Chapter 6 – Risk Management Flashcards Preview

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Flashcards in Chapter 6 – Risk Management Deck (30):

Risk Management

Minimize the adverse effects of accidental losses upon an organization


Loss exposure

chance of financial loss to the organization as the result of a particular peril striking a thing of value


Tangible Property

Is real, can be touched, and has form and substance


Real Property

consists of land, and generally whatever is erected or growing upon or affixed to the land


Personal Property

includes all tangible property other than real estate


Going Concern Value

Certain business property, more valuable when they are involved in producing revenue than when they are considered separately


Intangible Property

No physical substance and consists of legal rights rather than things


Contingent Business Interruption

Occurs away from the premises of the organization. Premises of a major supplier constitutes a contributing exposure


Increased Rental Expenses

Only applies if the rent charged at the new location exceeds that currently paid by the business


Expediting Costs

Extra costs incurred in hastening the recovery of a business after a loss


Natural Perils

Occurrence of a natural peril is largely beyond human control


Human Perils

Perils are those that find their origin in the individual or group and which can cause a loss to occur


Economic Perils

Stem from the actions of large numbers of persons or of governments


Financial Consequences of Losses Directly Related to

Loss Frequency and Severity
Frequency x Severity = Total Costs


Standardized Surveys/Questionnaires

Pro: people who have little risk management experience, such as business owners, can answer

Con: these rarely provide the reasons for the questions, it does not stimulate the user to do anything after the document has been completed


Financial Statements & Underlying Records

Analysis of its financial statement and underlying documents can often provide valuable clues regarding loss exposures


The Balance Sheet

Listing of the businesses’ assets and liabilities for the end of each accounting period is contained in the balance sheet


The Operating (Profit and Loss) Statement

Represents the past performance of the business and
cannot be depended upon to predict what will happen in the future.


The Statement of Changes in Financial Position

Analyze changes in the businesses net working capital. Potentially important change in the business’s loss exposures


The Opinion Letter

Required to identify any material changes that should have been made to the financial statement. Acts as a disclaimer and warns the risk management professional that something may be amiss.


Exposure Avoidance

Eliminates any possibility of loss, achieved by:
- Completely avoiding the exposure; or
- Eliminating the exposure


Loss Prevention

Any measure taken to reduce the frequency of a particular loss, focus on how a particular losses are caused


Loss Reduction

Reduce the severity of the losses that do occur


Pre-Loss Measures

Reduce the amount of property, the number of persons, or other things of value that may suffer loss from a single event


Indemnity contract

organization will be reimbursed by the transferee


Hold harmless agreement

Agrees to pay losses on behalf of the transferor


Hold harmless agreement is subject to the following uncertainties

- party accepting the risk may not have insurance
- the transferred exposures may not be clearly defined
- the enforceability of the contract may be challenged in the courts
If the transferee cannot pay, the transferor must pay.


Commercial Insurance is subject to the following uncertainties

- Insurer may be come insolvent or refuse to meet it policy obligations for some
other reason
- disagreement between insurer and the insured as to weather a loss is insured,
or the amount of the loss
- inadequate limits at the time of loss


Sound risk management program will incorporate at least one risk ______ and at least one _______

at least one risk control technique and at least one risk financing technique


Three forecasts are necessary

a) Forecast of frequency and severity
b) Forecast of the effects that various risk control and risk financing techniques are likely
c) Forecast of the costs of these techniques