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Risk Identification and Evaluation

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Risk Management, Portland, OR


Risk Assessment Roadmap Toolkit

Risk Identification and Evaluation

 

Loss Exposure: Possibility of financial loss as the result of a particular peril striking a thing of value.

Three Components of a Loss Exposure: Type of Value, Peril, Potential Financial Consequences

1.  The type of value exposed to loss.

  • People
  • Property (including vehicles)
  • Freedom from Liability
  • Revenue
  • Compliance

2.      The peril that causes the loss.

 

  • Natural Perils – Forces of Nature; no human intervention. 

Cave-in

Ice

Temperature extremes

Collapse

Land or mudslide

Tides

Drought

Lightning

Tidal waves

Earthquake

Meteors

Uncontrollable vegetation

Evaporation

Mildew

Vermin

Erosion

Mold

Volcanic eruption

Fire of natural origin

Perils of the air (icing, clear-air turbulence)

Water

Flood

Perils of the sea (icebergs, waves, sandbars)

Weeds

Hail

Rot

Wind (tornado, hurricane, typhoon)

Humidity extremes

Rust

 

 

  • Human Perils – Actions of one individual or a small group. 

Arson

Fire/Smoke of human origin

Shrinkage

Chemical leakage

Human error

Sonic boom

Industrial contamination

Labor union strikes (direct effects)

Terrorism

Discrimination

Molten materials

Theft, forgery, fraud

Confiscation

Pollution (smoke, smog, water, noise)

Toppling of high-piled objects

Electrical overload

Power outage

Vandalism, malicious mischief

Embezzlement

Riot

Vibration

Explosion of human origin

Sabotage

Water hammer

 

  • Economic Perils – Actions of large groups of people who act independently responding to particular conditions.

Changes in consumer tastes

Inflation

Strike (consequences)

Currency fluctuations

Obsolescence

Technological advances

Recession

Stock market decline

War

 

3.      The extent of the potential financial consequences.

  • Some of the valuation standards that are used to assess financial consequences of property losses include: 

Accounting (book) value – The price paid to acquire the asset, less accumulated depreciation.

Actual cash value – Current replacement cost, reduced by true physical depreciation or obsolescence. Actual cash value recognizes the percentage of an item’s useful economic life that has been expended. This can be applied to either real or personal property.

Economic value – A method used to determine a building’s value, which is based on the structure’s earnings potential, as opposed to its depreciated or replacement value.

Functional replacement cost – Cost to acquire a replacement that, while not identical to the property being replaced, will perform the same function with equal efficiency.

Historical cost – The price paid to acquire the asset.

Market value – Value of real or personal property based on the price a willing buyer would pay for the property.

Replacement cost – Cost to replace property, with like kind and quality, at its current price without a deduction for depreciation.

Reproduction cost – Cost of duplicating an item of real or personal property exactly by using identical materials, artistry, and other expertise comparable to those that were used in the original.

Tax-appraised value – The value of real or personal property based on the valuation established by a government tax assessor.

  • Property Definitions: 

Real property: The rough legal equivalent of the more common term “real estate”, meaning land and things of value permanently attached to it (buildings, other structures, and things growing on the land).

Personal property: All property other than real property. Personal property can be classified as either tangible or intangible.

Tangible property can be physically touched. It typically falls into eight categories, as follows:

  • Money and Securities.
  • Accounts Receivables.
  • Inventory – raw materials, goods ready for sale.
  • Furniture, Equipment, or Supplies.
  • Machinery – often characterized by large values; subject to rapid depreciation and special perils.
  • IT Hardware, Software, and Media.
  • Valuable Papers, Books and Documents.
  • Mobile property – autos, aircraft, ships, heavy mobile equipment used by contractors, etc.

Intangible property are assets that have no physical substance. These include, but are not limited to 

  • Copyrights.
  • Patents.
  • Trademarks.
  • Licenses.
  • Trade secrets.

 

Methods of Identifying Loss Exposures: 

  • Previous contracts of similar type and their outcomes.
  • Standardized surveys/questionnaires.
  • Financial statements.
  • Records and files.
  • Loss reports/claims.
  • Flowcharts.
  • Personal inspections.
  • Experts.

 

Rev 08/10