Loss Management/Insurance Essay

2627 words - 11 pages

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 the reader, that while trying to prevent loss it sometimes has to deal with the eventuality that loss can occur, even with all the above in place it could happen, so what is the next step?•Disaster Recovery Planning (DRP) - Policies and procedures of restoring operations critical to the resumption of business.•Business Continuity Planning (BCP) - A concept used to create and validate a practiced logistical plan for how an organization will recover and restore partially or completely interrupted critical function(s) within a predetermined time after a disaster or extended disruptionINTRODUCTIONThe basis of this report is to answer the statement -"As an organisation we pay a lot of money on insurance. There is therefore no need for us to invest time and resources in other methods of loss management"This report seeks to investigate the above statement and find out if there is any validity to it, and if a company can survive with an insurance only attitude to risk/loss or if it is better to have other means in...

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