Loss Management/Insurance

Essay by robinmercerUniversity, Bachelor'sC+, June 2008

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Insurance helps by creating a "safety net" for its insured/clientele, an insurance company may, by investigation from claims a company have made, find that its clients may not be as risk-averse as they might otherwise be (since, the insured has transferred the risk to the insurer). Moral hazard is the prospect that a party insured against risk may behave differently from the way they would behave if it were fully exposed to the risk. Moral hazard arises because an individual or company does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. Moral hazard is bad for businesses in two ways, firstly, costs will be passed on from the insurers, raising premiums (How long can a company rightly sustain those costs?) and secondly, it shows very bad decision making by upper management, meaning that the company is at risk in all the decisions being made at that level.

Because risk is ever-present in business, companies are seeking a way to increase predictability, and turning to Enterprise Risk Management (ERM) as a way to systematically address risk, it includes the methods and processes used by organizations to manage risks (or seize opportunities) related to the achievement of their objectives. ERM provides a framework for risk management, which by and large involves identifying particular events or circumstances relevant to the organization's objectives (risks and opportunities), assessing them in terms of likelihood and scale of impact, determining a response strategy, and monitoring progress.

Enterprise risk management consists of eight interrelated components, they are -1. Internal Environment2. Objective Setting3. Event Identification4. Risk Assessment5. Risk Response6. Control Activities7. Information and Communication8. Monitoring (COSO 1994)Loss management, it should be reminded to...