CPCU 500 Lecture Book Managing Evolving Risks

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CONTINUE READING
CPCU 500 Lecture Book
Managing Evolving Risks

         2021 Edition

                          1
Section 1. Embracing Risktec

                                                                                                                         Topic 1. The Risktech Ecosyste                                                                                        1
                                                                                                                         1.a. Traditional Risk Assessment Techniques and Big Dat 1

                                                                                                                         1.b. Data Captur                                                       1

                                                                                                                         1.c. Data Storag 1

                                                                                                                         1.d. Data Analytic                                                     1

                                                                                                                         1.e. Risktec 1

                                                                                                                         1.f. New Technologies to Risk Managemen                                                                               1

                                                                                                                         1.g. Preventive Analytic 1

                                                                                                                         1.h. Connected Ecosystem                                                            1

                                                                                                                         1.1. Question: The Risktech Ecosyste                                                                             1

                                                                                                                         Topic 2. Emerging Technologies, Smart Products, and
                                                                                                                         Operation 1
                                                                                                                         2.a. Arti cial intelligence (AI                                                               1

                                                                                                                         2.b. Sensors/Sensor Networ 1

                                                                                                                         2.c. Digital Twi 1

                                                                                                                         2.d. Computer Visio                                                        1

                                                                                                                         2.e. Smart Product                                                     1

                                                                                                                         2.f. Smart Operation                                                       1

                                                                                                                         2.1. Question: Emerging Technologies, Smart Products, and Operation                                                            2

                                                                                                     Section 2. Creating a Stronger RM Foundatio

                                                                                                                         Topic 3. Risk Management Process and Classi cations of
                                                                                                                         Ris    2
                                                                                                                         3.a. Concept of Risk Management Proces                                                                                2

                                                                                                                         3.b. Process for Managing Ris                                                                 2

                                                                                                                         3.c. Scan the Environmen                                                            2

                                                                                                                         3.d. Identify Risk                                                     2

                                                                                                                         3.e. Classi cations of Ris                                                          2

                                                                                                                         3.f. Pure and Speculative Ris                                                                 2

                                                                                                                         3.g. Subjective and Objective Ris                                                                      2

                                                                                                                         3.h. Diversi able and Nondiversi able Ris                                                                             2
                                                                                                                         3.i. Quadrants of Risk: Hazard, Operational, Financial, and Strategi                                                       2

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3.1. Question: Classi cations and Categories of Ris                                                                                                         3

                                                                              Topic 4. Risk Management Objectives, Bene ts, and Basic
                                                                              Measure 3
                                                                              4.a. Risk Management Objective 3

                                                                              4.b. Tolerable Uncertaint                                                                                                  3

                                                                              4.c. Pro tability and Growt 3

                                                                              4.d. Reduced Deterrent Effects of Hazard Risk                                                                                                           3

                                                                              4.e. Basic Risk Measure 3

                                                                              4.1. Question: Risk Management Objectives, Bene ts, and Basic Measure 3

                                                               Section 3. Identifying and Analyzing Costly Risk

                                                                              Topic 5. Holistic Risk Identi catio                                                                                                                     3
                                                                              5.a. The Holistic Approach to Identifying Risk                                                                                                          3

                                                                              5.b. De ning Enterprise-Wide Risk                                                                                                    3

                                                                              5.c. Technology’s Effect on Holistic Risk Managemen 3

                                                                              5.d. Measuring Risk Variable                                                                                                     3

                                                                              5.e. Risk Identi cation as a Tea                                                                                                 4

                                                                              5.f. Facilitated Workshop                                                                                                  4

                                                                              5.g. Delphi Techniqu                                                                                             4

                                                                              5.h. Scenario Analysi                                                                                            4

                                                                              5.1. Question: Holistic Risk Identi catio 4

                                                                              Topic 6. Introduction to Risk Analysi                                                                                                                       4
                                                                              6.a. The Nature of Risk Analysi                                                                                                  4

                                                                              6.b. Qualitative and Quantitative Analysi                                                                                                          4

                                                                              6.c. Assessing Control                                                                                           4

                                                                              6.d. Traditional Accident Analysi                                                                                                    4

                                                                              6.e. Sequence of Events (Domino Theory 4

                                                                              6.f. Energy Transfer Theor                                                                                                 4

                                                                              6.g. Technique of Operations Review (TOR) Approac                                                                                                               4

                                                                              6.h. Change Analysi 4

                                                                              6.i. Job Safety Analysi                                                                                          4

                                                                              6.1. Question: Introduction to Risk Analysi                                                                                                        4

                                                                              Topic 7. Root Cause Analysi                                                                                                              5
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7.a. Apply the root cause analysis process                                                                                                                    5

                              7.b. The Nature of Root Cause Analysi                                                                                                                     5

                              7.c. Root Cause Analysis Approache 5

                              7.d. Steps in the Root Cause Analysis Proces 5

                              7.e. Root Cause Analysis Exampl                                                                                                                       5

                              7.1. Question: Root Cause Analysi                                                                                                                     5

               Section 4. Leveraging Tech and Insuranc

                              Topic 8. Risk Treatmen 5
                              8.a. Risk Treatment Proces                                                                                                                   5

                              8.b. Risk Treatment Technique                                                                                                                    5

                              8.c. The Prouty Approac                                                                                                                      5

                              8.d. Developing a Risk Treatment Pla                                                                                                                      5

                              8.e. Technology’s Impact on Risk Modi catio                                                                                                                       5

                              8.f. Technology’s Impact on Risk Transfe 5

                              8.g. Insurers Embrace Io                                                                                                                     6

                              8.h. Technology’s Impact on Financial Transaction                                                                                                                     6

                              8.1. Question: Risk Treatmen 6

                              Topic 9. Risk Treatment Application 6
                              9.a. Hazard Risk: Creating a New Produc                                                                                                                       6

                              9.b. Operational Risk: Data Breac                                                                                                                     6

                              9.c. Financial Risk: Extending Credit to Customer                                                                                                                     6

                              9.d. Strategic Risk: Entering a New Marke                                                                                                                     6

                              9.e. Insurance as a Risk Management Techniqu                                                                                                                      6

                              9.f. Insurable Risks and Loss Exposure                                                                                                                    6

                              9.g. Ability to Meet Risk Financing Goal 6

                              9.1. Question; Risk Treatment Application                                                                                                                     6

                              9.2. Question; Insurance as a Risk Management Techniqu                                                                                                                    6

                              Topic 10. Noninsurance Contractual Risk Transfer and
                              Large Deductible Plan 7
                              10.a. Noninsurance Transfers for Risk Contro 7

                              10.b. Leasin 7
                              10.c. Contracting for Service 7

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10.d. Waiver, Exculpatory Clause, and Disclaimer of Warrantie                                                                   7

                                                                             10.e. Hold-harmless Agreement 7

                                                                             10.f. Purpose and Operation of Large Deductible Plan                                                                        7

                                                                             10.g. Operation of a Large Deductible Pla                                                                           7

                                                                             10.h. Large Deductible Versus Self-Insured Retentio                                                                     7

                                                                             10.i. Use of Large Deductible Plan                                                                       7

                                                                             10.j. Bene ts of Large Deductible Plan                                                                         7

                                                                             10.k. Ability to Meet Risk Financing Goal                                                                           7

                                                                             10.1. Question: Noninsurance Contractual Risk Transfe                                                                       7

                                                                             10.2. Question: Large Deductible Plan                                                                          7

                                                         Section 5. Preparing for Hazard

                                                                             Topic 11. Sources of Property Ris 7
                                                                             11.a. Natural Risk Source                                                                      7

                                                                             11.b. Human Risk Source                                                                        7

                                                                             11.c. Natural Disaster Loss Contro                                                                       7

                                                                             11.d. Windstor                                                   7

                                                                             11.e. Tornad                                                     7

                                                                             11.f. Earthquak 8

                                                                             11.g. Floo                                        8

                                                                             11.1. Question: Sources of Property Ris                                                                        8

                                                                             Topic 12. Life Safety and Valuing Physical Propert                                                                                  8
                                                                             12.a. Life Safet                                                 8

                                                                             12.b. Human Characteristic 8

                                                                             12.c. Building Occupancie                                                                      8

                                                                             12.d. Fire Safety Standard                                                                     8

                                                                             12.e. Valuing Physical Propert                                                                      8

                                                                             12.f. Book Valu 8

                                                                             12.g. Replacement Cos                                                                    8

                                                                             12.h. Market Valu                                                          8

                                                                             12.i. Economic Valu 8

                                                                             12.1. Question: Life Safet                                                                     8
                                                                             12.2. Question: Valuing Physical Propert 8

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Topic 13. Management Liability and Human Resource Ris
                                        9
                                        13.a. Management Liability Ris                                                                                                                            9

                                        13.b. Directors and Of cers Liabilit                                                                                                                          9

                                        13.c. Treatment for Directors and Of cers Risk                                                                                                                                         9

                                        13.d. Risk Related to Employment Practice                                                                                                                                   9

                                        13.e. Risks Related to Fiduciary Dutie                                                                                                                                 9

                                        13.f. Human Resource Ris                                                                                                                         9

                                        13.g. Assessing Human Resource Ris                                                                                                                                     9

                                        13.h. Treating Human Resource Ris                                                                                                                             9

                                        13.1. Question: Management Liabilit 9

                                        13.2. Question: Human Resource Ris                                                                                                                                     9

                              Section 6. Uncovering Operational Risk

                                        Topic 14. Operational Risk Categories and Indicator                                                                                                                                                   10
                                        14.a. Operational Risk Categorie 10

                                        14.b. Strategies to Mitigate People Ris                                                                                                                                10

                                        14.c. Reduction of Operational Risk Through Blockchai                                                                                                                                            10

                                        14.d. External Event 10

                                        14.e. Operational Risk Indicator 10

                                        14.f. Risk Indicators by Operational Risk Clas                                                                                                                                         10

                                        14.g. Exposure Indicators and Control Indicator 10

                                        14.h. Relating Indicators and Outcome                                                                                                                                  10

                                        14.1. Question: Operational Risk Categorie                                                                                                                                  10

                                        14.2. Question: Operational Risk Indicator                                                                                                                                  10

                                        Topic 15. Self-Assessing Operational Risk and Emerging
                                        Technolog 10
                                        15.a. Self-Assessing Operational Ris 10

                                        15.b. Risk Assuranc 10

                                        15.c. Control Risk Self-Assessment (CRSA                                                                                                                                    10

                                        15.d. Risk Management Monitoring and Reportin                                                                                                                                               10

                                        15.e. Emerging Technology and Operational Ris 11
                                        15.f. Blockchain Technolog                                                                                                                       11

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15.g. Robotic Process Automation and Operational Ris                                                                                          11

                                                              15.1. Question: Self-Assessing Operational Ris                                                                                           11

                                                              15.2. Question: Operational Risk and Emerging Technolog                                                                                            11

                                         Section 7. Making Sense of Financial Ris

                                                              Topic 16. Types of Financial Risk and Securitizatio 11
                                                              16.a. Types of Financial Ris                                                          11

                                                              16.b. Securitizatio                                  11

                                                              16.c. Special Purpose Vehicl 11

                                                              16.d. Income-Producing Assets and Securitization Mode 11

                                                              16.1. Question: Types of Financial Risk and Securitizatio 11

                                                              Topic 17. Assessing a Balance Shee                                                                                                       12
                                                              17.a. Balance Shee                                   12

                                                              17.b. Assets: Balance Shee                                                            12

                                                              17.c. Liabilities: Balance Shee                                                                           12

                                                              17.d. Shareholders' Equity: Balance Shee 12

                                                              17.e. Liquidity Ratio 12

                                                              17.f. Leverage Ratio 12

                                                              17.1. Question: Assessing a Balance Shee 12

                                         Section 8. Optimizing Risk for Strategic Advantag

                                                              Topic 18. Strategic Risk and Managemen                                                                                                        12
                                                              18.a 12

                                                              18.b. Strategic Risk Factor                                                           12

                                                              18.c. Assessing Strategic Ris 12

                                                              18.d. Strategic Managemen                                                             12

                                                              18.e. SWOT, PESTLE, and Porter’s Five Forces Analysi                                                                                          13

                                                              18.1. Question: Strategic Risk and Managemen                                                                                             13

                                                              Topic 19. Applying Strategic Risk Managemen                                                                                                             13
                                                              19.a. Risk and Strateg                                           13

                                                              19.b. Incorporating Risk Into Strateg 13
                                                              19.c. Meeting Strategic Goal 13

                                                              19.d. Strategic Management Proces                                                                                   13

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19.e. Risk Appetite and Risk Toleranc                                                                                         13

                                                                 19.f. Risk Assessmen                                                                         13

                                                                 19.g. Risk Contro                                                                     13

                                                                 19.1. Question: Applying Strategic Risk Managemen 13

                                                  Section 9. Breaking Down Risk Modelin

                                                                 Topic 20. Probability Analysi 14
                                                                 20.a. Nature of Probabilit                                                                          14

                                                                 20.b. Law of Large Number 14

                                                                 20.c. Probability Distributio 14

                                                                 20.d. Central Tendency and Dispersio                                                                                          14

                                                                 20.e. Normal Distributio                                                                            14

                                                                 20.f. Practical Application of Normal Distributio 14

                                                                 20.1. Question: Probability Analysi                                                                                 14

                                                                 Topic 21. Value at Risk and Trend Analysi 14
                                                                 21.a. Value at Ris                                                                    14

                                                                 21.b. Earnings at Ris                                                                        15

                                                                 21.c. Trend Analysi 15

                                                                 21.d. Charting a Linear Regression Lin                                                                                        15

                                                                 21.e. Analyzing Event Consequence 15

                                                                 21.f. Decision Tree Analysi                                                                         15

                                                                 21.g. Event Tree Analysi 15

                                                                 21.1. Question: Value at Risk and Trend Analysi                                                                                    15

                                                  Section 10. Diving Into Dat

                                                                 Topic 22. Big Data and Traditional Data Analysi 15
                                                                 22.a. Big Data Characteristic 15

                                                                 22.b. Internal and External Dat                                                                               15

                                                                 22.c. Structured and Unstructured Dat                                                                                         16

                                                                 22.d. Traditional Data Analysi                                                                                16

                                                                 22.e. Common Data Analysis Technique 16

                                                                 22.f. Exploratory Data Analysi                                                                                16
                                                                 22.g. Classi cation Tree 16

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22.h. Cluster Analysi                                                                 16

                                                            22.1. Question: Big Data and Traditional Data Analysi                                                                                                           16

                                                            Topic 23. Modern Data Analysis and Data-Driven Decision
                                                            Makin 16
                                                            23.a. Modern Data Analysi                                                                   16

                                                            23.b. Text Minin                                                  16

                                                            23.c. Neural Network                                                                  16

                                                            23.d. Social Network Analysi                                                                                    16

                                                            23.e. Data Science and Data-Driven Decision Makin                                                                                                          16

                                                            23.f. A Model for Data-Driven Decision Making in Risk Managemen 16

                                                            23.1. Question: Modern Data Analysis and Data-Driven Decision Makin                                                                                                            17

                                                  Section 11. Building Consensu

                                                            Topic 24. Communicating and Collaborating About Ris
                                                            17
                                                            24.a. Fundamentals of Effective Communicatio                                                                                                          17

                                                            24.b. The Communication Proces                                                                                        17

                                                            24.c. Delivering Dif cult Message                                                                                     17

                                                            24.d. Active Listenin                                                                 17

                                                            24.e. Communicating and Collaborating About Ris                                                                                                            17

                                                            24.1. Question: Communicating and Collaborating About Ris                                                                                                                 17

                                                            Topic 25. Collaborating With Experts About Risk and
                                                            Delivering Your Messag     17
                                                            25.a. The Importance of Collaboration in Risk Managemen                                                                                                              17

                                                            25.b. Motivate Worker                                                                 17

                                                            25.c. Collaborating With Experts About Ris                                                                                                      17

                                                            25.d. Delivering Your Messag                                                                                    17

                                                            25.e. Convey Nonverbal Message and Lead Effective Meeting                                                                                                                 17

                                                            25.f. Resolve Common Problem 17

                                                            25.1. Question: Collaborating With Experts About Risk and Delivering Your
                                                            Messag 180

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SECTION 1. EMBRACING RISKTECH

Topic 1. The Risktech Ecosyste
Topic 2. Emerging Technologies, Smart Products, and Operation

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Section 1. Embracing Risktech

                          Topic 1. The Risktech Ecosyste
                          Reference: CPCU 500 Online 1st edition, Assignment 1. Module 1,

                          1.a. Traditional Risk Assessment Techniques and Big Dat
                            Traditional risk assessment techniques focus on root cause analysis (RCA),
                          which identi es a loss's predominant cause. The inherent weakness of this
                          approach is obvious: RCA can only look backward. Plus, it might not identify all
                          root causes and the related events that contribute to a loss and can only be
                          performed periodically. Today, however, a universe of data about past events
                          can empower decision making that is further re ned through data about
                          previously imperceptible risk factors. The three components that are fueling
                          the big data revolution are data capture, data storage, and data analytics.

                          1.b. Data Captur
                             Data capture is enabled primarily by smart products that sense their
                          environment, process data, and communicate with other smart products and
                          smart operations through the Internet of Things (IoT). These interactions
                          generate the data to which advanced analytics can be applied. The availability
                          and sophistication of smart products and the IoT’s continued growth have led
                          to an explosion of risk management innovation.

                          1.c. Data Storage
                             The decision-making value of data produced by smart products, the IoT, and
                          other data-capturing technology can be undermined by its volume, velocity,
                          and veracity; more and faster is not necessarily better. Cloud computing
                          (Information, technology, and storage services contractually provided from
                          remote locations, through the internet or another network, without a direct
                          server connection) enables the storage and sharing of vast amounts of data.
                             Think of the blockchain as a virtual distributed ledger that maintains a list
                          of dynamically updated data records (blocks). These records are not actually
                          recorded in the ledger, however, until the veracity of data within them is
                          con rmed and veri ed through a consensus process called mining. This
                          veri cation process removes intermediary validation and establishes trust
                          without the use of a centralized authority. After a block is con rmed and the
                          data within it is veri ed through mining, the block is timestamped and added
                          to the preexisting blocks in the chain-hence the term "blockchain." The
                          blockchain is encrypted and protected against tampering and revision.
                            The risk management applications of the blockchain are a by-product of the
                          medium's immutability; security; transparency; scalability; and ability to
                          facilitate the sharing of veri ed, quality data.

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Topic 1. The Risktech Ecosystem

          1.d. Data Analytic
            Collected and stored data can also be used to reveal forward thinking risk
          management strategies when that data is organized and analyzed through
          methods that use arti cial intelligence, such as machine learning and data
          modeling. In short, insurers and risk managers can improve their business
          results through data-driven decision making in an ever-increasing variety of
          ways, such as these:

           1. Organizing large      A risk manager could organize data according to
           volumes of new data      multiple characteristics, such as the information
                                    provided by vehicle telematics, which can include
                                    speed, braking patterns, left turns, and distance
                                    traveled.
           2. Discovering new       A risk manager could identify the characteristics
           relationships in data    of workers who have never had a workplace
                                    accident and use that information to identify how
                                    to improve safety for all workers.
           3. Exploring new         Text mining can be used to compare documents
           sources of data          and analyze notes for various purposes.
           4. Developing new        The increasingly accurate predictive modeling of
           products                 hazards, particularly catastrophe modeling,
                                    enabled by sources of shared, comprehensive data
                                    about the complex interactions of contributing
                                    factors, has led to product innovation. One
                                    notable example is parametric insurance,
                                    coverage that pays a predetermined amount to
                                    the insured if a particular set of parameters occur,
                                    such as a hurricane’s wind speed.

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Section 1. Embracing Risktech

          1.e. Risktec
             Risk monitoring and mitigation technology is known as risktech. It is similar
          to insurtech, and many of the technologies used in both realms are identical.
          However, risktech goes one step beyond insurtech by expanding its focus on
          how to make risk nancing more ef cient to include how to prevent and
          mitigate risk in a variety of industries.
             Risktech is largely the result of emerging technologies coupled with smart
          products. Their interactions generate big data, to which advanced analytics
          can be applied, ultimately reducing the uncertainty associated with predicting
          future events.
             The application of emerging technologies to risk assessment and control is
          largely being driven by the Internet of Things (IoT), which consists of IoT
          objects that collect and transmit data through the internet, primarily through
          the use of sensors. For example, sensor data can inform a supply chain
          manager that weather conditions have interrupted the production of parts or
          that cargo has been stolen.

          1.f. New Technologies to Risk Managemen
            1. Wearables            Wearables such as helmets that monitor fatigue or
                                    wristwatches that measure vital signs can sense,
                                    monitor, report, and analyze workers’ health or well-
                                    being and their surrounding environments.
            2. Drones               Drones can be used in surveillance and aerial
                                    photography; being unmanned and highly versatile
                                    makes them ideal for assessing conditions or risks in
                                    dangerous or unfamiliar areas.
            3. Robots               Robots can measure, respond to, and produce data
                                    for monitored hazards or changing environmental
                                    conditions. And by performing certain activities, they
                                    can reduce the frequency of human error.
            4. Smartphones          Smartphones can measure acceleration, light,
                                    temperature, humidity, pressure, proximity, and
                                    location; all particularly relevant in transportation
                                    and workplace safety.

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Topic 1. The Risktech Ecosystem

     1.g. Preventive Analytic
        It is statistical and analytical techniques used to in uence or prevent future
     events or behaviors. Using the data provided by technologies and smart
     objects, businesses can practice preventive analytics. Preventive analytics
     leverages modern technology, big data, and advanced analytics to identify root
     causes and their interactions. It is particularly effective because it can
     continuously monitor activity; whether arising from humans or machines. By
     learning patterns, a machine can identify situations or behaviors that are
     unexpected or will likely produce an unexpected result. Therefore, preventive
     analytics is forward looking. Consider how computer-vision technology in an
     auto identi es and analyzes risks, which can then lead to preventive actions.
     For example, a truck’s brakes may automatically be applied because a front-
     facing camera determines that a vehicle has stopped directly in front of the
     truck.

     1.h. Connected Ecosystem
        A useful way to think about emerging technologies and their application to
     risk assessment and control is to view them as part of a connected ecosystem.
     An ecosystem is a system of interconnected parts, and the risktech ecosystem
     includes emerging technologies, smart products and smart operations, and big
     data analytics.
        However, emerging technologies and smart products also connect the
     physical and virtual domains, resulting in connected ecosystems for a variety
     of risk management specialties, including property, supply chain,
     transportation, catastrophe, and workplace safety.
       Overall, these connections enhance risk management decision making, as
     they allow property managers to detect leaks and malfunctions, transportation
     managers to respond to drivers’ issues in real time, more people to be
     evacuated before an impending catastrophe, and prevention of countless
     other injuries and damages.

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Section 1. Embracing Risktech

                    1.1. Question: The Risktech Ecosyste

                      1. The traditional de nition of risk management re ects the traditional
                    concept of risk as Negative.
                       2. The de nition of risk has evolved to include positive as well as negative
                    attributes.
                      3. Helmets that monitor fatigue is an example of a wearable.
                      4. Risks from accidental loss, including the possibility of loss or no loss
                    de nes Hazard risk.
                      5. Attracting investor interest is a positive risk for a start-up business.
                      6. Blockchain is described as a distributed database that serves as a
                    collectively shared ledger.
                      7. Text mining is a tool that can be used by fraud investigators to compare
                    documents and analyze notes.
                      8. Internet of Things as data capture tools has led to an explosion of risk
                    management innovation by allowing smart products to transmit data to each
                    other and to central hubs.
                       9. Risk managers today differ from traditional risk managers because they
                    attempt to minimize threats and optimize opportunities.
                      10. Risk has different meanings within the risk management and insurance
                    communities.
                      11. Preventive analytics uses smart products and data analytics to identify
                    root loss causes and their implications.
                      12. The science of designing work spaces based on the health concerns of
                    those who will operate in the work space is called Ergonomics.
                      13. The emerging technologies applied to risk assessment and control link
                    the physical domain to the virtual domain. Together, these domains linked by
                    the emerging technologies create a Connected ecosystem.
                      14. The difference between risk tech and insurtech is that Risk tech goes
                    beyond insurtech by expanding its focus to making risk nancing more
                    ef cient and preventing and mitigating losses in a variety of industries.
                      15. The sensors transmit data to and from each other, and the
                    manufacturing environment is continuously adjusted to assure production is
                    successful. The network of sensors transmitting data and the autonomous
                    corrective actions without human interaction is called The Internet of Things.
                       16. Southwest Interstate Railroad (SIR) is concerned about the number
                    derailments in recent years. In the past six months, the drones detected a track
                    blockage caused by a rock slide and damage to tracks in a remote area cause
                    by an earthquake. SIR dispatched work crews to make the tracks once again
                    passable, and no derailments occurred. SIR's use of drones, video, real-term
                    video scanning, and computer analysis illustrates Preventative analytics.

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Topic 2. Emerging Technologies, Smart Products, and Operations

                    Topic 2. Emerging Technologies, Smart Products,
                    and Operation
                    Reference: CPCU 500 Online 1st edition, Assignment 1. Module 3,

                    2.a. Arti cial intelligence (AI
                       Arti cial intelligence (AI) refers to the ability of machines to simulate
                    human intelligence. It enables computers to perform tasks that require critical
                    thinking, such as making decisions for risk assessment and control. It allows
                    robots to work collaboratively alongside humans in factories, cars to operate
                    without human drivers, and claims adjusters to be quickly deployed in the
                    event of a natural catastrophe.
                       Deep learning, an extension of AI, attempts to understand and mimic neural
                    networks in the brain through software that simulates image and speech
                    recognition. One example of deep learning is IBM’s Watson computer, which
                    can be trained in many different areas—such as understanding medical
                    information and its implications to assist medical personnel in crucial
                    decision making. A more common example is improved voice-search
                    capabilities on smartphones.

                    2.b. Sensors/Sensor Networ
                      Sensors assess risk by detecting and measuring objects or conditions on a
                    continuous basis; this provides early warnings of impending problems or
                    malfunctions and determines whether expected results have occurred. Smart
                    sensors may even trigger remedial actions, thereby controlling risk and
                    helping reduce losses. With the expanding number, type, and speci city of
                    sensors offered (and their ability to work together in network) sensors will
                    continue to play an important role in assessing and controlling risk.
                      Specialized sensors include transducers, actuators, and accelerometers.
                    These and other types of sensors are widely used in factories and many
                    industries (such as construction, medicine, retail, and transportation). Sensors
                    can be categorized by their functions and applications for risk assessment and
                    control. These classi cations include mechanical, thermal, radiant, and
                    biochemical sensors.

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Section 1. Embracing Risktech

          2.c. Digital Twi
             Sensors also enable the digital twin, which is a separate digital pro le of a
          physical object that helps identify risks arising from the object. Sensors on the
          physical object generate data that is used by the digital twin to analyze risk
          and provide alerts or take automated actions, when necessary, such as
          triggering actuators on the physical object to prevent loss.
             A digital twin allows data taken from the physical object to be analyzed.
          This analysis can lead to improvements in processes and mechanisms, such as
          in the manufacturing realm. It also provides orientation and training
          opportunities without the risk of employee injury or object damage.

          2.d. Computer Visio
             Computer vision is a technology that simulates human vision. It gains an
          understanding of images and then tries to help a machine not only recognize
          an object but also give that object context and respond to it as a human
          would. Computer vision is used in automobiles that are able to read traf c
          signs or detect pedestrians and other objects.
             Computer vision involves detecting, extracting, and analyzing images to
          better understand them. It does this by developing and using algorithms that
          can automatically provide visual understanding. One of the early tenets of
          computer vision was segmentation, or how images are seen and mapped.
          When combined with deep learning, this mapping of features through an
          algorithm relates to a commensurate action. Computer vision has been used in
          this way with self-driving vehicles for both risk assessment and risk control.
             Computer vision and AI can be used in facial recognition software. Cameras
          capture images of faces, which are matched with le photos or information
          from other databases. The software then segments the person’s face so that it
          can be easily compared with others. It can even assess a person’s emotions
          from his or her facial expressions. This technology has potential uses in
          identifying criminals in a crowd or quickly and accurately con rming identities
          of people boarding an aircraft or entering a secure area. These examples give
          a glimpse of the many risk assessment and control opportunities offered by
          this emerging technology.

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Topic 2. Emerging Technologies, Smart Products, and Operations

          2.e. Smart Product
             1. Wearables are designed with ergonomics in mind; they sense, monitor,
          report, and analyze workers’ health or well-being and their surrounding
          environments. To be labeled a wearable technology, the product needs to be a
          type of clothing or accessory that is worn on the body, not carried. To be
          considered a smart wearable, the device must contain sensors that detect and
          measure impulses and convert them to useable data, microprocessors that
          change this data into a transmittable form, and transmitters that wirelessly
          relay the data for appropriate processing or further use.
            2. Drones generally contain one or more cameras, batteries, and sensors, as
          well as a remote controller for the user and a communication source (usually
          Wi-Fi) that can accommodate smartphones or other devices. Infrared and
          thermal sensors in cameras can detect high temperatures, which can reveal
          overheating equipment and warn employees to move away from an area.
          Chemical sensors attached to drones can monitor the concentration of certain
          gases or other particles, and if dangerous amounts are detected, the sensors
          can report this through a connected transducer.
             3. Robots are another type of smart product. They may be either xed
          (containing moveable parts but unable to travel) or mobile equipped to travel
          to immediate, adjacent, or even distant environments. Robots have evolved
          from simple machines built to resemble humans to valuable tools of various
          design that can collaborate with human workers. Robots also assist humans by
          performing dangerous tasks and monitoring environmental conditions.

          2.f. Smart Operation
             Smart products are increasing the information risk managers have on hand:
          information about dangerous chemicals in the air, shipping malfunctions,
          exhausted workers, or almost any other facet of an organization’s operations.
          This information is already improving risk mitigation in many industries, and
          their success will lead to more operations becoming connected ecosystems.
          Here are some examples:

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Section 1. Embracing Risktech

           1. Property         Property managers use drones for surveillance and
           management          monitoring. This is a cost-ef cient way to proactively
                               identify damage or security risks at separate
                               locations. Consider the cost difference in scaffolding
                               a building to inspect it versus using a drone.
           2. Supply chain     Smart glasses can be used to provide inventory
           management          details to order pickers. They can also convey
                               instructions and even training aids to wearers.
                               Organizations are also exploring deliveries by drone.
                               Robotics increase productivity and reduce risk on the
                               warehouse oor.
           3. Transportation   Wearables have many bene ts for the transportation
           management          industry. They can analyze an operator's driving
                               habits or physical condition in real time.
                               Accelerometers can detect excessive vibration in a
                               vehicle and warn transportation managers of vehicle
                               conditions. Drones can take detailed photos of
                               routes. But the most signi cant change to
                               transportation management may come from
                               autonomous, or robotic, vehicles.
           4. Catastrophe      With the increased use of sensors in smart objects,
           management          the effects of catastrophes can be mitigated more
                               effectively. Drones increase awareness of potentially
                               dangerous situations as well. The American Red
                               Cross promotes the use of wearables and
                               smartphones in search-and-rescue missions, and
                               robots can be used in unsafe environments.
           5. Workplace        Thanks to wearables, sensors can be incorporated
           safety              into safety vests or other gear, leaving workers’
           management          hands free to do their jobs. Drones provide
                               information and help assess and control risks by
                               going into unknown and potentially dangerous
                               areas. Robots operate in close proximity to workers
                               but do more of the repetitive and heavy-lifting jobs.
                               This allows workers to better use their skills and
                               protects them from injury.

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Topic 2. Emerging Technologies, Smart Products, and Operations

     2.1. Question: Emerging Technologies, Smart Products, and
     Operation

       1. Drones may be equipped with cameras that relay data in real-time.
       2. Catastrophes such as recent earthquakes and the 2011 tsunami in Japan
     pointed out a need for many organizations to evaluate and manage their
     Supply-chain risk.
       3. The pulse and respiration monitors and the sensors that are part of the
     protective gear are called Wearable technologies.
       4. The sensors make sure water is owing properly and that there are no
     leaks or clogs which could produce a loss. These types of sensors are
     Mechanical sensors.
        5. In addition to metal detectors, many airports have installed a second type
     of scanning technology for checked baggage and cargo. The checked bags and
     cargo pass through a portal with scanners programmed to detect and test for
     explosive trace fumes. These scanners, which detect explosives based on air
     samples, are an example of Biochemical sensors.
       6. These smart products, which can be xed or mobile, reduce repetitive
     motion injuries that humans might suffer. They can also be used to perform
     dangerous tasks and in heavy-lifting jobs. These smart products are called
     Robots.
       7. Tsunami detection buoys are placed in the sea and they are equipped with
     sensors to detect high wave levels so that an early warning can be given to a
     coastal area if an evacuation is needed. This application of the use of smart
     products illustrates their use in Catastrophe management.
        8. William is a risk manager for Green Mountain Trucking. He has always
     analyzed auto loss frequency and severity rates for the eet. William would
     like to collect data on vehicle speeds, braking patterns, and distance traveled
     and compare that with the loss history. Vehicle telematics would help William
     capture and analyze this data.
        9. Mutual Fund Company (MFC) offers a wide array of mutual fund options
     to investors. The computer algorithm continuously monitors each fund's
     compliance with investment guidelines. If a fund manager violates the
     investment guidelines, the computer immediately noti es MFC's internal
     control director, and corrective action is taken. MFC's use of the computer
     algorithm to monitor investment compliance and to provide noti cation when
     corrective action is necessary illustrates use of Arti cial intelligence.
       10. For example, the technology would detect a presence in a crosswalk,
     extract the image, and a computer would analyze the image. When the image
     was determined to be a human being, the vehicle would slow down or stop
     until the crosswalk was clear. This technology, which is designed to capture
     and analyze images, and to act on the recognition of the image; is called
     Computer vision.

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Section 1. Embracing Risktech

   11. Last year, three Metro City remen died responding to a re at a
chemical plant, when they were overcome by toxic fumes. In response, Metro
City is purchasing advanced rst responder gear. It includes special ame
retardant suits with chemical and explosive fume sensors, air quality sensors,
and heat sensors. Responders will also wear special watches that will track a
responder's pulse, respiration, and blood pressure; and helmets that include
video cameras. All of these sensors will feed data to a computer in real-time.
The computer will analyze the data and issue threat levels and evacuation
orders, if necessary. The protective gear Metro City will purchase and the data
transmission and analysis capability illustrate the use of Smart products.

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SECTION 2. CREATING A STRONGER RM
FOUNDATION

Topic 3. Risk Management Process and Classi cations of Risk
Topic 4. Risk Management Objectives, Benefits, and Basic Measures

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Section 2. Creating a Stronger RM Foundation

                    Topic 3. Risk Management Process and
                    Classi cations of Risk
                    Reference: CPCU 500 Online 1st edition, Assignment 2. Module 1,

                    3.a. Concept of Risk Management Process
                        The rst thing you should know about the risk management process is that
                    it isn’t actually a process; at least not in its application. Rather, it’s a set of
                    interconnected simultaneously and sequentially occurring activities that
                    de ne an organization’s holistic approach to managing risks. It also differs
                    from organization to organization. This is because each organization’s risk
                    management framework is re ned based on how well it’s working and on
                    signi cant changes in the organization’s external and internal environments.
                    Despite differences in its implementation, however, the process's success
                    always relies on effective communication and collaboration among key
                    stakeholders. Your ability to facilitate and maximize the value of those
                    interactions brings the process to life.

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Topic 3. Risk Management Process and Classi cations of Risk

3.b. Process for Managing Risk
      1. Scan the             Risk management professionals should conduct speci c,
      Environment             detailed reviews of both the internal and external
                              environments of an organization.
      2. Identify             The purpose of risk identi cation is to develop a
      Risks                   comprehensive list of risks that could affect the
                              organization’s objectives. Identifying all risks is not
                              feasible or practical, but identifying key and emerging
                              risks is essential.
      3. Analyze              Risk analysis involves applying the de ned risk criteria
      Risks                   to determine the source, cause, likelihood, and potential
                              consequences of each of the identi ed risks. Depending
                              on the circumstances, this analysis can be quantitative,
                              qualitative, or both. Quantitative analysis, in particular,
                              may entail interacting with experts.
      4. Treat Risks          When no regulatory requirements are present, an
                              organization should compare the total level of risk
                              determined during the risk analysis with the established
                              risk criteria. This comparison will guide decisions
                              regarding risk treatment. These are the major options
                              available for risks: (1) Avoid the risk (2) Modify the
                              likelihood and/or impact of the risk (3) Transfer the risk
                              (4) Retain the risk (5) Exploit the risk.
      5. Monitor              Effective risk management processes include ongoing
      and Review              monitoring with periodic review of results. These are the
                              key purposes of monitoring: (1) Determine the
                              effectiveness of controls (2) Obtain information to
                              improve risk assessment (3) Analyze events and their
                              consequences to understand trends, successes, and
                              failures (4) Observe changes in internal and external
                              environments (5) Identify emerging risks.

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Section 2. Creating a Stronger RM Foundation

     3.c. Scan the Environmen
        For example, risk management processes around employee safety in the
     United States include the legal and regulatory requirements of the
     Occupational Safety and Health Administration (OSHA) and state or federal
     workers compensation statutes, as well as external stakeholders’ procedures
     (such as insurers’) and the organization’s internal procedures.
        Scanning the environment includes evaluating how each of an
     organization’s risk management processes aligns with its overall objectives.
     Additionally, risk management professionals should collaborate with the
     organization's internal stakeholders to de ne its risk criteria. These criteria
     should be aligned with the organization’s objectives, resources, and risk
     management policy and should consider these factors: (1) Causes of risk (2)
     Effects of risk (3) Metrics used to measure effects of risk (4) Timeframe of
     potential effects (5) Methods to determine level of risk (6) Approach to
     combinations of risk.

     3.d. Identify Risks
        This process relies on the risk professional's ability to perform or facilitate
     several key tasks involving communication, including these: (1) Asking the
     right questions of departmental stakeholders to understand their perspectives
     on the most pressing risks they face (2) Finding external experts who can shed
     light on emerging risks that the organization may not have anticipated
     previously and knowing how to speak their language to get the most from
     interactions with them (3) Collaborating with senior management and the
     board to ensure that risk associated with the organization's strategy are
     identi ed.
        Identifying risk interactions is also important. For example, the risk of a
     customer being injured by an organization’s product may traditionally have
     been viewed as a hazard risk. However, in an enterprise-wide process, related
     risks in other quadrants can be identi ed; such as reputational risk from
     publicity about the injury, which could have both strategic and nancial
     effects. If a product recall becomes necessary, operational and nancial risks
     would result.

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Topic 3. Risk Management Process and Classi cations of Risk

                              3.e. Classi cations of Risk
                                  One essential attribute of anyone who manages risk is the ability to classify
                              it. Classi cation can help with assessing risks because many risks in the same
                              class have similar attributes. It also can help with managing risk, because
                              many risks can be managed with similar techniques. Finally, classi cation
                              helps with the administrative function of risk management by helping to
                              ensure that risks in the same class are less likely to be overlooked.
                                 These classi cations of risk are some of the most commonly used: (1) Pure
                              and speculative risk (2) Subjective and objective risk (3) Diversi able and
                              nondiversi able risk (4) Quadrants of risk (hazard, operational, nancial, and
                              strategic)

                              3.f. Pure and Speculative Risk
                                A pure risk is a chance of loss or no loss, but no chance of gain. For example,
                              the owner of a commercial building faces the risk associated with a possible
                               re loss. But speculative risk involves a chance of gain. As a result, it can be
                              desirable, as evidenced by the fact that every business venture involves
                              speculative risks.
                                 Speculative risk is highly affected by these factors: (1) Price risk: Uncertainty
                              the cost of raw materials and other inputs (such as lumber, gas, or electricity),
                              as well as cost-related changes in the market for completed products and
                              other outputs. (2) Credit risk: Although a credit risk is particularly signi cant
                              for banks and other nancial institutions, it can also be relevant to any
                              organization with accounts receivable.
                                 Financial investments, such as the purchase of stock shares, involve a
                              distinct set of speculative risks. Insurance deals primarily with risks of loss, not
                              risks of gain—that is, with pure risks rather than speculative risks. However,
                              the distinction between these two classi cations of risk is not always precise.
                              Many risks have both pure and speculative aspects. For example, although a
                              commercial building owner faces a pure risk from causes of loss such as re,
                              that owner also faces the speculative risk of the building’s market value
                              increasing or decreasing during any one year.

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Section 2. Creating a Stronger RM Foundation

                              3.g. Subjective and Objective Risk
                                 Because it is based on opinion, subjective risk may be quite different from
                              the actual underlying risk that is present. In fact, subjective risk can exist even
                              where objective risk does not. The closer an individual’s or organization’s
                              subjective interpretation of risk is to the objective risk, the more effective its
                              risk management plan will likely be. These are some ways that subjective and
                              objective risk can differ:
                                 1. Familiarity and control: For example, although many people consider air
                              travel (over which they have no control and likely low familiarity) to carry a
                              high degree of risk, they are much more likely to suffer a serious injury when
                              driving their cars, where the perception of control and degree of familiarity are
                              much greater.
                                 2. Consequences over likelihood: People often have two views of low-
                              likelihood, high-consequence events. The rst misconception is the “It can’t
                              happen to me” view, which assigns zero probability to such low-likelihood
                              events as natural disasters, murder, res, and accidents. The second
                              misconception is overstating the probability of a low-likelihood event; this is
                              common with people who were previously exposed to such an event. This
                              perception may be enhanced by increased media coverage given to high-
                              severity events.
                                 3. Risk awareness: Because organizations have different levels of risk
                              awareness, they perceive risks differently. An organization that is not aware of
                              its risks, for example, would perceive the likelihood of something happening
                              as very low.

                              3.h. Diversi able and Nondiversi able Ris
                                 Diversi able risk is not highly correlated—that is, its gains or losses tend to
                              occur randomly and be isolated. Such risk can be managed through
                              diversi cation, or spread, of risk. An example of a diversi able risk is a re,
                              which is likely to affect only one or a small number of businesses. So an
                              insurer can diversify the risks associated with re insurance by insuring many
                              buildings in several different locations.
                                 Examples of nondiversi able risks include in ation, unemployment, and
                              natural disasters such as hurricanes. Nondiversi able risks are correlated. For
                              example, interest rates can increase for all rms at the same time. Systemic
                              risks are generally nondiversi able. For example, if excess leverage by
                                nancial institutions causes systemic risk resulting in an event that disrupts
                              the nancial system, this risk will have an effect on the entire economy and,
                              therefore, all organizations. Because of the global interconnections in nance
                              and industry, many risks that were once viewed as nonsystemic (affecting only
                              one organization) are now viewed as systemic.

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Topic 3. Risk Management Process and Classi cations of Risk

               3.i. Quadrants of Risk: Hazard, Operational, Financial, and
               Strategi
                  Although no consensus exists about how an organization should categorize
               its risks, one approach involves using risk quadrants: (1) Hazard risks arise
               from property, liability, or personnel loss exposures and are generally the
               subject of insurance. (2) Operational risks fall outside the hazard risk category
               and arise from people or a failure in processes, systems, or controls, including
               those involving information technology. (3) Financial risks arise from the
               effect of market forces on nancial assets or liabilities and include market risk,
               credit risk, liquidity risk, and price risk. (4) Strategic risks arise from trends in
               the economy and society, including changes in the economic, political, and
               competitive environments, as well as from demographic shifts.
                  Hazard and operational risks are classi ed as pure risks, and nancial and
               strategic risks are classi ed as speculative risks. The focus of the risk
               quadrants is different from the risk classi cations previously discussed. Risk
               classi cations focus on some aspect of the risk itself, while the four quadrants
               of risk focus on the risk source and who traditionally manages it.

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Section 2. Creating a Stronger RM Foundation

                         3.1. Question: Classi cations and Categories of Risk

                           1. A pure risk is a chance of loss or no loss, but no chance of gain.
                           2. Hazard risks are type of risks that can result in losses but not in any
                         gains.
                           3. Risk can be classi ed as subjective or objective. Subjective risk can exist
                         even where objective risk does not.
                            4. The focus of risk quadrants is different from the focus of risk
                         classi cations in general. While the classi cations of risk focus on some
                         aspect of the risk itself, the four quadrants of risk focus on The source of risk
                         and who has traditionally managed it.
                            5. A new computer chip that could position a company for explosive growth
                         is an example of Strategic risk.
                            6. Fluctuations in the value of stocks or bonds due to interest rate changes
                         is an example of Financial risk.
                            7. One enterprise risk management (ERM) approach to categorizing risks
                         involves dividing risks into four risk quadrants. The risks categorized as hazard
                         risks are Traditionally managed by risk management professionals.
                            8. Carol has worked as a payroll clerk for a small organization for 20 years.
                         Over the years she received only two small salary increases and began to
                         embezzle funds from the company since she felt she was not adequately
                         compensated for her job efforts. In terms of the quadrants of risk, Carol's theft
                         risk can be classi ed as Both a hazard risk and an operational risk.
                            9. Company G is a manufacturer of high pro le golf equipment. The risk
                         management professional for Company G is concerned about loss of business
                         related to product design. Failing to respond to changing customer demand
                         and preferences in the design of golf clubs could cost Company G signi cant
                         market share. Categorized according to the quadrants of risk, this exposure to
                         loss is classi ed as A strategic risk.
                            10. George has received an inheritance and is deciding what to do with the
                         money. He has limited his options to four choices: donate all the money to his
                         favorite charity, use the entire inheritance to buy a yacht, invest the
                         inheritance in a small rental property, or use the entire amount to purchase T-
                         bills. In this case, The rental property presents both pure and speculative risk;
                         property values may increase, and the building could burn down.
                            11. Jean is the Risk Manager for a Fortune 1000 company. Her CFO has
                         tasked her to analyze vulnerabilities in the rm's supply chain. The adequacy
                         of suppliers to meet an organization's needs would be an example of
                         Operational risk.

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Topic 3. Risk Management Process and Classi cations of Risk

        12. During the past year, International Toys has undertaken four capital
     projects. The company has renovated and refurbished one of its aging
     warehouse buildings. It has purchased the most recent version of its current
     order processing computer software. It has added two trucks to its eet of
     delivery vehicles. Lastly, it has purchased a new production machine that will
     allow it to launch a new product line. In this case, The new production
     machine is the most speculative risk in the company projects.
       13. George works for a large company and part of his job is to monitor
     assets according to their liquidity. George is particularly concerned that the
     company eet cars are affecting its liquidity and rising fuel prices are having
     an adverse effect during tight economic markets. If George's concerns were
     categorized as causes of loss according to the quadrants of risk, his concern
     most directly relates to Financial risks.

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Section 2. Creating a Stronger RM Foundation

          Topic 4. Risk Management Objectives, Bene ts,
          and Basic Measure
          Reference: CPCU 500 Online 1st edition, Assignment 2. Module 3,

          4.a. Risk Management Objective
            1. Tolerable             (1) Reduce Downside Risk (2) Earnings Stability (3)
            Uncertainty              Anticipate and Recognize Emerging Risks (4)
                                     Business Continuity
            2. Pro tability          (1) Intelligent, strategic risk taking (2) Identi cation
            and Growth               and management of cross-enterprise risks (3)
                                     Improved capital allocation
            3. Reduced Cost          (1) Costs of accidental losses not reimbursed by
            of Risk                  insurance or other outside sources (2) Insurance
                                     premiums and expenses incurred for noninsurance
                                     indemnity (3) Costs of risk control techniques to
                                     prevent or mitigate accidental losses (4) Costs of
                                     administering risk management activities
            4. Legal and             Such legal obligations are typically based on these
            Regulatory               items: (1) Standard of care that is owed to others (2)
            Compliance               Contracts entered into by the organization (3)
                                     Federal, state, provincial, territorial, and local laws
                                     and regulations
            5. Social                Businesses must ful ll their social obligations and
            Responsibility           behave morally for the community and society as a
                                     whole.

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Topic 4. Risk Management Objectives, Bene ts, and Basic Measures

               4.b. Tolerable Uncertainty
                  De ning and maintaining tolerable uncertainty, which means aligning risks
               with the organization’s risk appetite, is essential to every holistic risk
               management strategy. This connects to risk management’s fundamental
               purpose for organizations. To meet this objective, risk management programs
               should use measurements that align with the organization’s overall objectives
               and take into account senior management’s risk appetite. For example, value-
               at-risk (VaR) can be used to analyze various nancial portfolios with different
               assets and risk factors. VaR can be calculated quickly and easily to determine
               risk-factor returns on a portfolio.
                  (1) Reduce Downside Risk: Downside risks, including losses and failures, are
               an inevitable aspect of any type of business or speculative risk. To reduce
               downside risks, organizations can use threshold limits, which can be applied
               to many types of risks. By monitoring risks with preset limits based on
               established risk criteria, triggers are established to alert management when
               the threshold has been breached. When these thresholds are breached,
               management can review the situation and discuss changes before the losses
               become more signi cant and more dif cult to manage. The risk management
               strategy an organization uses must be well thought out so that the strategy
               itself does not increase risk.
                  (2) Earnings Stability: Maintaining earnings stability requires precise
               forecasting of uctuations in asset values, liability values, and risk
               management costs (such as costs for insurance).
                  (3) Anticipate and Recognize Emerging Risks: Analyzing the past will always
               be one of the most effective ways to predict the future—after all, past is
               prologue. However, the risks that offer the richest potential upside and the
               most calamitous downside are often those that either can't be anticipated at
               all or are deemed so improbable that the organization doesn’t even consider
               them. An organization’s risk radar should scan both the organization and the
               external environment for emerging risks. This radar should also be sensitive to
               the convergence of emerging internal and external risks.
                  (4) Business Continuity: Continuity of operations is a key goal for many
               private organizations and an essential goal for all public entities. Although
               survival requires only that no risk occurrence (no matter how severe)
               permanently shut down an organization, the goal of continuity of operations is
               more demanding. To be resilient, an organization cannot interrupt its
               operations for any appreciable time. When an organization’s senior
               management sets business continuity as a goal, its risk management
               professionals must have a clear, detailed understanding of the speci c
               operations for which continuity is essential and the maximum tolerable
               interruption interval for each operation.

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Section 2. Creating a Stronger RM Foundation

                    4.c. Pro tability and Growth
                       Holistic risk management isn’t just about staving off disaster or ensuring
                    organizational survival. Ideally, risk management is integrated into every facet
                    of an organization’s strategy for pro tability and growth.
                       (1) Intelligent, strategic risk taking: Successful organizations usually take
                    risks to grow and increase pro t. This type of risk can create a positive or a
                    negative outcome. Decisions about new opportunities should be based on the
                    organization’s risk appetite. An important bene t of risk management is that it
                    provides organizations with a framework to analyze and manage the risks
                    associated with an opportunity. For example, when an organization considers
                    whether to expand into a new product line, risk management can help it
                    decide whether the potential rewards are greater than the downside risks.
                       (2) Identi cation and management of cross-enterprise risks: For example,
                    supply chain risks have traditionally been viewed as operational risks.
                    However, a supply chain interruption could also become a nancial risk if it
                    affects product sales and a reputational risk if it affects customer service.
                    Holistic risk management provides an opportunity to recognize these cross-
                    enterprise risks when making strategic supply chain decisions.
                      (3) Improved capital allocation: A holistic risk management strategy
                    empowers organizations to improve their capital allocation in two ways. The
                     rst is by reducing the cost of risk, freeing up capital for other purposes. The
                    second way is by improving risk analysis for various strategic options so that
                    capital is allocated where it is likely to produce the best reward for the risk.

                    4.d. Reduced Deterrent Effects of Hazard Risk
                      Risk management reduces the deterrent effects of uncertainty about
                    potential future accidental losses by making these losses less frequent, less
                    severe, or more foreseeable. The resulting reduction in uncertainty offers
                    organizations these bene ts: (1) Alleviates or reduces management’s fears
                    about potential losses, thereby increasing the feasibility of ventures that once
                    appeared too risky (2) Increases pro t potential by greater participation in
                    investment or production activities (3) Makes the organization a safer
                    investment and therefore more attractive to suppliers of investment capital
                    through which the organization can expand.
                      The security sought by these sources of new capital rests at least partly on
                    con dence that the organization will prosper despite the accidental losses
                    that might befall it. Consequently, an organization’s ability to attract willing
                    investors depends to a signi cant degree on the effectiveness of its risk
                    management program to protect investors’ capital against the cost of
                    accidental losses.

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Topic 4. Risk Management Objectives, Bene ts, and Basic Measures

                                    4.e. Basic Risk Measures
                                       Risk professionals should use these measures to evaluate an organization’s
                                    risk pro le. Highly correlated risks with a high likelihood, major consequences,
                                    high volatility, and signi cant exposure over a long time horizon should be a
                                    key focus of risk management.
                                     1. Exposure       In these examples, the exposure can be quanti ed based
                                                       on the number and amount of mortgages or the number
                                                       of policies and policy limits. Other exposures, such as the
                                                       risk of a data breach or loss of reputation, are not as
                                                       easily quanti ed.
                                     2. Volatility     The CBOE Volatility Index, or VIX, created by the Chicago
                                                       Board Options Exchange, provides a measure of stock
                                                       market volatility. The volatility of energy prices, as
                                                       another example, is a major risk for many organizations.
                                                       Utilities, airlines, trucking companies, and other types of
                                                       organizations that are highly dependent on fuel use
                                                       strategies such as hedging to manage the risk associated
                                                       with volatility in the price of oil and other fuels.
                                     3. Likelihood     For example, a bank can probably quantify the likelihood
                                                       of a loan default based on a prospective borrower's
                                                       credit score and other characteristics. However, it would
                                                       be more dif cult for the bank to determine the likelihood
                                                       of a cyberattack in which customer data is taken,
                                                       resulting in liability.
                                     4.                Risks with high likelihood and minor consequences
                                     Consequences      should usually be managed through an organization’s
                                                       routine business procedures. Risks with potentially major
                                                       consequences should be managed even if the likelihood
                                                       of their occurrence is low. For instance, the risk of a re
                                                       at a bank, although unlikely, must be managed.
                                     5. Time           For example, diversi cation in nancial investments can
                                     horizon           help manage the risks associated with the time horizon
                                                       of those investments. An insurer that matches the
                                                       durations of its assets (investments) and liabilities (loss
                                                       reserves) neutralizes the risks associated with time
                                                       horizon. When real estate prices are highly volatile, an
                                                       organization may defer an expansion strategy that
                                                       involves a long time horizon, such as purchasing or
                                                       building new facilities.
                                     6. Correlation    The correlation coef cient is a measure that determines
                                                       the degree to which two variables' movements are
                                                       associated. The range of values for the correlation
                                                       coef cient is -1.0 to 1.0. For example, if hazard risk A and
                                                         nancial risk B are positively correlated (correlation
                                                       increase), then the overall risk of the organization is
                                                       increased and, if it is negatively correlated (or
                                                       uncorrelated), the overall risk is reduced.

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