Chapter 1

Question 1

Define probability.

Answer 1

The likelihood that an outcome or event will occur. It is measurable.

Question 2

Define loss exposure.

Answer 2

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

Question 3

Define hazard.

Answer 3

A condition that increases the frequency or severity if a loss.

Question 4

Define moral hazard.

Answer 4

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

Question 5

Define morale hazard.

Answer 5

A condition of carelessness or indifference that increases the frequency or severity of a loss.

Question 6

Physical hazard.

Answer 6

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss.

Question 7

Legal hazard.

Answer 7

A condition of the legal environment that increases loss frequency or severity v

Question 8

Property loss exposure.

Answer 8

A condition that presents the possibility that a person or organization will sustain a loss resulting from damage to property in which that person or organization has a financial interest.

Question 9

Define tangible property.

Answer 9

Property that has a physical form.

Question 10

Define real property.

Answer 10

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land.

Question 11

Drefine personal property. Give an example of asset exposed to loss, cause of loss, and financial consequences.

Answer 11

All tangible and intangible property that is not real property.

Question 12

Define intangible property.

Answer 12

Property that has no physical form.

Question 13

Define liability loss exposure.

Answer 13

Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.

Question 14

Define personnel loss exposure.

Answer 14

A condition that presents the possibility if loss caused by a person’s death, disability, retirement, or resignation that deprives an organization of the person’s special skill or knowledge that the organization cannot readily replace.

Question 15

Define Personal loss exposure.

Answer 15

Any condition it situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment.

Question 16

Define net income loss exposure.

Answer 16

A condition that presents the possibility of loss caused by a reduction in net income.

Question 17

Define pre-loss goals.

Answer 17

Goals to be accomplished before a loss, involving social responsibility, externally imposed goals, reduction of anxiety, and economy.

Question 18

Define post-loss goals.

Answer 18

Risk management program goals that should be in place in the event of a significant loss.

Question 19

Define pure risk.

Answer 19

Chance of loss or no loss, but no chance of gain.

Question 20

Define speculative risk.

Answer 20

Chance of loss, no loss, or gain.

Question 21

Define subjective risk.

Answer 21

The perceived amount of risk based on opinion.

Question 22

Define objective risk.

Answer 22

The measurable variation in uncertain outcomes based on facts and data.

Question 23

Why can subjective and objective risk differ substantially?

Answer 23

Familiarity and control (cars may be unsafe but someone may chose car travel over a plane due to familiarity and control.

Severity over frequency: (ex. lterrorist attack: one might avoid going out in public. These attacks are very unlikely but the fact that they are highly publicized makes them seem more likely.

Question 24

Define diversifiable risk.

Answer 24

A risk that affects only some people. (Fire in a single factory)

Question 25

Define nondiversifiable risk.

Answer 25

A risk that affects large numbers of people at the same time. Ex. Inflation increasing building cost of factories.

Question 26

What are the quadrants of risk?

Answer 26

One ERM approach to categorizing risk. Hazard risks: managed by risk management professionals. Operational risks: pure risks that fall outside of traditional risk management. Could jeopardize service-related or manufacturing-related business functions. Financial risks: directly affect an organization's financial position via changes in revenue, expenses, business valuation, or cost or availability of capital. Strategic risks: fundamental to an organization's existence and business plan. They have a current or future effect on earnings or capital arising from business decisions, or lack of responsiveness to changes in the industry or changes in demand.

Question 27

List the three consequences of risk.

Answer 27

Expected costs of losses or gains. Expenditures on risk management. Cost of residual uncertainty.

Question 28

What are the expected costs of losses or gains.

Answer 28

They include direct and indirect costs.

Question 29

Define residual uncertainty.

Answer 29

The level of risk that remains after individuals or organizations implement their risk management plans.

Question 30

What is the following an example of? A manufacturer delays building a new factory due to the risks of expanding business. As a result they may face increased construction costs later.

Answer 30

Cost of residual uncertainty.

Question 31

What does traditional risk management focus on?

Answer 31

Exposures related to hazard risk. (Purchasing insurance, managing safety, controlling financial recovery from losses generated by hazard oak.

Question 32

Describe ERM.

Answer 32

ERM is a broad view of oak management. It includes hazard risk and business risk. It manages all of an organization's key risks and opportunities to meet goals. The goal is to maximize the organization's value. The risk management process occurs at the enterprise level.

Question 33

What are the three elements of loss exposures?

Answer 33

Asset exposed to a loss. Cause of loss (peril) Financial consequences of loss.

Question 34

What three costs equal the financial consequences of risk?

Answer 34

1. Cost of value loss because of actual events that cause a loss. 2. The cost of the resources devoted to risk management for that asset or activity. 3. The cost of residual uncertainty.

Question 35

How does risk management benefit individuals?

Answer 35

Preserves financial resources by reducing expected losses. Reduces residual uncertainty.

Question 36

How does risk management benefit organizations?

Answer 36

Preserves financial resources, making it a safer and more attractive financial investment. Confidence that capital is protected against future loss is attractive to suppliers and customers. By reducing the deterrent effect of risk, capacity to engage in business activities is increased.

Question 37

How does Risk Management benefit society?

Answer 37

Preserves resources. Reduces residual uncertainty which improves the allocation of productive resources. Can engage in riskier activity that may maximize profits, roi, and ultimately wages. These changes increase the standard of living.

Question 38

List the preloss goals.

Answer 38

``` (LETS) Legality Economy of operations Tolerable uncertainty. Social responsibility. ```

Question 39

List the post-loss goals.

Answer 39

``` Survival Continuity of operations Profitability Earning stability Social responsibility Growth ```

Question 40

How do pre and post-loss goals conflict?

Answer 40

Achieving post loss goals is expensive. This may conflict with economy of operations. Legality and social responsibility goals may conflict with economy of operations. Some externally imposed obligations may be nonnegotiable.

Question 41

What are the six steps in the risk management process.

Answer 41

1. Identify the loss exposure. 2. Analyzing loss exposures. 3. examining the feasibility of Risk Management techniques. 4. Selecting the appropriate Risk Management techniques. 5. Implementing the selected Risk Management techniques. 6. Monitoring results and revising the Risk Management program

Question 42

List some methods used to identify loss exposures.

Answer 42

Questionnaires, checklists, financial statements, contests, insurance policies, organization policies and procedures, flow charts, loss histories, inspections, expertise within and beyond the organization, compliance reviews, inspections.

Question 43

What are the four dimensions used to analyze loss exposures?

Answer 43

Loss frequency Loss severity Total dollar losses Timing

Question 44

What are the four steps involved in monitoring a Risk Management program?

Answer 44

1. Establishing standards of acceptable performance. 2. Comparing actual results with these standards. 3. Correcting substandard performance or revising standard that may prove to be unrealistic. 4. Evaluating standards that have been substantially exceeded.

Question 45

How does an organization determine which Risk Management technique is economical?

Answer 45

The potential costs if loss exposures are left untreated are compared with the costs of possible risk management.

Question 46

What do the four quadrants of risk focus on?

Answer 46

The source of risk and who had traditionally managed it.

Question 47

Which Risk Management goal is both a pre-loss and post-loss goal?

Answer 47

Social responsibility.

Question 48

Explain the pre-loss goal of economy of operations.

Answer 48

A Risk Management should operate economically and efficiently. It should not incur substantial costs for slight benefits.

Question 49

Explain the pre-loss goal of tolerable uncertainty.

Answer 49

Involves keeping managers' uncertainty about losses at a tolerable level. Managers should be able to make decisions without being unduly affected by uncertainty

Question 50

Explain the pre-loss goal of legality.

Answer 50

Ensure that the organizations legal obligations are met: standard of care owes to other, contracts entered into, Federal, State, local laws.

Question 51

Explain the pre-loss goal of social responsibility.

Answer 51

Both a pre-loss and post-loss goal. Includes acting ethically and fulfilling obligations to the community and society as a whole.

Question 52

Give an example for each post loss goal.

Answer 52

Survival: BP has huge oil spill and must make sure exposure to liability doesn't consume all funds so company survives. Continuity of operations: A company had a plan to rent backup generators if power is interrupted so they can continue operating. Profitability: ABC has Risk Management plans that will ensure they can still maintain a profit in the case of a catastrophic loss. Earnings stability: DEF company is happy with consistent earnings after a significant loss. Social responsibility: GHI wants to continue hosting an annual charity golf tournament each year, even if there is a significant loss. They might find a more affordable course ahead of time so they can meet the goal of social responsibility. Growth: JKL just opened a factory overseas and needs to consider expanding, even if there is a large loss.

Question 53

Define systemic risk.

Answer 53

The potential for a major disruption in the function of an entire market ofr the financial system.

Question 54

Define liquidity risk.

Answer 54

The risk that an asset cannot be sold on short notice without incurring a loss.

Question 55

How does classifying risk help an organization's Risk Management process.

Answer 55

It can help with assessing risks because many risks in the same classification have similar tributes. It can also help with managing risks because many risks in the same classification can be managed with similar techniques. It also ensures that risks in the same classification are less likely to be overlooked.

Question 56

Provide examples of operational risks.

Answer 56

- A piece of machinery breaks down. | - An employee embezzled money from the company. P

Question 57

Provide examples of financial risks.

Answer 57

Credit risk. Liquidity risk. Market risk. Price risk.

Question 58

List some hidden costs of loss.

Answer 58

Time lost by inured employee. Time lost by other employees who stop work. Time spent by first aid attendants and hospital department staff (not paid by insurer) Damage to equipment/spoilage Interference with production. Continuation of employee's wage. Los of profit on the injured employee's productivity and idle machines Overhead per injured employee continues while employee is not productive.

Question 59

For organizations, what are the costs of residual uncertainty?

Answer 59

Effect the uncertainty has in consumers, investors, and suppliers.

Question 60

For individuals, what are the costs of residual uncertainty?

Answer 60

Lost salary and forgone investments.

Question 61

Provide examples of strategic risks.

Answer 61

Failure to foresee drastic decline in sales for an item that a company manufactures.

Question 62

What steps can an organization take to forestall an intolerable shutdown and ensure continuous operations after a loss?

Answer 62

- Identify activities whose interruptions cannot be tolerated. - Identify the types of events that could interrupt such activities. - Determine the standby resources that must be immediately available to counter the effect of those losses. - Ensure the availability of the standby resources at even the most unlikely and difficult times.

Question 63

What forecasts can an organization use to analyze the costs of a risk management technique?

Answer 63

- A forecast of the dimensions of expected losses. - A forecast, for each feasible combination of risk management techniques, of the effect on the frequency, severity, and timing of these expected losses. - A forecast of the after-tax costs involved in applying various risk management techniques.

Question 64

What are the four steps to monitor and revise a risk management program?

Answer 64

1. Establishing standards of acceptable performance. 2. Comparing actual results with these standards. 3. Correcting substandard performance or revising standards that prove to be unrealistic. 4. Evaluating standards that have been substantially exceeded.

Question 65

What are risk management techniques selected based upon?

Answer 65

Based on: -Quantitative financial considerations (i.e. forecast expected losses, effect of risk management techniques, and after-tax costs. -Qualitative nonfinancial considerations (e.g. ethical considerations, maintaining operations, peace of mind)

Question 66

Sally and her husband Bill own a saddle shop that has been in Sally's family for generations. Because of the sentimental value of the shop, they have invested a great deal in loss-prevention devices and safety features to ensure the survival of the business. This tendency to over-invest in loss-prevention measures creates the risk that: A. Too much emphasis is being placed on maximum earnings in any one period rather than stability of earnings over time. B. Risks that should be transferred are being retained C. The risk management techniques selected are not the best ones for the saddle shop. D. The financial value of the saddle shop is not being maximized.

Answer 66

D. his tendency to over-invest in loss-prevention measures creates the risk that the financial value of the saddle shop is not being maximized.

Question 67

Risk management program goals are typically divided into pre-loss goals and post-loss goals. Pre-loss goals

Answer 67

A. Describe an organization's need to meet responsibilities as an ongoing operation.