A practical look at risk management and planning for your business

1. Ri k M tRisk Management
Michael A. Cristal, CPCU, ARM
Consolidated Risk Management

2. What is Risk Management?What is Risk Management?

3. Basic Premise
The Purchase of Insurance does not:
• Prevent a loss from occurringg
• Maintain market share in the event of a loss
• Guarantee business continuity• Guarantee business continuity

4. C A i d i h LCosts Associated with Loss
• Time to Investigate• Time to Investigate
• Determination of Insurance Coverage
• Deductible (if insurable)• Deductible (if insurable)
• Non‐Insurance Costs
• Time to negotiate settlement• Time to negotiate settlement
• Negative publicity
• Increased Insurance Costs• Increased Insurance Costs

5. Risk Management
P f id if i l i d• Process of identifying, evaluating and
managing exposures to accidental loss
inherent in organization’s operations

6. Risk Control
E b di t h i d i d t• Embodies techniques designed to
minimize the frequency and severity of
accidental losses

7. Risk Control Techniques
• Transfer risk contractually to third party• Transfer risk contractually to third party
• Segregation or duplication
• Avoidance or Elimination• Avoidance or Elimination
• Reduction through
– SafetySafety
– Security
– Education
– Catastrophe Planning

8. Risk Finance
E th d f i f• Encompasses methods of paying for
losses that do occur

9. Risk Finance Techniques
T f t I C• Transfer to an Insurance Company
• Retain or assume the risk
• Large Deductible, Retentions
• Modified Self Insurance• Modified Self Insurance
• Ignorance
• Transfer contractually to a third party

10. Historical Perspective
• Pre 1970’s ins rance rates appro al req ired• Pre‐1970’s insurance rates approval required
• Little differentiation in rates from Insurer to
InsurerInsurer
• Late 1970’s switched to file & use
• Interest rates took off
• Cash flow underwriting
• Premium differentiation significant

11. Historical Perspective (continued)
• Insureds shopping and switching brokers and• Insureds shopping and switching brokers and
Insurers
• Throwing the baby out with the bathwater
• Institutional knowledge gone
CONSOLIDATED RISK MANAGEMENT

12. Historical Perspective (continued)
F t 500 C i t Ri k• Fortune 500 Companies create Risk
Management Departments
– Institutionalize the Risk Management issues
– Control the losses
– Finance the losses
CONSOLIDATED RISK MANAGEMENT

13. Basic Risk Management
Philosophy

14. Better to have a fence at the
top of the hill…

15. Rather than an ambulance
at the bottom

16. Common Findings from
our Risk Assessments...

17. Lack of Business Continuity Planning
• 88% of all businesses that have a major
loss are out of business within 2 years
• It’s all about Market Share

18. What’s troubling about this picture?

19. Back‐Up Data
• D plication• Duplication
• Segregation

20. Contractual Transfer
• Vendors• Vendors
• Suppliers
• On‐Site Contractors

21. Purchase Orders Should Include
• Indemnification and hold harmless cla ses• Indemnification and hold harmless clauses
• Minimum Insurance Requirements to fund the
indemnification clause
• Requirements to submit Certificates ofRequirements to submit Certificates of
Insurance verifying coverage

22. General Insurance Issues
• Consistent Named Ins reds on all policies• Consistent Named Insureds on all policies
• 90 day notice of cancellation, notice of non‐
renewal
• Most state laws only require 30 daysMost state laws only require 30 days

23. Failure to Adequately Identify an
Organization’s Appetite for Risk
• Ins rance sho ld be for the loss that o ld be• Insurance should be for the loss that would be
a financial hardship
• Too many organizations purchase insurance
with inappropriate deductibles

24. Property Insurance Issues
Bl k t P t C• Blanket Property Coverage
• Eliminate Co‐Insurance
• Building Ordinance Coverage
• Contingent Business InterruptionContingent Business Interruption
• Earthquake & Flood

25. Blanket Property Coverage
Exposure Insured Values If Total Loss
Building $9,600,000 $7,600,000 $7,600,000
Bus Pers Prop $8,350,000 $13,550,000 $8,350,000
Inventory $8,600,000 $6,500,000 $6,500,000
TOTALS $26,550,000 $27,650,000 $22,450,000

26. Coinsurance Issues
• Did/Should x LossDid/Should x Loss
80% Coinsurance; $1 million RC
Did = $400,000
Should = $800,000
Loss = $300,000
$400,000/$800,000 x $300,000 = $150,000
Request Agreed Amount Coverage

27. Building Ordinance Coverage
• Where City Ordinance requires you to• Where City Ordinance requires you to
replace entire building if more than 50%
damaged and rebuild entire building todamaged and rebuild entire building to
code
• Insurance only covers that which is
damaged from an insurable loss

28. Building Ordinance Coverage
• Covers Demolition of undamaged• Covers Demolition of undamaged
portion of building
• Rebuilding demolished portion of
building
• Increased Cost of Construction

29. Contingent Business Interruption
• Co ers Named Ins red d e to an ins rable• Covers Named Insured due to an insurable
loss at a key vendor or supplier which causes
an interruption of your businessan interruption of your business

30. Liability Issues
• Amended Notice of Loss• Amended Notice of Loss
• Claims Made vs Occurrence Coverage
• Foreign Products Liability Coverage

31. Amended Notice of Loss
• Policy requires “timely notification” of insurer• Policy requires timely notification of insurer
“You must see to it that we are notified as soon as
practicable”
“You” defined as Named Insured
D fi iti f I d i l d E ti Offi Di tDefinition of Insured includes Executive Officers, Directors
and your employees

32. Amended Notice of Loss
• Request that the policy be amended such that• Request that the policy be amended such that
notification not deemed to have been made
until an officer or risk manager has beenuntil an officer or risk manager has been
notified of the loss

33. Claims Made vs. Occurrence
Liability Policies
• Claims Made policy responds at the time the• Claims Made policy responds at the time the
claim is presented
• Occurrence policy responds at the time the
incident occurs

34. Claims Made vs. Occurrence
Liability Policies
• Annual policies in force consecutively from 1/1/2000• Annual policies in force consecutively from 1/1/2000
– 12/31/2005
• Incident occurs March 15 2002Incident occurs March 15, 2002
• Claim is presented April 20, 2003
• Occurrence policy in force on March 15 2002 would• Occurrence policy in force on March 15, 2002 would
respond
• Claims made policy in force on April 20 2003 wouldClaims made policy in force on April 20, 2003 would
respond

35. Claims Made vs.
Occurrence Liability Policies
• If you don’t renew an occurrence policy past• If you don t renew an occurrence policy, past
coverage will always remain in force
• If you don’t renew a claims made policy, you need to
purchase an Extended Reporting Period to assure
future coverage for past incidents or purchase
another claims made policy with a similar “Retro
”Date”

36. Foreign Products Liability Coverage
• Most GL policies provide coverage if incident• Most GL policies provide coverage if incident
happens overseas and suit brought forth in US
• But if incident happens overseas and suit
b ht f th N Cbrought forth overseas – No Coverage
• Need Foreign Products Liability coverage

37. Policy Changes
When an agent says “Don’t worry about it theWhen an agent says Don t worry about it, the
insurance underwriter sent me an email and said he
would cover”
“Policy Changes. This Policy contains all the agreementsPolicy Changes. This Policy contains all the agreements
between you and us concerning this insurance.”
You should worry and ask for the policy to be endorsed