Chapter 3

Question 1

Risk

Answer 1

Uncertainty about future occurrences or possible losses
Pure Risk - accidental risk, no possibility of gain only loss, it is insurable (Property, injury)
Speculative Risk - business risk, a possibility for loss or gain. Typically this is uninsurable (gambling, market fluctuations)

Question 2

Risk Management

Answer 2

the minimization of the impact of accidental and business losses to an organization in a cost-effective manner

Question 3

Enterprise Risk Management

Answer 3

manages risk from accidental loss but also strategic, financial, and operative risks from all divisions and the potential impact on the entire organization

Question 4

Risk Management Process

Answer 4

Identify Exposures - items subject to loss, potential causes of loss/damage, financial consequences of an occurrence
Have knowledge of
-physical assets
-loss of use of those assets (net income)
-legal liabilities
-personal health and earning capacity (human assets)

Evaluate Risks - what is the probability or likelihood of a loss occurring? The financial impact of losses over a period of time can be calculated by multiplying the loss frequency by the loss severity. The Law of Large Numbers statistically dictates that as the number of events increases, the degrees of certainty also increases.

Consider Options for Risk Control - strategies to manage risk
-Avoidance - reduces probability of loss to zero but is not practical
-Loss Reduction - activities that lessen the severity of loss (sprinkler systems)
-Loss Prevention - activities that prevent losses from occurring (safety guards to equipment to prevent injury)
-Separation or Diversification of Exposures - separate locations to reduce concentration of values or duplication of items to reduce the impact of loss
-Risk Transfer - contractually transfer the legal and financial risk to someone else (hazard protocol to a separate company)(insurance for financial risk) Retaining loss is the decision to absorb the loss when it does not make financial sense to pay for an insurance policy if a loss or replacement is needed.
Current Expense - everyday losses and business expenses paid for from the operating account
Unfunded reserve - expenses that are recognized and budgeted for but no money is held in accounting reserve.
Funded reserve- expenses are recognized and money is put aside to cover the expense.
Borrowing - loan from a bank is the money in the operating fund is insufficient
Captive Insurer - An insurance company that is funded by its parent company and is set up for the purpose of funding

Formulate RM plan - based on financial criteria what is the best strategy for the organizations objectives and budget.

Implement RM plan -

Monitor and Modify plan - have any new exposures developed? Do expectations need to be modified?