Chapter 6- Risk Management


Published on

1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Chapter 6- Risk Management

  3. 3. IDENTIFYING AND ANALYSING LOSS EXPOSURES A loss exposures is a set of circumstances that presents a possibility of loss, whether or not it actually takes place.  Element of property loss exposures: - the value exposed to loss - the peril causing the loss - the potential financial impact of the loss 
  4. 4. TYPES OF PROPERTY AND VALUES EXPOSED TO LOSS i. Real property ii. Personal property - tangible property - intangible property iii. Non-owned property
  5. 5. i. Real Property Structures that intended to be permanently attached to the land. a) Unimproved land  Real estate excluding all permanent property improvements.  Classified separately because values are tough to determine and perils that can cause damage are distinctive or unusual.  Not covered by insurance. 
  6. 6. b) Buildings and other structures  Loss exposure depends on the type of construction, occupancy and location of property.  Potential loss exposures includes: i. values of building and structures directly exposed to loss. ii. Income lost until damaged property is repaired or replaced.  These exposures are almost always insurable.
  7. 7. ii. Personal Property  Includes all property other than real property. Categorized as tangible or intangible. Tangible property  Property that has physical form.  Money and securities; • All types of monetary asset. (e.g: cash, securities and notes) • Loss exposure varies between size of business. • Biggest lost exposure is theft. a)
  8. 8. Accounts receivable; • Paper or other means on which account receivable are recorded is subject to physical damage, destruction or removal of possession. • Loss potential can be reduced by implementing loss control methods.  Inventory; • Defined as raw material, good in progress and finished goods. • Loss exposures include perils of transportation, fluctuation of values and when the time supplier suffer loss and unable to deliver. 
  9. 9.  Furniture, equipment and supplies; • It consists of many separate pieces and relatively low value and frequently shift from one location to another. • Thus it is impractical to focus on one item for precise valuation and it is difficult to keep and accurate inventory. • May then lead to risk management problem.
  10. 10.  Machinery; • It subject to depreciation and obsolescence and can be very costly to reproduce. • Loss exposures usually caused by breakdown of machinery which will resulted in additional loss consequences. • Example is damage to power, heating, cooling and lighting system. • It also subject to unique perils such as technological advances. • It is usually uninsurable.
  11. 11.  Computer equipment; • It includes software, hardware, data in the system and discs, cards or tapes on which it is recorded. • It requires special environmental control system such as separate temperature and humidity control. (e.g: magnetic tape) • Other loss potential is from computer fraud and obsolescence.
  12. 12.  Valuable papers, books and documents; • It includes maps, books, drawings and other documents. • It creates special loss exposure because they are small, light and easily destroyed or lost. • It also can be difficult to value and reproducing it is time consuming and may lose income or incur additional expense.
  13. 13.  Mobile property; • It consists of cars, aircraft, boats and other mobile machinery. • Exposed to special hazards arise from transportation. • Collision is a major cause of loss. • Mobile property is usually insurable.
  14. 14. ii. b) Intangible property  It includes goodwill, copyrights, patent, trademark, trade names, leases and leasehold interest, licenses and trade secrets.  They are difficult to recognize and value.  Some intangible asset exposures are insurable and some are not.
  15. 15. iii.  Non-owned Property: Have less obvious of losses than losses by damage to owned property. Non-owned property include:  Bailed property:  Dry cleaner or laundry and warehouse operators have on their premises property of customers which they are not legally responsible.  Leased property:  The terms of the lease agreement usually determine who is responsible for losses. But some leases require tenants to pay for repairs towards damage on premises.  Property on consignment:  Between distributors and retailers should be spelled out in a contract of the responsibility for losses.
  16. 16. PERILS CAUSING PROPERTY LOSSES There are an infinite number of perils that can destroy or damage property.  Many perils for which insurance is readily available but many causes of loss that are excluded from insurance coverage such as explosion as a human peril.  A peril covered by insurance policy is defined in the policy to include only what the insurer intends to cover. 
  17. 17.   Being familiar with the insurance definitions of particular perils may be useful in the risk management process. Examples of natural and peril events: Natural perils – Acts of nature • • • • • • • • • Collapse Earthquake Fire of natural origin Flood Landslide/mudslide Meteor shower Tidal waves Volcanic eruption Wind (tornado, hurricane) Human perils – Acts of individual or small group of individual Economic perils – Acts of large group of people who act independently responding to particular conditions Chemical leakage Discrimination Embezzlement Human error Pollution (smoke, fog, water, noise) Sabotage Terrorism Theft, forgery, fraud Vandalism • Changes in consumer tastes • Currency fluctuations • Depression (recession) • Inflation • Obsolescence • Stock market declines • Consequence of strikes • Technological advances • War • • • • • • • • •
  18. 18. FINANCIAL CONSEQUENCES OF A PROPERTY LOSS  There are many type of valuation associated with property, such as: i. ii. iii. iv. v. vi. vii. viii. ix. methods Historical cost Tax-appraised value Accounting (book) value Replacement cost Reproduction cost Functional replacement cost Market value Actual cash value (depreciated replacement cost) Economic or use value
  19. 19. i. Historical cost;  This represent the price paid to acquire the asset.  HC is a useful indicator to assess property losses for assets that are kept for a relatively short period of time such as inventory.  The longer the assets remain with the firm, the less useful is HC since it will be soon be outdated because of inflation, changes in technology and other factors.
  20. 20. ii. Tax-appraised value;  Tax appraised value is usually determined by the local authority (government) and is of little use to other parties.  This valuation is only useful for the purpose of determining local council rates of taxes that are payable by property owners to the local authority based on property values.
  21. 21. iii. Accounting (book) value;  Book value is HC less the accumulated depreciation.  Accumulated depreciation is an estimation of the decline in the value of the asset over its useful life, and is determined using accounting assumptions.  However, book value will not represent the current value of the asset and may sometimes be revised.
  22. 22. iv. Replacement cost;  RC is one of the most useful measures of assessing the property loss exposure.  RC is the amount required to replace a lost, damaged or destroyed asset  For buildings, the replacement cost may be determined by:  Quotations or bids by contractors or valuers  Using construction price index  Using square foot construction cost and then extrapolating in for the entire building
  23. 23.  For personal property, the replacement cost may be determined by:  Begins with an inventory that owns or uses at each of its facilities  Once developed, personal property falls into number of broad classifications  Method of establishing the RC of items in each broad category  Normally the process performed on computers which can be easily brought up to date with current prices as needed
  24. 24. v. Reproduction cost;  Some assets cannot be replaced with assets that readily available in the market. Instead they have to be replicated or reproduced.  For example documents, maps, paintings  Reproduction cost represents the cost of reproducing the assets using the same material, artistry and other expertise comparable to that used in the original
  25. 25. vi. Functional Replacement Cost;  For certain specific assets, RC may not be suitable simply because the asset to be replaced is no longer available.  Example mobile phones  FRC is an assessment based on the RC of a different model of asset but which is capable of performing the same function as the old one.
  26. 26. vii. Market value;  The market price represents the price to be paid between a willing seller and a willing buyer in an arm’s length transaction.  However, in certain cases, market value may be difficult to assess in the absence of a secondary market for such assets.
  27. 27. viii. Actual Cash Value (Depreciated Replacement Cost);  The actual cash value is replacement cost less its depreciation. • The depreciation may be calculated on a different basis than that used for accounting purposes. • Can be applied to real or personal property.
  28. 28. ix. Economic or Use Value For valuing items of property based on the value of the future income stream attributable to that item of property.  Not affected by cost of an item or expenses that will incurred. 
  30. 30. Standardized questionnaire;  Thorough survey/questionnaire to identify items of tangible property whether real or personal.  Provide indications of intangible property i. Loss Histories;  Know the amounts, causes of losses.  Helpful in analysing loss exposures as a basis for forecasting the frequency and effective control of an organisation’s future actual loss.  Good predictor for future losses. ii.
  31. 31. Financial statements and underlying records;  Identify loss by referring organization’s income statement.  Focus on revenue section iii. Other records and documents;  Minutes of board meeting can reveal plan to acquire or dispose.  Records, memorandum or correspondence may reveal property exposures for example from purchasing and maintenance department. iv.
  32. 32. Flowcharts;  Extend beyond an organization, encompassing suppliers and customers and the routes to them.  Suggest the importance: i. Suppliers’ and customers’ properties ii. Transportation bottlenecks iii. Key role of an organization’s vehicles v.
  33. 33. Personal Inspections;  May discover assets that are not identified on any balance sheet or flowchart or find any reported assets no longer exist but yet to be removed from records. vi. Consultation with experts within and outside the organization;  Discussion with front line  Supervisors and middle managers may have alternative assets give better serve.  Experts outside can determine the replacements cost of assets. vii.
  34. 34. THE END