Qualitative Analysis

Learning Objectives1. Discuss the purposes of qualitative and

quantitative analysis and characteristics of each.

2. Explain measurement scales and areas of qualitative analysis.

3. Discuss the assessment of broad loss exposures that may have a financial impact on the organization but may be difficult to quantify.

Learning Objectives4. Explain the purpose, characteristics of quality

loss data and the basic ways loss data can be organized for analysis.

5. Discuss risk mapping and how it is used as a key risk management tool.

Skills Application Case

Diamond Creek Resorts International, Inc. (DCRI)

Learning Objective #1:

Discuss the purposes of qualitative and quantitative analysis and characteristics of each.

I. Qualitative Analysis

A. Purposes

1. The “what” analysis

2. Identification and evaluation of loss exposures that cannot be easily measured by traditional statistical or financial methods

Qualitative Analysis

3. Attempts to assign relative values to determine implications and scope of effects risks have on an organization; does not try to assign hard financial values to assets, expected losses and cost of controls

4. Helps management understand the potential impact of the organization’s ultimate risks on performance

Qualitative Analysis

B. Characteristics

1. Conducted using questionnaires, surveys, task forces, workshops and collaboration with a variety of internal and external knowledgeable groups related to an organization

2. Frequently addresses the following questions:

a. Should we do this?

b. What is the impact on the organization’s reputation or morale?

II. Quantitative Analysis

A. Purposes

1. The “how much” analysis

2. Attempts to accurately measure risks by using acceptable traditional methodologies to calculate relative numerical values

Quantitative Analysis

B. Characteristics

1. Conducted by using analysis of losses, exposures, costs, benefits and financial statements

2. Frequently addresses the following questions:

a. Can we do this?

b. What is the financial impact of this?

III. Reasons to use both Qualitative and Quantitative Analyses

A. Valid answers are needed, e.g., predicted losses, value of claims

B. Costs and benefits are primary factors of decision making

C. Non-monetary factors are part of the decision-making process, e.g., reputation, morale and citizenship

Learning Objective #2:

Explain measurement scales and areas of qualitative analysis.

II. Measurement Scales of Qualitative Risk Exposures

A. Identification methods should be used to analyze those qualitative risks that could have a potentially harmful impact on the organization, although they are not subject to financial measurements

Measurement Scales

B. Measurement scales depict relative values that are not easily quantified

1. Critical risks – assigned to a level to capture their critical nature to the organization, e.g., losses that could bankrupt the organization, threaten survival or stop operations

2. Important risks – could result in losses that would require the organization to borrow external funds to continue operations

Measurement Scales

3. Less important risks – could result in losses with a low financial impact that would not harm operations or could be paid from existing cash flows

Measurement Scales

C. Severity level measurement scales

1. High severity

2. Moderate severity

3. Low severity

Measurement Scales

D. Probability or frequency level measurement scales

1. High likelihood of occurrence

2. Moderate likelihood of occurrence

3. Low likelihood of occurrence

III. Areas of Qualitative Analysis

A. Management’s appetite for risk

1. Company history

2. Long-term objectives

3. Growth mode or stage in growth cycle

4. Financial stability

5. Market maturity

6. Competition and the need to take risks

7. Public image

8. Appetite for risk vs. financial ability

Areas of Qualitative Analysis

B. Innovation, product development, and marketing

1. Criticality to the organization

2. Market positioning and market share

3. Competition

4. State-of-the-art product development

Areas of Qualitative Analysis

5. Business interruption exposure

6. Technology

7. Production capacity

8. Degree of automation/Internet marketing

9. Nature of operations, e.g., inherently hazardous

Areas of Qualitative Analysis

C. Contractual

1. Enforceability of hold harmless and indemnification agreements under applicable jurisdictions

2. Willingness and financial ability of other party to perform

3. Financial capability and attitude of insurers providing additional insured status and contractual liability

Areas of Qualitative Analysis

D. Compliance and regulatory requirements

1. Industry subject to heavy regulation

2. Management awareness of regulatory governmental requirements

3. Possible industry and voluntary regulation

4. Penalties, fines, and public image

5. History of enforcement

Areas of Qualitative Analysis

E. Safety (internal and external)

1. Union concerns related to safety

2. Ergonomic audits

3. Existence of safety programs

4. Level of management support for safety programs

5. Ability to recruit and retain work force

Areas of Qualitative Analysis

6. Implications on employee productivity

7. Crisis management plan

8. Disaster recovery

9. Security plan

10. Possibility of terrorism

Areas of Qualitative Analysis

F. Social responsibility and citizenship

1. Industry profile – high or low

2. Management’s concern with reputational risks

3. Effect of negative press

4. Use of outside auditors

Areas of Qualitative Analysis

G. Internal policies

1. Audit and oversight

a. Internal

b. External

c. Board involvement

Areas of Qualitative Analysis

2. Employment issues

a. Leasing

b. Contract

c. Seasonal

d. Mobile workforce

e. Employment Practices Liability (EPL)

Areas of Qualitative Analysis

3. roduct guarantees

4. Product recall

5. Ethics policies and procedures

Learning Objective #3:

Discuss the assessment of broad loss exposures that may have a financial impact on the organization but may be difficult to quantify.

IV. Financial Assessment

A. Purpose – to identify and evaluate those broad loss exposures that may have a financial impact on the organization and are difficult to quantify

Financial Assessment

1. Revenue growth

a. Relative to increase in expenses and fixed costs

b. Improvement of market share compared to overall growth in market

c. Compared to competition either in industry or trade area

Financial Assessment 2. Profitability

a. Criticality

1) Importance of profitability to the organization

2) Organization’s profit margin

3) Nature of organization

4) Stage of growth cycle

5) Shutdown

Financial Assessment

b. Adequacy of return, e.g., total dollars, earnings per share, profit margins

1) Management’s overall expectations

2) Budget

3) Enough return on its investments to fund other opportunities

Financial Assessment

c. Industry standard – comparison to the industry and competitors

d. Stockholder expectations

e. Management implications – bonuses, stock options

Financial Assessment

3. Financial capacity – the organization’s ability to fund projects, activities, etc.

a. Current needs vs. future opportunities

b. Retention vs. transfer options

c. Liquidity and cash flow

Financial Assessment

d. Long-term debt and cost of capital

1) Credit rating

2) Borrowing costs

3) Outstanding letters of credit

e. Retained earnings

Learning Objective #4:

Explain the purpose, characteristics of quality loss data and the basic ways loss data can be organized for analysis.

V. Loss Data Analysis

A. Purpose – application of various methods of analyzing loss data to identify and understand the potential impact those losses may have on the organization’s risk management program and the total cost of risk

B. Characteristics of quality loss data – without a reliable degree of comfort in each of the following areas, the credibility of loss analyses suffer

Loss Data Analysis1. Completeness

a. Enough loss data (frequency); a rule of thumb is at least 5 years of data, preferably 10+ years and at least 30 data points per year

b. Adequate details about each data record

c. Understanding components of paid and reserve amounts

Loss Data Analysis2. Consistency

a. Same types of data should be provided for each data record

b. Consistent policy year, data record year, or calendar year

c. Consistent recording methodology

Loss Data Analysis3. Integrity

a. Data should be current

b. Data should be checked for accuracy related to the type of information and reserves from its sources

Loss Data Analysis4. Relevancy Data should be current

a. Data that yields information on matters about which the organization is concerned

b. Discontinued or divested operations

c. Acquired operations

d. Commingling of data

e. Data not relevant to the loss

Loss Data AnalysisC. Organizing loss data

1. Four classifications of types of losses

a. Property

1) Real property vs. personal property

2) Location of property

Loss Data Analysis3) Perils causing loss

a) Human perils, e.g., arson, pollution

b) Economic perils, e.g., strikes, obsolescence, inflation

c) Natural perils, e.g., hail, earthquake, hurricanes

4) Large loss report

Loss Data Analysisb. Human resources

1) Employee injuries

a) Length of employment when injured

b) Accident repeaters

c) Cause of injury

d) Type of injury

e) Body part injured

Loss Data Analysisf) Evaluation of time intervals

g) Location of accident (whether company location or another location, etc.)

h) Any other appropriate, relevant or meaningful categorization

2) Termination

3) Retirement

Loss Data Analysisc. Liability

1) Litigation report

2) Large loss report

d. Net income

1) Net income losses – decrease of net income or increase of expenses

2) No loss reports/information for net income losses

Loss Data AnalysisD. Frequency and severity

1. Pareto Principle – 80/20 rule – 20% of the causes will result in approximately 80% of the problems

Loss Data Analysis2. Number and cost of losses

a. In each severity range

b. At each location

c. By line of coverage

d. By type of loss

e. By type of injury

f. By length of employee’s service

g. Other demographic data

Learning Objective #5:

Discuss risk mapping and how it is used as a key risk management tool.

VI. Risk Mapping

A. Risk mapping – a visual analytical tool from which all risks of an organization can be identified and the potential impact can be understood

B. Risk maps are useful in the following ways:

1. Serve as a powerful representation of an organization’s vulnerability to unforeseen loss exposures and may be simple or complex

2. Used to convey important risk information in concert with the risk manager’s recommendations to senior management

Risk Mapping

3. Support certain risk control decisions

4. Assist with risk financing decisions

5. Model the effects of potential exposure scenarios that might develop in the future

6. Track risk reduction results

7. Monitor changes in exposures over time

Risk Mapping

C. A simple risk map consists of a graph divided into four quadrants, each reflecting a different blending of frequency and severity characteristics for each risk

A Simple Risk Map

VII. Summary

A. Non-quantifiable risks are subject to identification and analysis

B. Qualitative risks that are not analyzed can cause significant losses

C. Qualitative risk analysis requires a different type of thought process from that of quantitative risk analysis

D. Qualitative risk analysis techniques should be used in conjunction with quantitative risk analysis techniques

Review of Learning Objectives

1. Discuss the purposes of qualitative and quantitative analysis and characteristics of each. (p. 4)

2. Explain measurement scales and areas of qualitative analysis. (p. 7)

3. Discuss the assessment of broad loss exposures that may have a financial impact on the organization but may be difficult to quantify. (p. 14)

Review of Learning Objectives

4. Explain the purpose, characteristics of quality loss data and the basic ways loss data can be organized for analysis. (p. 17)

5. Discuss risk mapping and how it is used as a key risk management tool. (p. 24)

Thank you!

Qualitative Analysis