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Terms
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- Define Risk
- Chance of loss
- Two types of risk
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operational
speculative - financial an up and downside - Goal of Risk mgt
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1) safe workplace
2) prevent large financial losses
3) budgetary stability - 3 benefits of a comprehensive risk management program
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1) effective use of funds
2) increase worker productivity
3) reduce uncertainties associated with future projects - 4 fundamental activities in a risk managment program
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1 risk ID
2 risk evaluation
3 risk treatment
4 implementation - Risk unique to the public sector
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risk - high
scope - enormous
control -lack of
pg 5 - Risk Manager duties
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LAMP
loss control
administering claims
monitoring litigation
purchasing insurance - Trends in risk managment
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1.new risk
2.costlier litigation
3.risk pools
4.increased use of Technology
5. Better data on losses - New risks
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Law enforcement
workplace related increases
technology - Technology risks
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E-mail
Privacy
E-commerce - What is a risk pool?
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Govts pool resources and purchase insurance collectively
pg 12 - What is enterprise risk?
- Coordinating the management of both operational and financial risk
- Where do risks arise in local government?
- SLOP PEC social, legal, operational, political, physical, economic, cognitive
- What is tort reform
- legislation to reduce lawsuits. Usually caps on jury awards
- Risk that results in economic loss - six types
- 1. legal liability to others, 2. propery loss, 3. extra expense, 4. loss of income, 5. human resource loss, 6. crime and fidelity loss.
- define hazard and peril
- hazard - risk factor that creates conditions called perils. Snowstorm- hazard; icy streets- peril
- difficulty in matching loss to an incident
- 1. multiple factors, 2. confusion of between cause and effect.
- Risk tracking reports help to determine?
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1. contributions - future level
2. risk financing strategies
3. loss control -future efforts - selecting risk financing alternatives table
- severity vs. frequency. Severity - high, freq low or high: insurance, self insure, risk pool; severity- high, freq low or high: self insure
- Moral Hazard?
- change in behavior due to the purchase of insurance
- Techniques for treating risk
- 1. loss prevention and control, 2. risk transfer 3. risk retention 4. risk avoidance
- Role of risk avoidance in the public sector
- most complete manner to avoid risk. Cannot close many public services
- 3 methods to manage unavoidable risk.
- 1. loss prevention/control. 2. risk transfter, 3. risk retention. Can also be some combination of. Pg 25.
- hold- harmless provision
- the gov't transfer the risk under the terms of a contract.
- risk management common tasks
- 1. create risk mgt policy 2. develop inspection programs, design safety orientation for new employees 3. create and accident and claims investigation program. 4.creatin accident and claims investigation systems 5. ID safety measures that require funding 6. developing disciplinary procedures 7. esablish review boards to investigate - faciliites, serious injuries
- insurance govt's buy - three basic
- PLW 1. property, 2. liability, 3. worker's compensation
- supplemental insurance - fidelity?
- covers loss from embezzlement, fund misapropriation, loss of money pg 30
- 6 types of risks:
- 1] legal liability to others – injuries/prop damage/actions of employees/officials, 2] property loss – accidental loss/damage 3]extra expenses 4]loss of income 5] human resources loss 6] crime and fidelity loss
- Steps to evaluate severity of liability exposure:
- 1] Review state laws/claims history/suits in nearby communities/recent court cases. 2] Identify liability exposure most likely to affect organization. 3]Estimate potential losses from all events that might occur.
- Property valuation should include 2 estimates of potential total probable and maximum possible loss
- Maximum probable – worst loss occurring under average conditions Maximum possible – worst case scenario predicting the greatest conceivable loss assuming all safety measures fail – estimates should also project indirect costs stemming from disruption of daily operations, loss of income and other expenses
- Types of risks and their treatment:
- 1] Low frequency/low severity – paid from operating funds or claims reserves 2] High frequency/low severity – paid from operating funds or claims reserves 3]Low frequency/high severity – insurance or pool coverage 4]High frequency/high severity – insurance is often best financing
- Risk control techniques/treatment:
- 1] risk avoidance – most complete way to manage risk – eliminates chance of loss altho’ some public services have to be provided regardless of risk 2] loss prevention/control – steps taken to reduce likelihood that risk will occur; e.g., fire safety training prog; smoke detectors, etc. 3]risk transfer – (to another party, e.g., insurance) more feasible than avoidance since service is continued but protects jurisdiction 4]insurance - commercial is most common – designed in layers – primary is first layer; excess pays beyond primary level; umbrella covers all primary liability insurance as well as self-funded retentions not covered by any insurance but does not provide complete coverage for all perils, types/amounts of losses
- 3 criteria for risk analysis to decide which technique to use:
- 1] frequency and severity – how often losses occur and how much they may cost 2] effectiveness – how techniques achieve objectives 3]costs – costs and benefits of each technique
- Local govt’s core obligations are:
- : health and safety; public welfare and the safeguarding of public assets – all of w/c are classified as risk management responsibilities
- Risks are not confined to insurable or accident related situations
- – may arise from actions of state legislature, investment management practices, climatological phenomena and even changing voter preferences
- Risk imposes two types of costs on local govt:
- ü Cost of losses that occur (e.g., fires, vehicular accidents) and Cost of uncertainty
- Primary goal of risk management:
- maintenance of budget stability thru control of the costs of risk – core objective is to minimize negative impact of risks on budget and on the human psyche
- Upside of risk management
- potential for cost savings; service improvements; revenue enhancements such as: financial investment, training and development of employees and intergovernmental relations
- – effective risk assessment
- involves a systematic and ongoing process for identifying and examining risks and deciding w/c risks are important
- In organizing approaches to assessing risks, answers can be structured around 3 questions:
- 1] Where do risks arise? 2] What is local govt’s exposure to risk? 3]How do local govt systematically gather information about risks?
- Risks arise from seven sources:
- 1] physical, 2] economic, 3]political, 4]social, 5]legal, 6]operational and 7]cognitive (absence of information, the influence of attitudes toward risk on decision making) environments – these environments contain hazards (characterized as features w/in an environment that elevate the probability of loss or its potential severity) – hazards in themselves do not produce losses – peril is the cause of loss
- Exposure to risk – principal motivation to practice risk management – 2 types are
- asset and liability
- Asset exposures:
- : physical, financial (2 primary bases of exposure: holding financial assets and issuing financial assets) and human
- While a primary risk management concern will be XXXX risk management decisions may also affect directly
- safeguarding assets from harm, risk management decisions may also affect directly the productivity of those assets.
- Liability exposures:
- : legal (sorted into premises; contractor; product or service liability; employment liability; workers’ compensation; motor vehicle liability; professional liability; errors and omissions; and police) and moral (risk management is concerned w/ the impact of local govt decisions and actions w/in the context of its moral obligations)
- Sources of information to assist in identification and assessment process
- checklists, interviews, onsite inspection, incident records and reports, budget documents and other financial reports, council and committee minutes, real estate records, permits, contracts, public forums.
- Categorizing risks: (risks s/b sorted, ranked, or otherwise separated to reflect the level of seriousness they represent):
- Category 1 – low frequency/low severity – rare and of minor importance Category 2 – low frequency/high severity –rare but are significant Category 3 – high frequency/low severity –frequent but relatively modest Category 4 – high frequency/high severity – frequent and serious
- From a risk management perspective, exposures to risks have two bases of evaluation:
- Cost to replace those assets AND Contributory value of an asset (reflects asset’s value to the govt as a whole)
- 2 broad categories of risk treatment methods:
- risk control tools and techniques – include efforts to avoid, prevent, reduce or otherwise manage risk and its impact on an organization AND risk financing measures – involve measures taken to anticipate and pay for losses that could occur
- 5 basic techniques in controlling loss exposures
- ü    risk avoidance – “airtight†solution/eliminates chance of loss – (the inability to avoid many risks distinguishes public sector risk management from its private sector counterpart) loss prevention – measures seek to prevent or at least reduce the likelihood of losses (e.g., proper training/supervisory procedures) loss reduction – methods do not prevent losses from occurring but rather minimize the impact of losses that do occur (e.g., hard hats, firewalls) uncertainty reduction – primary tool is information management risk transfer – e.g., contracting w/ private or non-profit organization for services and products – service may be transferred but responsibility may not be transferred in certain cases
- Risk financing options:
- Risk retention – jurisdiction assumes all or part of a loss AND Risk transfer – organization agrees to pay for the losses of another organization in exchange for a premium
- Most common risk financing mechanisms:
- Insurance AND Risk retention – 2 forms: passive or unplanned and planned retention (self-insurance – use of deductibles is a form of self-insurance)
- The primary purpose of pools is
- is not to lower costs but to provide consistent coverage. In other states, special enabling legislation permits pools to operate as a kind of special purpose mutual organization w/c allows most pools to escape the regulatory and tax treatment to w/c most insurance companies are subjected
- Types of insurance pools:
- 1]Risk transfer pools – much like insurance companies; an indemnity agreement transfers the risk from the member entity to the pool 2]Group insurance buying arrangements 3]Banking pool – each member contributes to the pool to pay administrative expenses and to establish reserve funds for extraordinary losses – each member has a separate account out of w/c its losses are paid 4]Risk management pool – the pool serves as the risk manager for its entities (most successful financing pools are evolving into a version of the risk management pool)
- Other risk financing tools:
- 1] Risk retention groups (private sector analogs to pools) 2]Captive insurance companies – an insurance company that insures only one client – its parent organization 3]Banking arrangements – e.g., lines and letters of credit 4]Other public agencies
- The idea of a cost/benefit analysis has been suggested as a means to judge the merit of a particular risk management initiative – many, if not most risk management decisions
- fundamentally economic in nature.
- Challenges that test the effectiveness of conventional cost benefit analyses:
- 1] Extended time horizons – e.g., may take years for a safety program’s effect on persistent loss to become clear 2]Externalities – spillover effects of a risk are not easily measurable (e.g., pollution) 3]Data credibility – credible statistical data are often hard to come by: A] Interdependencies – nature of one risk is strongly related to other risks B]Uncertainty – can lead to tentative or ineffective decision making C]Measurement of benefits – most often difficult to determine
- Risk management policy statement
- 1] emphasizes the importance of risk management and commits govt to managing risks 2]strengthens the authority of the person or committee assigned to risk management responsibilities 3]shows insurance companies that govt is committed to managing risks 4] useful in litigation to show that govt had a formal policy dictating certain procedures 5]does not describe specific actions but presents guidelines for making decisions about controlling and financing risks
- Risk management policy statement should contain
- risk management objectives; description of the authority and responsibilities of the person or committee overseeing the risk management effort; description of the responsibilities of supervisors, managers and other employees.
- Risk management manual: - outlines and describes the policies that a dept or local govt should follow – should include
- 1]criteria for making insurance decisions 2] Guidance on whether to join a pool or a risk retention group 3]Types of risks to be insured 4]How to select insurers, agents, brokers 5]Use of co-insurance/deductibles 6]Establishment/operation of a claims reserve fund 7]Guidance for deciding whether to use insurance or risk management consultants 8]Description of procedures (e.g., accident reporting/investigation) 9]Guidelines for risk transfer 10]Description of insurance cost allocation among various depts. 11]Type of decisions that must be approved by specified officials 12]Training and employee orientation processes 13] Policy on the role of citizens to risk management
- One of the most important functions of an accident investigation is
- is to determine why an accident occurred and how it can be prevented in the future.
- Risk management program evaluation:
- results standards (measured in dollars, percentages, ratios or number of losses or claims) and activity standards (measure efforts to achieve goals)
- Insurance method – simple, non quantitative method for evaluating individual projects and for looking at a risk management program as a whole – involves 4 basic steps:
- 1] Risk identification 2]Insurance coverage identification 3]Risk and insurance coverage prioritization (categorized as mandatory – treatment is required; important – correspond w/ serious or catastrophic outcomes; useful – correspond w/ moderate or noncatastrophic outcomes; unimportant – neither important nor useful) 4]Consideration of alternatives and supplements – results in a listing of the control and financing solutions that will be used by the local govt
- Insurance method accomplishes the following not ordinarily seen in organization management:
- 1] Forces managers to systematically identify and think about risks 2]Forces managers to understand where coverages exist and where they do not 3]Compels managers to consider w/c are key problem areas/moderate importance/unimportant 4]Motivates managers to consider what other measures might be undertaken to help the risk management effort to succeed
- risk management manual (possible blueprint or contents would be as follows):
- 1] Risk management policies and procedures 2]Risk assessment policy and practice 3] Risk control policy and practice 4]Risk financing policy and practice 5]Statement on risk management program audit and review programs/procedures 6]Appendices
- Risk transfer:
- Financial risk transfer – to insurance company; risk pool AND Contractual risk transfer – to contractor
- 3 basic types of insurance coverage (in addition, fidelity/faithful performance bonds):
- 1] property – against damage or loss – protects govt from direct loss 2]liability – govt negligence in performance of operations – indirect loss 3]workers’ compensation – on the job injuries – indirect loss
- Supplemental coverage maybe needed depending on
- 1] One time projects exposures – e.g., RDA 2]Geography based exposures– e.g., California, earthquake insurance 3]Unique exposures – e.g., employees handling cash 4]Errors & omissions policy – may be required for wrongful acts by public official
- Criteria for procuring insurance:
- 1] Quality of service 2]Scope of service – a la carte or integrated 3]Lines or breath of coverage – whether govt selects a single insurance carrier for liability, workers’ comp and property insurance or select different companies; and, whether coverage from one carrier for a given line of coverage will be as complete as another carrier’s standard or will it have important gaps/exclusions. 4]Financial stability – use ratings by Weiss Ratings or A.M. Best 5]Cost
- Classifications of risk pool by:
- 1] Type of services offered 2]Lines of insurance coverages 3]Types of local govt members 4]Packaged services versus “a la carte†options 5]Degree of state regulation 6]Financial resources available to the pool 7]Extent of risk transference 8]Primary versus excess coverage
- When pools self fund
- – pass part of their collective risk to a reinsurer or insurance co
- 3 choices govt have in financing cost of risk (each makes sense depending on severity/frequency of each risk
- 1] purchasing insurance 2]member of risk pool 3]self insurance
- Organizational challenges when implementing risk management program
- Making top level officials aware of risk management issues AND Gaining their political support
- Purpose of risk management policy
- : create framework allowing supervisors, managers and other employees to implement the risk management objectives in their departments – s/b brief and to the point –clarifies the value an organization places on risk management – may resolve dispute over authority w/in organization and encourage interdepartmental cooperation – may help demonstrate to risk pools of govt’s commitment to managing risks -
- of risk management policy should include
- 1] Statement of organization’s goals and objectives 2]Identify officials charged w/ carrying out risk related functions 3]Contain overarching guidelines for making decisions about fundamental activities
- Principal players in public sector risk management marketplace:
- 1] Insurance brokers 2]Insurance companies 2]Risk pools 4] Third party claims administrators 5]Actuaries
- Risk management activities to be included in budget (govt that self insure should also include costs of making claim payments):
- 1] Premiums 2]Deductibles 3]Loss prevention activities 4]Loss control measures 5]Claims administration 6]Legal review/litigation management
- Top three expenditures for risk exposure:
- 1] Workers’ comp – often expressed as % of payroll – average in 1998 1.3% 2] General liability 3]Property coverage
- Most risk management expenditures appear as an Internal Service Fund in govt budget. If govt chose to account directly in the General Fund, for financial reporting purposes,
- charges or premiums paid to the General Fund by other funds must be treated as a reduction of risk-related expenditures rather than as revenues (i.e., reimbursement accounting).
- Success of risk management program determined by:
- workload, efficiency and effectiveness. Challenge in benchmarking lies in obtaining reliable data and using relevant benchmarks so that meaningful comparisons can be made over time.
- supplemental coverage may be needed depending on what three factors?
- 1] one-time projects, 2]geography, 3] unique departmental needs or special government services.
- criteria for procuring insurance
- 1] quality of service. 2] scope of service, 3] lines or breadth of coverage, 4]financial stability, 5] cost
- Risk management pools classified according to; and key differentces
- 1] type of service offered, 2] lines of insurance coverage offered, 3] type of local government member, 4] "a la carte" options vs. single package, 5] degree of state regulation, 6] financial resources available to the pool, 7] extent of risk transference, 8] primary vs. excess coverage.
- Financial resources among pools differ because:
- 1] some pools can assess a mandatory charge upon members, 2] some pools have a capital fund, 2] others use a pay-as-you-go arraingement.
- primary vs. excess insurance coverage
- primary - assume obilgation to pay the entire claim. Excess- like deductable insurance
- Risk mgt alternatives
- see pg 41