APPLICATION QUESTION 1

88 CHAPTER 4 / ENTERPRISE RISK MANAGEMENT AND RELATED TOPICS Insurance option (79) Integrated risk program (71) Interest rate risk (69) Internal rate of return (IRR) (83) Intranet (85) Loss distribution (82) Mutually exclusive events (80) Net present value (NPV) (83) Predictive analytics (85) Regression analysis (81) Risk management information system (RMIS) (84) Risk maps (85) Securitization of risk (78) "Soft" insurance market (75) Surplus (76) Time value of money (82) Underwriting cycle (75) Value at risk (VAR) (85) Weather option (79) insurance company possess to offer integrated risk management products? 2. A risk manager self-insured a property risk for one year. The following year, even though no losses had occurred, the risk manager purchased property insur- ance to address the risk. What is the best explanation for the change in how the risk was handled, even though no losses had occurred? 3. How do insurance company mergers and insurance bro- kerage mergers impact the practice of risk management? 4. a. What would be the effect of ignoring the time value of money when making risk management decisions? b. What does the net present value of a loss control investment really represent to the owners of the organization? 5. During a "hard" insurance market, a manufacturing company decided to self-insure its workers compensa- tion loss exposure. The company hired a third party to administer the workers compensation claims. Even though the risk was being self-insured, the risk man- ager insisted that the third-party administrator main- tain meticulous records. When asked why such detailed records were necessary, the risk manager replied, So we have a good story to tell an insurance company next year." What did the risk manager mean? REVIEW QUESTIONS 1. Name three speculative financial risks that may be con- sidered by a risk manager. 2. How does enterprise risk management differ from tra- ditional risk management? 3. What is the underwriting cycle? Differentiate between a "hard" and a "soft" insurance market. 4. What is meant by "consolidation" in the insurance industry? 5. How does securitization of risk increase capacity in the property and casualty insurance industry? 6. a. Why is loss forecasting necessary when making a decision about whether to retain or transfer loss exposures? b. What techniques can a risk manager use to predict future losses? 7. What is the danger of simply using past losses to esti- mate future losses? 8. Why is time value of money analysis used in risk man- agement decision making? 9. What variables are difficult to quantify when analyzing investments in risk-control projects? 10. a. What is a risk management information system (RMIS)? b. What is a risk management intranet? INTERNET RESOURCES Casualty Actuarial Society (CAS) promotes the application of actuarial science to property, casualty, and similar loss exposures. To learn more about the CAS, its research, and its publications, access the site at casact.org Insurance Information Institute (III) is an excellent resource. The Ill provides a wealth of information about the prop- erty and casualty insurance industry, as well as reports on timely topics. It also provides information on the financial services industry. Visit the site at iii.org APPLICATION QUESTIONS 1. Integrated risk management programs are new to many risk managers and the insurance companies that offer such programs. What additional expertise, aside from knowledge of property and casualty insurance, must an International Risk Management Institute (IRMI) seeks to be the premier authority in providing expert advice and practical strategies relating to insurance and risk man- agement. The organization has a large online library with information on many insurance and risk manage- ment topics. Visit the site at irmi.com