happen unless someone was negligent

Vicarious Liability

one person becomes legally liable for the negligent behavior of another

example of vicarious liability

employers are held responsible for actions of their employees acting within the capacity of employees. ( this is why employers background check)

Joint and Several liabilty

-negligence of two or more parties contributes to the injury or damage

- involved party may recover the entire amount of compensation from any negligent party who is able to pay

"Search for Deep Pockets"

poor people don't get sued

Product Liability

a manufacturer is liable for any injuries or damages caused by a faulty product

Product liability losses

-cost of defending and paying claims for injury

-cost of recalling any batches of products suspected of being defective

-damage to your name

the assumption of risk defense

A defense to negligence that bars a plaintiff's recovery for harm caused by the defendant's negligence if the plaintiff voluntarily incurred the risk of harm.