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EXECUTIVE

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EXECUTIVE FORUM. MANAGING RISK IN A DYNAMIC AND COMPETITIVE ENVIRONMENT ... EXECUTIVE FORUM ... EXECUTIVE FORUM. Managing risk is a combination of science and art. ... – PowerPoint PPT presentation

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Title: EXECUTIVE


1
College of Business Administration
EXECUTIVE FORUM
Cosponsors
A U T O H O M E L I F E
AMICA MUTUAL INSURANCE COMPANY
RI CHAPTER
2
MANAGING RISK IN A DYNAMIC AND COMPETITIVE
ENVIRONMENT
Robert DiMuccio, President and CEO, Amica Mutual
Insurance Company
3
  • Definition of Risk
  • The possibility of suffering harm or loss
    danger
  • Definition of Uncertainty
  • Not known or established, vague, unsteady,
    fitful, variable

4
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5
  • Definition of Business Risk
  • Some combination of the risk of loss and
    uncertainty over the size and timing of a
    potential loss

6
  • The Business Problem
  • Managing the risk of possible loss of capital to
    levels appropriately lower than the cost of
    capital
  • The Competitive Environment
  • Will relentlessly increase the risk of loss
    while also driving up the cost of capital
  • Profit
  • Can be derived from appropriately managing risk
    and the cost of capital

7
  • Typical Business Risks
  • Loss of asset value
  • Revenue declines
  • Loss of major customers
  • Product obsolescence
  • Unexpected liabilities, lawsuits, or
    expenditures
  • Harm to company reputation

8
  • Typical Business Risks
  • Loss of key employees
  • Data security
  • Employment-related liabilities
  • Environmental liabilities
  • Regulatory or governmental issues
  • Harm to company reputation
  • And on, and on, and on

9
  • You cannot evaluate a business risk if you do not
    understand the true nature of the business.
  • Sounds simple
  • Surprisingly not always followed

10
  • Data and System Security Risks
  • Risk to valuable company asset data
  • Reputation risk
  • Regulatory action
  • Specialized area most businesses need in-house
    or hired consulting expertise

11
  • Managing risk is a combination of science and
    art.
  • Modern business approaches have given us
    numerous precise measurement tools to quantify
    risk the science.
  • Business judgment or the art is developed
    through experience.

12
  • Examples of Tools Used to Quantify and Identify
    Risk
  • Statistical analysis (mortality tables,
    historical loss trends, etc.)
  • Financial analysis (rates of return, loss or
    defaults by investment categories, payback
    periods, etc.)
  • Long term historical data sets (hurricanes,
    earthquakes, demographic data, etc.)

13
  • Benefits of Quantifying Risk
  • Many methods use standardized formulas allowing
    comparisons to normalized data.
  • Consistent and objective
  • Results can be easily verified/rechecked
  • Easy to automate

14
  • Downside to Reliance on Quantified Risk Analysis
  • Tends to be historically based
  • Built on assumptions about relationships between
    components
  • Non-quantifiable but real risks i.e.,
    political, consumer taste for a product,
    irrational competitor actions, etc.

15
  • Uses of Business Judgment
  • Not all situations lend themselves to being
    quantified.
  • Unique circumstances regularly arise that have
    little or no precedent.
  • Many business decisions have a human factor
    that cant be quantified, but must be considered.

16
  • Limitations of Business Judgment
  • Process can be difficult to document.
  • We all have some level of preconceived notion
    or bias.
  • Intuition or gut feel about situations are
    wrong as often as they are right.
  • This can lead to inconsistent results across a
    large organization.

17
  • In many instances, business procedures are
    designed to both identify and control risks
    simultaneously.

18
  • Methods to Identify and Control Risks
  • Financial risks
  • Financial controls
  • Internal accounting and business controls
  • Statistical analysis
  • Common business ratios
  • Numerous organizations dedicated to financial
    risk analysis too much info available

19
  • Methods to Identify and Control Risks
  • Operational risks
  • Periodic operational reports
  • Daily, weekly, monthly
  • Safety of employees
  • Review by workers compensation carrier
  • Various industry safety groups provide education
  • Assistance by federal, state or local authorities

20
  • Methods to Identify and Control Risks
  • Operational risks
  • Operating limits
  • Asset exposures
  • Trading positions
  • Future commitments
  • Pricing and quoting controls
  • Purchasing controls

21
  • Methods to Identify and Control Risks
  • Operational risks
  • Liability exposures
  • Identification by management exposures not
    always apparent or easily defined
  • Assistance of insurers, insurance agents, or
    professional risk managers
  • Trade associations of a particular industry

22
  • Differentiate between business procedures
    designed to detect risk, prevent risk, or both,
    in some cases.

23
  • Other Risk Evaluation Issues the Following
    Attributes Can Magnify Risks
  • Complexity of the business
  • Size of the business
  • Number and geographical spread of locations
  • Inexperienced or untrained employees
  • Business environment economy, regulation,
    competitor risk appetite, etc.

24
  • Methods to Manage Risk of Loss
  • Avoid
  • Minimize
  • Retain
  • Finance
  • Transfer

25
  • Managing Risk
  • Avoid Can be effective, but not possible for
    all risks
  • Minimize Some risks can easily be minimized,
    others not so
  • Retain Frequent and small losses should be
    retained
  • Finance Can the business sustain the loss?
  • Transfer Insurance

26
  • Culture of Risk Management
  • Risk is inherent in all business situations. All
    employees should be aware of risks and understand
    their role in managing risk.

27
  • Culture of Risk Management
  • Both employees and management are integral to
    the process
  • Training
  • Experience
  • Appropriate use of outside experts
  • Checklists, literature, etc.
  • Risk Management Committee

28
  • No Perfect Plan to Manage Risk
  • For every complex problem, there is an
    answer that is clear, simple and wrong.
  • H. L. Mencken

29
  • Final Comments
  • Flexibility
  • Diligence
  • Training
  • Experience

30
QUESTIONS?
31
College of Business Administration
EXECUTIVE FORUM
Cosponsors
A U T O H O M E L I F E
AMICA MUTUAL INSURANCE COMPANY
RI CHAPTER
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