While risk may be inevitable, it is manageable. The ability to effectively predict, prepare for, and manage risks can help individuals and organizations set and achieve future goals. Insurance professionals who understand risk management terminology, forms of risk, and what steps or actions to take to reduce or avoid them can help clients minimize financial loss
To understand risk management, you must understand some common terms. For example, the term “risk,” is a condition of either positive or negative uncertainty arising from a given set of circumstances. “Pure risk” involves situations or incidents in which the only outcomes can either be loss or no loss; in other words, there is no possibility of gain. On the other hand, “speculative risk” involves the possibility of loss or no loss and includes the chance of a gain.
Many of these terms are used throughout the insurance industry, but the definitions here are from the risk manager’s perspective. Just like other Individuals within every industry or profession, risk managers share special vocabulary, or jargon. Understanding these 11 essential risk management terms taken from our popular CISR Elements of Risk Management Course gives you a solid foundation for effective communication about risk management.
1.) Loss is a reduction in the value of assets.
Mr. Adams Suffers a Loss
Mr. Adams works for a hardware distributor. He uses a company truck to deliver hardware orders to remote parts of his state. Last winter, while returning from making a delivery, Mr. Adams’ truck slid on a stretch of black ice and slammed forcefully into a road barrier. A towing service was called to remove the truck, and emergency service providers took Mr. Adams to the nearest hospital where X-rays revealed a broken tibia in his left leg.
What kinds of losses have occurred?
Injury to Mr. Adams and physical property damage to the truck and the road barrier definitely occurred. It is also possible that because Mr. Adams can’t make deliveries, the company’s revenue was reduced and/or they had to hire a temporary or replacement driver at an additional expense.
2.) Exposure is an activity or an asset.
A property example:
A building is an asset that presents various exposures for the building’s owner like damage from fire or windstorm. If the building is a restaurant, what additional types of exposures might there be? While food poisoning of customers may immediately come to mind, kitchen injuries to employees are common. So are slip and fall injuries to both customers and employees when food or liquids spilled on the floor are not cleaned up properly.
3.) Peril is the cause of a loss.
4.) Hazard is a condition or circumstance that makes a loss from a given peril more likely or more severe.
5.) Incident is an unplanned event that may lead to a loss or a claim.
6.) Accident is an unplanned event, definite as to time and place, that gives rise to a loss.
7.) Occurrence is an accident without the time constraint; it occurs over time.
8.) Claim is a demand for payment or an obligation to pay as the result of a loss.
9.) Frequency is the number of incidents, accidents, occurrences, or claims in a given time period.
10.) Severity is the dollar amount of a single loss or the total value of all losses in a given time period.
For an insurance company, the total dollar amount of homeowners’ insurance claims in a calendar year is an example of severity, while the total number of homeowners’ claims is an example of frequency.
11.) Expected Losses are a prediction of the frequency and severity of losses based upon loss history, distributions, and statistics.
Check Your Knowledge
Are these statements true or false?
- A hazard is a cause of loss.
- A situation, behavior, or condition that may lead to adverse financial consequences is an exposure.
- A cyberattack is an example of an exposure.
- A spill on a supermarket aisle is an example of a hazard because it increases the likelihood that someone will fall.
- An incident is an accident with the time limitation removed
Answer Key= (1=F) (2=T) (3=F) (4=T) (5=F)
The CISR Elements of Risk Management course provides tools and techniques to identify exposures, assess their impact on clients’ assets and operations, consider a variety of loss funding/insurance options, control losses, and claims, and finally to implement risk management and loss control procedures and to monitor their progress.
Deepen your knowledge of risk management with our Elements of Risk Management Course. Our self-paced and upcoming classroom and webinar courses can help you design more effective insurance and risk management programs.
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