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Lecture Outline
(Join Young Risk Manage YRP)
1st consideration in risk management is to gain an understanding
of the base concepts and terminology.
I.

What is Risk?
A.

Uncertainty Concept No universal definition.

1.

Majority of insurance authors define risk as

uncertainty

2.

Risk and probability-if the probability of an

event occurring is either zero or one, there is
no risk since there is no uncertainty.

2. Objective Risk
1.

Defined as the relative variation of actual loss

from expected loss

2.

Declines as the number of exposure units

increases

3.

Is measurable by using the standard

deviation or coefficient of variation

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3. Subjective Risk

II.

1.

Defined as uncertainty based on ones

mental condition or state of mind

2.

Difficult to measure

Chance of Loss
A.

Objective Probability
1.

A priori-by logical deduction such as in games

of chance

2.

Empirically-by induction, through analysis of

data

B.

Subjective Probability a personal estimate of

the chance of loss. It need not coincide with
objective probability and is influenced by a variety
of factors including age, sex, intelligence,
education, and personality.

C.

Chance of Loss Distinguished from Risk

although chance of loss may be the same for two

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groups, the relative variation of actual loss from

expected loss may be quite different.

III.

IV.

Peril and Hazard

A.

Peril defined as the cause of loss

B.

Hazard
1.

Physical hazard physical condition that

increases the chance of loss. Examples are
icy streets, poor designed intersections, and
dimly lit stairways.

2.

Moral hazard dishonesty or characteristics

of an individual that increase the chance of
loss

3.

Moral hazard carelessness or indifference to

a loss because of the existence of insurance

Basic Categories of Risk

A.

Pure and Speculative Risk

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V.

1.

Pure risk a situation where there are only

the possibilities of loss or no loss

2.

Speculative risk a situation where either

profit or loss is possible

3.

Why the distinction is important

B.

Diversifiable and Non-Diversifiable Risks

C.

Enterprise Risk

Types of Pure Risks

A.

Personal Risks
1.

Basic personal risks are premature death, old

age, poor health, and unemployment.

2.

Types of losses are loss of earned income,

extra expenses, and depletion of financial
assets.

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B.

C.

D.

Property Risks
1.

Types of losses include direct physical

damage losses, theft losses, indirect or
consequential losses, and extra expenses.

2.

Perils include natural disasters, dishonesty,

and the failure of others.

Liability Risks
1.

The loss is legal liability for damages arising

out of bodily injury or property damage to
another party.

2.

Perils include negligence, breach of warranty,

and absolute liability.

Commercial Risks
1.

Property risks

2.

Liability Risks

3.

Loss of Business Income

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4.

Other Risks Crime / Human Resources /

Foreign
Loss Exposures / Intangible
Property Exposures /
Government
Exposures
6. Burden of Risk on Society
A.

Need for a Larger Emergency Fund

B.

Loss of Needed Goods and Services

C.

Fear and Worry

VII. Methods of Handling Risk

A. Avoidance:
Move your factory out of an unstable country
B.

Retention
1.

Active (desirable) is the deliberate choice to

assume part or all of a loss exposure.

2.

Passive (dangerous) often results from

ignorance or inertia.

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C.

D.

Noninsurance Transfers
1.

Contracts

2.

Hedging

3.

Incorporation

Loss Control
1.

Loss Prevention (pre-loss)

Bars on door

2.
Loss reduction (Post Loss)
Having a protocol that mitigates the damages of a
risk

E.

Insurance (worth 4.7 Trillion)

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Meaning of Risk Management

Definition of Risk Management - process that identifies loss
exposures face by an organization and elects the appropriate
technique to handle them.
Risk Management and Insurance Management - Insurance
management is simply a sub-set of risk management
Status of Risk Management
Today - Importance is
increasing. Business
philosophy is changing from REACTIVE to
PROACTIVE
Present in most large corporations (either formal or
informal) - but
obviously can be very different across
industries.
Example - use of chemicals - printing industry differs
from dry
cleaners differs from manufacturing
silicon chips
Increasingly regarded as a management specialty field businesses
have become aware that a risk to
enterprise increase so does the
business risk
premium - decreasing available cash for operations investment for future - expansion, etc.
Objectives of Risk Management
Primary Objective - Minimize Pure Risk.

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Pre-Loss Objectives
1.
Economy goal - Businesses desire to prepare for loss in the
most
economical means available - so one must consider all
available methods
AVOIDANCE / RETENTION / TRANSFER TO 3RD PARTY /
LOSS CONTROL / INSURANCE
Note as cost to transfer to 3rd parties increases, businesses must
consider use of Avoidance and Retention (Active) often require the
greatest effort but typically lead to the greatest ultimate savings.
2.
Reduction of anxiety - As mentioned last class - this is
certainly a societal goal but also a goal within an enterprise or
business - old Adage = A happy
worker is a productive
worker.
3.

Meet externally imposed obligations

4.
Creditors - For obvious reasons - creditors may conduct risk
analysis of
borrowers - can range from simple credit check to
a full blown on-site investigation.
5.
Legally imposed - Examples - building codes / workers
compensation
6.

Contractually Imposed - Example - termination clause.

Post-Loss Objectives
1.
Survival of the firm - clearly the primary objective - what
seem like small
exposures can bring catastrophic impact to
the business.

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2.
Continued operations - differs from industry to industry and
within a given industry from business to business. Example utilities/medical/ energy /transportation - auto vs. perishable
goods.
3.
Stability of earnings - risk redress shareholder value as more
resources are used to handle the risk rather than for expansion
or dividends.
4.
Continued growth - must consider how loss could impact
future growth thus a business might choose to pay a high
risk cost by purchasing insurance rather than returning the risk
(and with it the chance that the risk
forecast is wrong)
5.
Social responsibility - As mentioned before - particularly
acute in small communities with dominate employer but can
clearly affect larger enterprises - recent example - BP Gulf of
Mexico disaster - huge PR
campaign geared to demonstrate
the positive attributes of BP.
Risk Management Process
Most authors identify 4 steps:
1.

Identification: To avoid passive retention

2.

Analysis (measurement)

3.

Selection of risk management techniques

4.

Implementation.

(But should also add)

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5.
Continual Evaluation: Reevaluate the assumptions, look at
new insurance rates. Legal changes, Tunnel vision kills companies.
Revaluation is key.
Identifying Potential Losses
prevention almost
cheaper than loss. One should
consider:
A.

Cost of Risk

1.

Calculate expected cost

critical step - cost of

always

direct loss
indirect loss
extra expenses

2.
Determine possibility of loss control and cost associated with
it - such as
increased safety measures.
3.

Determine possibility of loss financing

-

4.

insurance
outsourcing activity
increased line of credit (cost of

capital)

Is Internal Risk Reduction Available?

-

diversification - geopolitical/operational/
managerial
transaction costs - employee re-training
evaluate cost/ ramifications

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4.

Residual Uncertainty what if insurance

company fails?
AMBEST Rating agency

Note - Defense costs can be huge - even if ultimately

unsuccessful - Mattel Case 146 million dollars
B.
Cost Trade Offs risks to not necessarily operate
independently hence enterprise
(the entire company) risk.
1.
Expected Losses/Loss Control typically more spent in
loss control less risk - but
not always
Example Discuss leaking underground storage tank
2.
Loss Financing of Expected Indirect Loss door
minimizes risk of fire
spreading to other
operations

installing fire

3.
Loss Financing of Residual Uncertainty pay more to
avoid
residual uncertainty pay higher premium for
financial stronger
insurance company.
C.

Types of potential loss

1.
Physical damage to property obviously can range from
small (vandalism) to large (explosion)
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2.
Loss of income - shut down of operations; loss to reputation;
product recall
3.
Liability lawsuits - as mentioned before - some potential
liability risk can be foreseen but sometimes a judicial decision
can come out of the blue
4.
Death or disability of key persons - Can not ignore the fact
that loss of a key person can be devastating - not just related
to founders for example
- loss of key marketing / sales
person / key scientist.
5.
Losses from job-related injuries or disease - Typical examples
- Asbestos /
Carpal Tunnel/ Coal Dust. Recently a court held
that exposure to diesel fumes harmful even if less than EPA
standards
6.
Losses from fraud, criminal acts, and employee dishonesty typically seen as issue to retail operations but what about trade
secrets (know-how)
Example involved banks

recent Wall Street Journal most fraud

and for less than $150K.

7.
Employee benefits loss exposures - besides actual injuries residual costs such as workers compensation insurance rates
are impacted for 3 years.
General Rule Business suffers $4 additional cost for
every $1
direct loss - so if $500,00 loss
- Total Loss =
$2,000,000 +
500,000 = $2,500,000 @10% profit
level - necessitates $25,000,000 in additional
sales.
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8.
International loss exposures (political risk) - for obvious
reasons this area is becoming increasingly important - bedsides
commodity costs - must consider local regulations and
customers - just look at recently discussed
differences between
US and Europe for Google (right to be forgotten)
D. Tools for recognizing loss exposures - Always evolving /
changing
Examples -

Advent of GPS tracking devices can reduce

theft
DNA testing
1.

Physical inspection -

Scientific -

Experience
but an
overlooked in
downsizing - loss or brain
drain?

testing/sampling.
usually invaluable
element often

2.
Survey form
allows risk managers to gain
understanding of
operations. But
must be careful to ensure truthful
response
- employees can see what the expected
answer is
3.
Flow chart
appreciating the
of activities.

useful in understanding and

interconnectedness

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[Will discuss in detail later in this semester especially in relation

to
supply chain risk analysis]
4.
Financial statements
how much loss can an
enterprise handle?
where is
cash? if overseas, may be cost
barriers to bringing back to U.S. (taxes)?.
5.

Past loss experience -

depend on a
or how business or
react.

history often repeats itself but as

mentioned before cannot
repeat performance
individuals

Evaluating Potential Losses

Key Concepts
Loss frequency -

how often does loss occur?

Variance as mentioned before - tells us about the likelihood

and
magnitude actual outcome will differ
from expected outcome.
Skewedness
loss possibilities are not uniform.
Correlation
another?

how do (if at all) the variables affect one

(U.S. GDP + Berlin Zoo - pink flamingos.)

Loss severity how big is the loss? for risk manager,
understanding
both frequency and severity
are critical in evaluating risk

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Example -

increased technology may

frequency but

decrease
increase severity. By the
issue is discovered - more product
manufactured and distributed.

time

Guidelines for measuring severity

Maximum possible loss
is
this activity.
Truck

Maximum probable loss -

no chance element - simply what

largest loss possible for
Cement
what is the most likely loss?

Selecting the Appropriate Technique

1.

Avoidance - again, if possible, always the best approach.

2.
Retention use when
also
umbrella policies).
3.

critical, if used, that it is an Active Retention losses are predictible.

Marsh Mac claims - insurance deductible but
insurance policy limit (Discuss -

Noninsurance transfers

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4.
Loss control - typically used in combination with other
methods.
5.
Insurance by a wide margin - most used technique to
transfer risk but as we will start talking about insurance is multifaceted - standard
insurers but also captive
companies/risk retention groups - offer differing
protections

Implementing the Program

Policy statement tells employees (and customers) what to
expect. Educated employees on importance of risk management
Cooperation with other departments critical that risk manager
has cooperation of other departments
Periodic review-must determine if choice = effective
Continual Evaluation of every Step especially base
assumptions text
books refer to periodic
review but needs to be
continual - so many factors
today affect enterprise's risk
exposures.
Example areas Technology changes; Legal changes just one
judicial decision can
completely upend risk
assessments and management; Regulatory
changes - new regulator / legislature.
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The Fascinating World of Insurance

Insurance offers several advantages in handling risk:
Greater Predictability of Actual Losses due to application of
Law of Large Numbers
Transfer of Risk (of an Unknown Amount and perhaps,
Nature) to Another Party for a Sum Certain (i.e. Premium)
Specialized Approach to Analyzing, Assessing and Handling
Risk
Two Basic Premises:
1.
Business should purchase insurance coverage if the premium
is less than
the risk adjusted present value of the Expected
Loss.
2.
Businesses should also consider whether or not the asset for
which
insurance coverage is sought, is redundant. Many
businesses purchase
insurance on assets for which it can
better handle through one of the other means of handling risk.
Effect of Insurance
insurance is by far
means of handling risk.

As mentioned several times 0

the most prevalent

Definition of Insurance
Pooling of fortuitous losses by
transfer of such
risks to 3rd
parties - who agree to indemnify the
transferee (policy holders) for such losses to
provide certain services related to that risk.

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Basic Characteristics of Insurance - 4 Basic Characteristics

1.
Pooling of losses
spreading of losses over many
exposures - causes
the average or
Expected Loss to become closer to
the
Actual Loss
Payment of fortuitous losses - losses that are unforeseen and
unexpected - occur as the result of chance i.e. accidental - Law of
Large Numbers depends on losses being random.
Risk transfer -

Indemnification

Requirements of an Insurable Risk

Started with shippers @ Lloyds coffee shop;
who helped cover each others ships to help
mitigate risks.
General Requirements
Large number of exposure units

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Accidental and unintentional loss

1.

Determinable and measurable loss

2.

No catastrophe loss

3.

Calculable chance of loss

4.

Loss cant be related

5.

Economically feasible premium

Applications of Requirements
How the risk of fire to a private dwelling satisfies
the requirements

How the risk of unemployment fails to meet the

requirements

Adverse Selection and Insurance

Nature of adverse selection

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Consequences of adverse selection

Description of Insurable and Uninsurable Risks
A. Insurable Risks
Uninsurable Risks

B.

Generally

1.

Personal

1.

Market

2.

Property

2.

Financial

3.

Liability

3.

Production

4.

Political

Insurance Distinguished from Other Transactions

How Insurance Differs from Gambling

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Insurance eliminates a pure risk, while gambling

creates a new speculative risk.

Insurance is socially productive, while gambling is

socially unproductive.
How Insurance Differs from Hedging
Insurance transfers a pure risk, while hedging
involves the transfer of a speculative risk.

Insurance reduces objective risk, while hedging

does not.

Types of Insurance
Private Insurance
Life and health insurance

Property and liability insurance

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Government Insurance

Social insurance

Other government insurance programs

Social Benefits and Costs of Insurance

Benefits of Insurance to Society
Indemnification for loss

Less worry and fear

Source of investment funds

Loss prevention

Enhancement of credit

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Costs of Insurance to Society

Cost of doing business

Fraudulent claims

Inflated claims
The Changing
Management

Scope

of

Risk

A.

Financial Risk Management

B.

Enterprise Risk Management

C.

Insurance Market Dynamics

Underwriting Cycle
Consolidation in the Insurance Industry
Capital Market Risk Financing Alternatives
Loss Forecasting
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A.

Probability Analysis

B.

Regression Analysis

C.

Forecasting with Loss Distributions

Financial Analysis in Risk Management Decision Making

A.

The Time Value of Money

[Example of choosing between Policy A and Policy B]

B.

Financial Analysis Applications

[Example of capital budgeting process]

Law of Large Numbers

[Example No. 1 discussed]

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Basis of Legal Liability

A.
1.

Types of Legal Wrongs

Legal wrong is defined as

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2.

B.

Types of legal wrongs include

Types of Torts

1.
2.
3.
Law of Negligence
A.

Negligence is

B.

Elements of Negligence

1.
2.
3.
4.
C.

Defenses against Negligence

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1.
2.
3.
4.

D. Imputed Negligence
1.
2.
3.
4.
E.

Res lpsa Loquitur

Definition
Four elements must be present for it to apply:
1.

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2.
3.
4.

Specific Applications of the Law of Negligence

A.

Ownership of Property

1.
Degree of care required for trespasser, licensee, or
invitee

2.

Attractive nuisance doctrine

B.
Ownership and Operation of Automobiles, Trucks,
Commercial Liveries, etc.
1.

The negligent owner and operator of the vehicle can be

2.

Where the owner is not the operator, the general rule is

that the owner is not liable for the negligence of the
operatorexceptions include the family purpose
doctrine, or an agency relationship exists

C.
1.

Government Liability
Government entities can be sued if

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2.

With respect to government functions,

D.

Charitable Institutions

E.

Employer and Employee Relationships

1.

Must be an

2.

Must be acting

F.

Parents and Children

1.

Common law

2.

Today

G.

Animals

1.

Wild Animals

2.

Domestic pets

Current Tort Liability Problems

..and therefore areas in which the rules may change and
therefore your risk may change as well..
A.

Defective Tort Liability System

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1.
2.
3.
4.
5.
6.
B.

Medical Malpractice Crisis Healthcare costs

1.
2.

C.

Corporate Fraud and Lax Corporate Governance

D. Increase in Mass Tort Liability Lawsuits e.g. Asbestos; Toyota

Braking Systems; Ford and Michelin Tires / Rollovers

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Special Characteristics of an Insurance Contract

Insurance Is ___________________________________ Contract
Insurance Is ___________________________________ Contract
Insurance Is ___________________________________ Contract
Insurance Is ___________________________________ Contract.
Doctrines of Waiver and Estoppel
1.

Waiver

2.

Estoppel

3.

Practical significance of these legal doctrines

Basic Parts of an Insurance Contract

Declarations Page
Definitions
Insuring Agreement

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Exclusions
Conditions

Coinsurance
Nature of Coinsurance
Purpose of Coinsurance

i.

Liability Risk

A.

Business Liability

1.

Tort / Negligence

2.

Strict Liability

3.

Product Liability

4.
Breach of Contract
Term

Defective Manufacturing
Design
Warning

Breach

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Representation
Warranty

5.

Failure to Perform / Complete -

6.

Breach of Fiduciary Duty -

7.

Regulatory

B.

Additional Concepts

1.

Dispute Resolution -

Mediation -

Contractual
Judicial
Regulatory

Arbitration
-

Binding
Non-binding

3.

Appraisal Clauses

II.

Types of Insurers

Violation Law
Regulation
Order

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A.

Types of Private Insurers

Stock Insurance
1.

Ownership
and
stockholders

governance

2.

Status of the
nonassessable

3.

Dominant in the property and liability industry

policyowner

owned

by

contracts

are

Mutual Insurers
1.

Ownership
and
policyowners

governance

owned

by

2.

Dominant in the field of life insurance

3.

Types include assessment, advance premium, and

fraternal

Changing corporate structure of mutual insurers because of

mergers, demutualization, and formation of mutual holding
companies
Reciprocal Exchange
1.

Defined as an unincorporated mutual

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2.

Managed by an attorney-in-fact, which may be a

corporation

Risk Retention Groups

Risk Purchasing Groups

Captives

Lloyds Associations
1.

Lloyds of London
a.

Provides a meeting place

syndicates do the insuring.

b.

Has great financial strength

b.

Major lines of business are ocean marine,

reinsurance, and surplus lines.

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2.

American Lloyds differ from Lloyds of London in

that they are smaller, less prestigious, and not as
financially strong.

Health Maintenance Organizations (HMOs)

III.

Distribution Systems - Agents and Brokers

A.

Legal Status of an Agent

B.

1.

Authorized agent can bind the principal to a

contract.

2.

Sources of authority -

Brokers
1.

Represent insureds

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IV.

2.

Marketing Systems - provide services such as risk

management, loss control, and knowledge where
insurance can be best placed

3.

Are important in the surplus lines market

Claim Settlement
A.

B.

Basic Objectives
1.

Verification that a covered loss has occurred

2.

Fair and prompt payment of claims

3.

Providing personal assistance to the insured

Texas Unfair Claims Settlement Act -- Brief Discussion

Reinsurance
Key Definitions
Reinsurance shifting of part or all of the insurance to another
insurer
Ceding company insurer that initially writes the business
Reinsurer firm that accepts insurance from the ceding insurer
Net retention the amount of insurance kept by the ceding
company
Retrocession reinsurer obtains reinsurance

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Reasons for Reinsurance

To increase underwriting capacity
To stabilize profits
To reduce drain on surplus because of the unearned
premium reserve
To protect against a catastrophic loss
Types of Reinsurance
Facultative reinsurance

Treaty reinsurance
Advantages
Types of automatic treaties
Quota share

Surplus share

Excess of loss

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Reinsurance pool

Other Approaches to Catastrophe Losses

Catastrophe bonds
Catastrophe insurance options

Reasons for Insurance Regulation

Maintaining Insurer Solvency

Contract for future delivery

Possible financial insecurity if insurers fail

Inadequate Consumer Knowledge
Complex product
Difficult to compare and determine monetary value
Protection needed against unethical agents
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Ensuring Reasonable Rates

Making Insurance Available
Historical Development of Insurance Regulation
Early Efforts
State-chartered companies
State insurance commissions
Paul v. Virginia
Ruled that insurance was not commerce
Defeated a challenge to state regulation

South-Eastern Underwriters Association Case

Reversed the Paul decision court ruled that insurance

was interstate commerce when conducted across state
lines and was subject to federal regulation

Cast doubt on the legality of private rating bureaus and

powers of the state to regulate and tax the insurance
industry
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Public Law 15 McCarran-Ferguson Act

Reaffirmed states responsibility to regulate and tax the

insurance industry
Conditionally exempted the insurance industry from
federal antitrust laws

Methods for Regulating Insurers

Legislation

State laws:
Federal laws;

Courts

Constitutionally of state insurance laws

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Interpretation of policy clauses and provisions

Legality of administrative actions by state departments

State Insurance Departments

Areas That Are Regulated

Formation and Licensing of Insurers
Financial Regulation
Rate Regulation
Policy Forms
Sales Practices and Consumer Protection

State versus Federal Regulation

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Advantages of Federal Regulation

Advantages of State Regulation
Shortcomings of State Regulation
D.

Repeal of the McCarran-Ferguson Act

Current Issues in Insurance Regulation

Convergence of Financial Services
Increase in Mergers and Acquisitions
Growth of the Internet and E-Commerce
Insolvency of Insurers
Quality of Insurance Regulation
Deregulation of Commercial Lines
Texas Unfair Claims Settlement Act
Texas Prompt Payment of Claims Requirements
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Property and Casualty Insurance Companies

A.

Balance Sheet

B.

Income and Expense Statement

C.

Measuring Profit or Loss

Rate Making in Property and Casualty Insurance

A.

Objectives in Rate Making

B.

Basic Rate Making Definitions

C.

Rate Making Methods

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An overview of the most commonly used insurance coverage for

the typical risks faced by a commercial enterprise.
Commercial Package Policy
--

--

Overview of Commercial Package Policy

Building and Personal Property Coverage Form

A. Covered Property
1.Building
2.Building personal property
3.Personal property of others
4.Additional coverages (debris removal, preservation of
property, fire department service charge, pollutant
cleanup and removal, increased cost of construction, and
electronic data)
5.Extensions of coverage (________________property,
personal effects and property of others, valuable papers
and records, property off the premises and outdoor
property)
Business Income Insurance
A. Business Income (and Extra Expense) Coverage Form
1.The form covers
2.Extra expenses incurred as
3.Additional coverages include
4.Coinsurance

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5.Optional coverage
B. Extra Expense Coverage Form
1.The form covers
2. ___________ are not covered since the firm is still
operating.
C. Business Income from Dependent Properties
1.
2.
3.
4.
Other Commercial Property Coverage
A. Builders Risk Insurance
B. Equipment Breakdown Insurance -- fka Boiler and
Machinery Coverage
C. Difference in Conditions (DIC) Insurance

Transportation Insurance
A. Ocean Marine Insurance
1.Interests insured:
2.Implied warranties

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3.Perils covered: fire,

Policies may also be written on an ___________ basis
4.Exclusionslosses due to
B. Inland Marine Insurance

Businessowners Policy (BOP)

A. Eligible Firms
B. BOP Coverages
1.Buildings
2.Business personal property
3.Covered causes of loss
4.Business liability insurance

General Liability Loss Exposures

A. Premises and Operations
1.Liability because of
2.Liability because of
B. Products Liability
C. Completed Operations

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1.Typical insureds:
2.Provides coverage for losses that occur
D. Contractual Liability
E. Contingent Liability
F. Other Liability Exposures
1.Liability arising out of ownership or use of autos, aircraft
or watercraft
2.Occupational injury or disease to employees
3.Suits by employees alleging 4.Professional liability
5.Directors and officers liability

Commercial General Liability (CGL) Policy

A. Overview of the CGL Occurrence Policy
Section ICoverages
1.Coverage Abodily injury and property damage liability
2.Coverage Bpersonal and advertising injury liability
3.Coverage Cmedical payments
4.Supplementary paymentscoverages A and B

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B. Overview of CGL Claims-Made Policy

Meaning of Claims Made
Rationale for Claims-Made Policies (___________ problem)
Retroactive Date
Extended Reporting Periods

Employment-Related Practices Liability Insurance

A. Insuring Agreement
B. Co-payment provision
C. Legal Defense
D. Exclusions

Workers Compensation and Employers Liability Insurance

A. Part oneworkers compensation insurance
B. Part twoemployers liability insurance
C. Part threeother states insurance
D. Voluntary Compensation Coverage

Commercial Auto Insurance

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Aircraft Insurance
Commercial Umbrella Policy
A. Basic Features
1.Excess liability insurance
2.Required underlying coverages are
3.Liability coverages: bodily injury and property damage
liability; personal injury and advertising injury
4.Self-insured retention (SIR) for losses not covered
by any underlying insurance but is covered by the
umbrella policy

Liability InsuranceBusinessowners Policy

A. Basic Coverages
B. Amount of Insurance
C. Legal Defense Costs
D. Exclusions

Professional Liability Insurance

A. Physicians, Surgeons, and Dentists Professional Liability
Insurance

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B. Errors and Omissions Insurance

Directors and Officers Liability Insurance

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Commercial General Liability (CGL) Policy

Overview of the CGL Occurrence Policy

Occurrence
-

Section ICoverages
- Coverage Abodily injury and property damage liability
- Coverage Bpersonal and advertising injury liability -

- Coverage Cmedical payments - Supplementary paymentscoverages A and B - Overview of CGL Claims-Made Policy
-

Meaning of Claims Made

Rationale for Claims-Made Policies (long-tail problem)

-

Retroactive Date

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Extended Reporting Periods -

Employment-Related Practices Liability Insurance

-

Insuring Agreement

Co-payment provision

Legal Defense

Exclusions

Workers Compensation and Employers Liability Insurance

One of the principal areas of liability for a business is that arising
from its employees.
This liability regarding employees is
Employee injuries account for in excess of
= cost to businesses.

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When we discussed Automobile Liability the risk arises from

action by an insured.
You hit another vehicle
Same with Commercial Auto Your employee hits another vehicle.
Employers Liability typically arises from the employers inaction
=>
Key =
Therefore issue is what is a safe workplace under the given
circumstances => i.e. whats required to have a safe coffee shop
is different than what it takes to make a safe metal shop.
4. Brief History

Courts dramatically changed the legal relationship and therefore

the legal responsibility of employers.
8.
9. 3 Basic Rules Protected Employers
1.

2.

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3.

Eventually, society realized that the pendulum had swung

too far.
Courts and legislatures acted:

10.

WORKERS COMPENSATION LAWS

Earnest workers compensation laws date back to essentially to

mid 1800s; 1846

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That evolution was very evident with the changes in the Texas
Workers Compensation Law.

Talk about L.S. Mitchell

Business began opting out of the workers compensation system

and taking their chances at the courthouse.
Talk about East Texas Memorial Medical Center
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Remember -

The TX Legislature had 2 options:

Part oneworkers compensation insurance

Part twoemployers liability insurance

Part threeother states insurance

- Voluntary Compensation Coverage

Commercial Auto Insurance

Aircraft Insurance

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- Aviation Insurers (written by a relatively small number of

aviation pools)
- Aviation Insurance for Private Business and Pleasure
Aircraft
- Physical damage coverage (can be written on an
basis; or

; or
)
- Liability coverage
Commercial Umbrella Policy
- Basic Features
- Excess liability insurance
- Required underlying coverages
- Liability coverages: bodily injury and property damage
liability; personal injury and advertising injury
- ________________________(____) for losses not covered by any
underlying insurance but is covered by the umbrella policy
- Exclusions
Liability InsuranceBusinessowners Policy
- Basic Coverages
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- Business Liability coverage

- Medical expenses coverage
- Amount of Insurance
- Legal Defense Costs
- Exclusions
Professional Liability Insurance
- Physicians, Surgeons, and Dentists Professional Liability
Insurance
- There are two insuring agreements.
- Liability is not restricted to
physician or surgeon.

the

- Current forms permit the insurer to

.
- Professional liability insurance is ______ a substitute for
general liability insurance.
-

Errors and Omissions Insurance

Directors and Officers Liability Insurance

-

Insuring Agreement

Exclusions

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Supply Chain Risk Management

-

(SCRM)

increasing reliance on other entities for Companys success

historically businesses expend ____ of budget on goods and

services from outside vendors (3rd parties)
today many companies spend over _____ of their budget on
outside goods and services
-

due to efficiency advantages -

(1)

(2)
(3)
-

additional regulatory compliance both

increased levels of economic uncertainty

shorter ____________ / rapid technological change

demanding customers

supply side capacity constraints think of

consolidation of operations to gain economies of scale

Result

ever

Supply Chain Risk

Supply Chains are more ______ than

before
Need to handle that
increased risk

defined as
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from sources of

Identify Internal and External Environments

-

Note -

that

Where to Start ?

typically good starting point is

as with all risk management it is important to

Effective team would include members from areas within the

business focused on:
-

finance
logistics
manufacturing
quality control
senior management -

best if members are

responsible for

results in better buy in to

process
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Must be ____________ in the company culture to be effective

should meet regularly

discuss risks - changes in
environment - effects on contingency plans - conduct
simulations / tests
Example -

Remember

Effective SCRM -

(1)

(2)

(3)

Example -

Nokia vs. Erikson case

[ GO TO NOTIONAL SUPPLY CHAIN PROCESS FLOW ]

Terms Used therein

Major Categories:

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Upstream Inputs

Distribution

Manufacture

Downstream Outputs

Sub-Categories:
Infrastructure

Utilities

Raw -

Converted

Process Functions
People

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Obvious that these sub-categories affect the Suppliers and

Production / Manufacturing, but why do we consider the
Customers?
1.
2.
3.
Remember
that the process flow stops with your
customer but what
if
Answer

Having identified potential risks, what is next?

and

Analysis.

need to analyze each risk and determine the likelihood

consequence i.e.

Many methods of analysis

Bow-Tie Risk Analysis Method

[ GO TO BOW TIE RISK ANALYSIS METHOD ]

Bow-Tie Method looks at any

(1)

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(2)

___________ - risk remaining after

treatment

Remember 5 ways to handle risk

-

Avoidance
Retention (active / passive)
Non-Insurance transfer to 3rd
party
Loss control (pre and post

Insurance

loss)

In evaluating risks one must consider the businesss

_______________.
Risk Tolerance Graph
High

Buffer
Eliminate /Avoid Risk

Likelihood
of Event
(________)
Acceptable Risk Frontier

Low
Minor

Major

Consequence of Event (_________)

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concept allows prioritization of risks

may
-

other risks may warrant -

if low, business
decide to take no further
action - i.e._____________.

(1) some type of buffering

__________- use of multiple
suppliers for example, or
building inventory.

(2)

___________________.

Once business understands its supply chain, it can address how

best to handle or treat those risks.
3 Basic Elements of Supply Chain Risk Management Program:
1.
2.
3.
Protecting and Securing the Supply Chain
-

essential because

(2)

(1)

Example use of corporate jet and

shipment of gold
(1)

Physical Security

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(2)

Access Control -

(3)

Personal Security

(4)

Education and Training

(5)

Procedural Security -

(6)

IT Security

(7)

Business Partner Security

(8)

Conveyance Security

Responding to Events
-

obviously with the best pans, unexpected events occur

Cement Trucks are Real

Definition of a Crisis

(i)
(ii)
(iii)
(iv)

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So Crisis Management
is the overall strategy and tactical
responses of business to (i) recognize; and (ii) respond
effectively, efficiently and comprehensively
to actualized threats.
recognition therefore includes pro-active
measures to detect events
As with all corporate hierarchies, Crisis Management teams
operate at all levels of the business.

Executive Crisis
Management Team
T
ECMT

__________ Crisis Team

_____ Crisis MT

_______ Incidents
affecting Business

__________ Crisis MT

Site & Functional Teams

__________ Crisis Team

Personnel __________
response

__________ Response Team

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Each level will have specific Trigger Points events that cause the
team to be activated
need to consider triggers very carefully otherwise senior
management may appear uninterested / uncaring think of BP
Gulf disaster / Head of Bears Stern playing in bridge tournament
as firm was collapsing
Important not to base all trigger points on dollars e.g.
trigger may be when the frequency reaches a pre-determined
level.
Important to avoid organizational reluctance to report
incidents avoid compensation schemes that penalize reporting
Ideal Crisis Response Process should include the following steps
1.
2.
3.

Risk Assessment

4.
5.

Communication to Stakeholders

6.

Event Control and Resolution

7.

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8.

Plan maintenance, training and preparation

Continuity of Operations
Business Continuity Plansthose activities, programs, system
developed and implemented prior to an incident used to
mitigate, respond to and cover supply chain disruptions, disasters
and emergencies
After addressing immediate concerns / needs rescue / medical
attention / shelter / protection (think international events or
looters), ________________________________ is key to resuming
operations
Continual Monitoring of Risks and their Treatment
Critical that business implement a monitoring program evaluating
plans, procedures and capabilities through
(i)
(ii)
(iii)
Testing and Adjustment of Plans

goals should be:

(1)

Determining whether or not crisis response process works

and how it can be improved

(2)

Testing capacity (e.g.______________________)

(3)

Reducing time to accomplish a process (e.g.

__________________)
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(4)

Increasing awareness and knowledge among employees

about risk management plan

(5)

Incorporating lessons learned from previous tests and actual

incidents

Discuss Examples

Nokia vs. Erikson

Boeing

Toyota

Ford

Steps to Take:
(1)

Improve demand planning

work with customers to
avoid being blindsided by changes in demand again Ford
Example

(2)

Work with suppliers to create ________________

(3)

Diversify sourcing
chain failure

(4)

Extend insurance coverages when possible

reduces risk of catastrophic supply

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(5)

Use large 3rd party logistics provider

typically larger
organizations have greater up to date knowledge of
conditions e.g. which ports are closed or are experiencing
delays which might cause need to divert shipments to
another port and then transported to manufacturing plant

(6)

Model and optimize inventories on a disaggregated basis

i.e.

(7)

Increase product component standardization think of Apollo

13 carbon dioxide problem square and round filters
Note -

(8)

Create centralized product data management system

(9)

Raise visibility along extended supply chain

(10) Monitor specific warning signs e.g.

So we get back to fundamental process:

(1)

Understand risk environment

(2)

Identify and assess current risk

(3)

Quantify and prioritize risk

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(4)

Develop risk handling technique

(5)

Implement plan

(6)

Continually monitor effectiveness.

Sounds like the basic risk management process .

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