State Accounting: Risk Identification and Evaluation

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

• The type of value exposed to a loss:
  • People
  • Property (including vehicles)
  • Freedom from Liability
  • Revenue
  • Compliance
• The peril that causes loss:

Natural Perils - Forces of nature; no human intervention.

Cave-in	Fire of natural origin	Lightning	Rot	Vermin
Collapse	Flood	Meteors	Rust	Volcanic Eruption
Drought	Hail	Mildew	Temperature Extremes	Water
Earthquake	Humidity extremes	Mold	Tides	Weeds
Evaporation	Ice	Perils of the air (icing, clear-air turbulence)	Tidal Waves	Wind (tornado, hurricane, typhoon)
Erosion	Land or mudslide	Perils of the sea ( icebergs, waves, sandbars)	Uncontrollable vegetation

Human Perils - Action of individual or a small group.

Arson	Electrical overload	Labor union strikes (direct effects)	Sabotage	Toppling of high-piled objects
Chemical leakage	Embezzlement	Molten materials	Shrinkage	Vandalism, malicious mischief
Industrial contamination	Explosion of human origin	Pollution (smoke, smog, water, noise)	Sonic boom	Vibration
Discrimination	Fire/Smoke of human origin	Power outage	Terrorism	Water hammer
Confiscation	Human Error	Riot	Theft, forgery, fraud

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

Changes in consumer tastes	Recession	Obsolescence	Strike (consequences)	War
Currency fluctuations	Inflation	Stock market decline	Technological advances

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 (building, 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 is 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.