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Classifications of Risk
Pure Speculative
Objective Subjective Objective Subjective
Non- Non- Non- Non-
Diversifiable Diversifiable Diversifiable Diversifiable
Diversifiable Diversifiable Diversifiable Diversifiable
© SAW Financial Group, L.L.C. d.b.a. BigDaddy University
Risk Quadrants
HAZARD OPERATIONAL
People risk
Property risk
PU
Process risk
Liability risk
R
Systems risk
E
Personnel loss exposures
External events
Market risk Competition risk
-Interest rate risk-
Economic risk
SP
-Exchange rate risk-
Marketing risk
EC
-Liquidity risk-
U
Credit risk Procurement risk
LA
Price risk Regulatory risk
TI
VE
FINANCIAL STRATEGIC
© SAW Financial Group, L.L.C. d.b.a. BigDaddy U
Prouty Matrix
Loss Severity
Severe TRANSFER MODIFY MODIFY AVOID
Significant RETAIN TRANSFER MODIFY AVOID
Slight RETAIN TRANSFER MODIFY MODIFY
Almost no chance Slight chance Moderate chance Definite
Loss Probability
© SAW Financial Group, L.L.C. d.b.a. BigDaddy U
Risk Management Goals
Risk Control Risk Financing
Pay for Losses
Business Continuity
Maintain Liquidity
Effective/Efficient Measures
Goals Legal Requirements
Manage Uncertainty
Legal Requirements
Life Safety
Manage Cost of Risk
Loss Prevention (Modification)
Loss Reduction (Modification)
Separation Retention (Deductibles)
Techniques Avoidance Transfer (Insurance, Hedging)
Duplication
Diversification
Ability of Retention and Transfer to Meet Risk Financing Goals
Goal Retention Transfer
Depends on size of loss, management
Meets Goal (Primary Benefit of Risk
Paying for Losses of retention measure, and strength of
Transfer is Paying for Losses)
cash flows
Maintaining Depends on size of loss and
Appropriate management of retention measure, Reduces liquidity need
Liquidity and strength of cash flows
Managing Results in Higher Variability Results in Lower Variability
Uncertainty of Cash Flow of Cash Flow
Complying with Depends on structure and
Secondary benefits
Legal Req. management of retention measure
Managing Cost of Meets Goal (Primary Benefit of Risk Rarely option that is
Risk Retention is Managing Cost of Risk) most cost effective
BLUE - Meets Goal
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Balance Sheet
Assets Liabilities and Shareholders' Equity
Current Assets Current Liabilities
Cash 50,000 Accounts Payable 6,250,000
Accounts Receivable 125,000 Short-Term Debt 4,000,000
Inventory 1,500,000 Non-Current Liabilities
Marketable Securities 25,075,000 Long-Term Debt 200,000,000
Total Current Assets 26,750,000 Total Liabilities 210,250,000
Non-Current Assets
Buildings & Equipment 300,000,000
Less: Accumulated Depreciation (10,000,000) Shareholders' Equity 111,500,000
Intangible Assets 5,000,000
Total Assets 321,750,000 Total Liabilities and Equity 321,750,000
Financial Ratios
Liquidity Ratios Leverage Ratios
Current Assets Long-Term Debt
Current Ratio Debt-to-Equity
Current Liabilities Shareholders' Equity
Current Assets - Inventory Total Liabilities
Acid-Test (or Quick) Ratio Debt-to-Assets
Current Liabilities Total Assets
© SAW Financial Group, L.L.C. d.b.a. BigDaddy U
Probability Distribution - Theoretical/Discreet
Total Points
Two Dice Occurrences Probability
2 1 2.78%
3 2 5.56%
4 3 8.33%
5 4 11.11%
6 5 13.89%
7 6 16.67%
8 5 13.89%
9 4 11.11%
10 3 8.33%
11 2 5.56%
12 1 2.78%
Sum 36 100.00%
Probability of Total Points - Two Dice
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2 3 4 5 6 7 8 9 10 11 12
Probability Distribution - Empirical/Continuous
Size Number of Percentage Dollar Percentage
of Loss Losses of Losses Amount of Dollar
$0-$4,000 9 45.00% $22,000 20.00%
$4,001-$8,000 7 35.00% 34,000 30.91%
$8,001-$12,000 2 10.00% 23,000 20.91%
$12,001-$16,000 1 5.00% 13,000 11.82%
$16,001+ 1 5.00% 18,000 16.36%
Sum 20 100.00% $110,000 100.00%
Mean dollar amount: $5,500
© SAW Financial Group, L.L.C. d.b.a. BigDaddy U
Normal Distribution
© SAW Financial Group, L.L.C. d.b.a. BigDaddy U
Initiation Fire Sprinkler Alarm Not Annual
Event Origin Broken Activated Outcomes Frequency
TRUE Noncontrolled fire
0.004
0.05 without alarm*
TRUE
0.10
FALSE Noncontrolled fire
0.076
0.95 with alarm
TRUE
0.80 TRUE Controlled fire
0.036
0.05 without alarm
EXPLOSION FALSE
0.90
FALSE Controlled fire
0.684
0.95 with alarm
FALSE
No fire 0.20
0.20
*Worst case scenario
© SAW Financial Group, L.L.C. d.b.a. BigDaddy U
Ideally Insurable Characteristics
Definite and Large Number of Independent and Affordable
Loss Exposure Pure Risk Fortuitous Measurable Exposure Units Not Catastrophic Premiums
Fire Yes Yes Yes Personal - Yes Yes Yes
(Not Arson) (Not Arson)
Commercial -
Depends on type,
location, use
Windstorm Yes Yes Yes Personal - Yes Potentially Depends on
catastrophic location
Commercial -
Depends on type,
location, use
Flood Yes Yes Yes Personal - Yes Potentially Depends on
catastrophic location
Commercial -
Depends on type,
location, use
Premises & Yes Yes Yes Yes Yes Yes
Operations
Liability
Products Yes Yes Depends on Depends on Potentially Depends on
Liability product product catastrophic product
Automobile Yes Yes Yes Yes Yes Yes
Liability
Net Income Loss Yes Yes Yes Yes Potentially Yes
Associated With catastrophic
Property Loss
Net Income Loss Yes Yes May not be Yes Yes N/A
Associated With definite
Liability Loss
Death Yes Yes Personal - Yes Personal - Yes Yes Personal - Usually
(Except suicide)
Commercial - Commercial - Commercial -
Depends on Depends on Yes
personnel personnel
Health Yes Depends on Depends on Yes Yes Usually
cause of loss cause of loss
Retirement Yes Depends on Personal - Yes Personal - Yes Yes N/A
circumstances &
personnel Commercial - Commercial -
Depends on Depends on
personnel personnel
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