Ri k M tRisk Management

Michael A. Cristal, CPCU, ARM Consolidated Risk Management

What is Risk Management?What is Risk Management?

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

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

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

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

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

Risk FinanceE th d f i f• Encompasses methods of paying for losses that do occur

Risk Finance TechniquesT 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

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

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

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

Basic Risk Management Philosophy

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

Rather than an ambulance at the bottom

Common Findings from our Risk Assessments...

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

What’s troubling about this picture?

Back‐Up Data• D plication• Duplication

• Segregation

Contractual Transfer • Vendors• Vendors

• Suppliers

• On‐Site Contractors

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

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

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

Property Insurance IssuesBl k t P t C• Blanket Property Coverage

• Eliminate Co‐Insurance

• Building Ordinance Coverage

• Contingent Business InterruptionContingent Business Interruption

• Earthquake & Flood

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

Coinsurance Issues• Did/Should x LossDid/Should x Loss

80% Coinsurance; $1 million RCDid = $400,000Should = $800,000Loss = $300,000

$400,000/$800,000 x $300,000 = $150,000

Request Agreed Amount Coverage

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

Building Ordinance Coverage• Covers Demolition of undamaged• Covers Demolition of undamaged portion of building

• Rebuilding demolished portion of building

• Increased Cost of Construction

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

Liability Issues• Amended Notice of Loss• Amended Notice of Loss

• Claims Made vs Occurrence Coverage

• Foreign Products Liability Coverage

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

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

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

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 

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”

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

Policy ChangesWhen 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