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Insurance & Social Security > 01. Risk Management > Flashcards

01. Risk Management Flashcards

1
Q
  1. What is risk?
A

The uncertainty concerning the occurrence of a loss

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2
Q
  1. What is objective risk
A

Objective risk is the relative variation of actual loss from expected loss.

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3
Q
  1. How is the amount of objective risk in a particular situation calculated?
A

Relative variation of actual loss from expected loss divided by the expected loss.

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4
Q
  1. How can objective risk be statistically measured?
A

By using a measure of dispersion, eg. standard deviation or coefficient of variation. Which is useful as future loss experience can be measured as business grows.

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5
Q
  1. What do the statistically measurement and prediction of objective risk rely upon and what does this mean?
A

IT relies on the law of large numbers which states as the number of exposure units increases, the more closely will the actual loss experience approach the probably loss experience.

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6
Q
  1. What is subjective risk?
A

It is uncertainty based on a person’s personal view or perception. High subjective risk often results in conservative or prudent conduct, while low subjective risk may result in less conservative conduct.

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7
Q
  1. What is the chance of loss?
A

It is the probability that an event will occur.

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8
Q
  1. What does objective probability refer to?
A

The long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying decisions.

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9
Q
  1. What is another name for objective probabilities and how can they be determined?
A

Priori probabilities - they can be determined by deductive reasoning.

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10
Q
  1. What is subjective probability?
A

It is the individual’s personal estimate of the chance of loss. This includes their age, sex, intelligence, education and use of alcohol.

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11
Q
  1. Explain the difference between chance of loss and objective risk?
A

Chance of loss is the probability an event will occur. Objective risk is the relative variation of actual loss from expected loss

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12
Q
  1. What is a peril?
A

It is a cause of loss, eg the peril of fire, wind, hail or theft.

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13
Q
  1. What is a hazard?
A

It is something that creates or increases the chance of loss arising from a given peril - eg combustable materials in a fire.

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14
Q
  1. Can things be both a peril and a hazard?
A

Yes

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15
Q
  1. What are the three classifications of a hazard?
A
  • Physical hazard - physical properties that increase the chance of loss
  • Moral hazard - they increase the probability of loss that result from dishonest tendencies in the character of the insured person - fraud or exaggerate
  • Morale hazard - acts to increase losses where insurance exists - more careless
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16
Q
  1. What are the four classifications of risk?
A
  • Financial and non-financial
  • Static and dynamic risk
  • Fundamental and particular risk
  • Pure and speculative risk
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17
Q
  1. What are dynamic risks?
A

Those resulting from changes in the economy (prices, tastes and technology) and generally benefit society in the long run.

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18
Q
  1. What are static risks?
A

Involve losses that would occur even if there were no changes in the economy eg. loss occurring from perils of nature and dishonesty of others. They occur more regularly and more predictable than dynamic risks and so are better suited to insurance.

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19
Q
  1. What are fundamental risks?
A

They involve losses that are impersonal in origin and consequence. They are group risks caused by economic, social and political phenomena.

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20
Q
  1. What are particular risks?
A

Involve losses that arise out of individual events and are felt by individuals eg. robbery.

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21
Q
  1. Why is it generally held that fundamental risks are dealt with by society rather than the individual?
A

Because they are caused by conditions outside people’s control where as particular risks are the individual’s personal responsibility so require insurance, loss prevention or other risk management techniques.

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22
Q
  1. What is speculative risk?
A

It is where there is a possibility of loss but also of gain. eg. gambling or investing. It is generally not insurable.

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23
Q
  1. What is pure risk?
A

It is used to designate those situations that involve only the chance of loss or no loss (eg property ownership.

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24
Q
  1. What are the three reasons to differentiate between pure and speculative risks?
A
  1. Generally insurers only insure pure risks
  2. The law of large numbers can be applied more easily to pure risks
  3. Society may benefit from a speculative risk but it is harmed by a pure risk.
25
Q
  1. What are the types of pure risk?
A
  • Personal risks
  • Property risks
  • Liability risks
  • Risks occurring from the failure of others
26
Q
  1. What are the four major personal risks?
A
  • Risk of premature death
  • Risk of inadequate funds for retirement
  • Risk of sickness and disability
  • Risk of unemployment
27
Q
  1. What two types of loss are covered under property risks?
A
  • direct loss - loss of property

* indirect (consequential) loss - the loss of use of that property resulting in lost income or additional expenses.

28
Q
  1. What are liability risks?
A

The basic peril in the liability risk is the unintentional injury of other persons or damage to their property through negligence or carelessness.

29
Q
  1. What are the three major burdens that risk places on society?
A
  • Size of emergency fund - without insurance these would be required
  • Loss of goods and services - would occur if no insurance
  • Worry and fear - risk generates this which can affect performance.
30
Q
  1. What are the five methods for handling risk?
A
  1. Avoidance
  2. Loss Control
  3. Retention
  4. Non-insurance transfer
  5. Insurance
31
Q
  1. What are the two major objectives of loss control?
A
  • Loss prevention - reduce the probability of loss so frequency of loss is reduced
  • Loss reduction - reduce the severity of the loss after it occurs.
32
Q
  1. Why is loss control highly desirable to society?
A

1) Indirect costs of losses may be large and can easily exceed the direct costs. Prevention reduces both indirect and direct costs
2) Social cost of losses are reduced.

33
Q
  1. What are the two options for retention of risk?
A
  • Active - consciously aware of risk and deliberately plans to retain all or part of the loss
  • Passive - unknowingly retain risk because of indifference or laziness
34
Q
  1. Why is active retention used?
A
  1. to save money

2. because commercial insurance is unavailable or excessive

35
Q
  1. What does non-insurance transfer involve and what are the three options?
A

The transfer of risk to another party who is not an insurer. This can occur by:

  • transfer of risk by contracts (warranties & hold harmless clauses)
  • Hedging price risks - transfers some risk of unfavourable movements to a speculator
  • Incorporation of a business firm - protects individual’s personal assets.
36
Q
  1. Insurance is the most practical method for handling a major risk. Private insurance has what three major characteristics?
A
  • risk transfer is used
  • pooling is used to spread the losses over the group
  • the risk may be reduced by application of the law of large numbers by which an insurer can predict future loss experience with some accuracy.
37
Q
  1. What is risk management?
A

It is the systematic process of identifying and analysing the various loss exposures faced by an individual and the best methods of treating the loss exposures consistent with that individual’s goals and objectives.

38
Q
  1. What is the difference between risk management and insurance management?
A

Risk management is broader as it considers all options for managing the risk and the cost of handling the risk where as insurance management is limited to insurance and retention and how much can be saved by retaining the risk and if this is worthwhile

39
Q
  1. What are the six stages of the risk management process?
A
  1. Determine the objectives
  2. Identify potential losses
  3. Evaluate the potential losses
  4. Select the most appropriate technique for handling losses
  5. Implement the program
  6. Periodic review and evaluation
40
Q
  1. In step 1 determining the objectives the primary goal is to ensure the business is not prevented from attaining its goals, What are the two categories of objective?
A
  • Pre-loss objectives - inc. economy, reduction of anxiety and meet any externally imposed obligations
  • Post-loss objectives - inc. survival of business, continuing operation, stability of cash flows, continued growth and social responsibility.
41
Q
  1. What is a risk management policy statement?
A

It enables an effective risk management program and outlines the risk management objectives in respect of treatment of loss exposures.
It should be incorporated into an individual’s financial plan.

42
Q
  1. What are the three types of potential risk?
A
  • Personal risk
  • Property risk
  • Liability risk
43
Q
  1. What types of losses come under personal risk?
A
  • loss of income due to premature death
  • insufficient income and assets in retirement
  • catastrophic bills & loss of earnings (disability)
  • loss of income from unemployment.
44
Q
  1. What types of losses come under property risk?
A
  • direct physical damage due to natural disaster
  • indirect losses resulting from a physical loss
  • theft or destruction of property
  • direct physical damange losses to vehicles
  • theft of cars and other personal vehicles
45
Q
  1. What types of losses come under liability risk?
A

Legal liability arising from:
* personal acts that cause damage to others
* libel, slander or defamation
* arising from negligent operation of a vehicle, and
Payment of attorney fees and other legal costs

46
Q
  1. In Step 3 evaluating potential losses, what two methods are used?
A
  • loss frequency - propbable number of losses that may occur in a period
  • loss severity - probably size of the losses that may occur
47
Q
  1. There are two key options under step 4 ‘selecting the most appropriate techniques’, what are they?
A

a. Risk control

b. Risk financing

48
Q
  1. What options are there for risk control?
A
  • Avoidance - avoidance of the risk

* Loss control - reduces frequency and severity of loss.

49
Q
  1. What are the two disadvantages of the risk control option of avoidance?
A
  • it may not be possible to avoid all losses

* it may not be practical or feasible to avoid the exposure completely.

50
Q
  1. Under risk control, the option of loss control includes what examples?
A

Loss control and prevention, examples include:

  • driving within limits
  • wearing a helmet
  • security control checks
  • strict enforcement of safety rules
  • limit cash held on premises
  • locking valuable items up.
51
Q
  1. What are the options under the risk financing technique?
A
  • retention
  • Non-insurance transfer
  • Insurance
52
Q
  1. When is active risk retention good?
A
  • no other method of treatment is available
  • worst possible loss is not serious
  • losses are highly predictable
53
Q
  1. What are the advantages of retention?
A
  • Saves money in the long run if actual losses are less than premiums
  • it involves lower expenses
  • it encourages loss prevention
  • it increases cash flow.
54
Q
  1. What are the disadvantages of risk retention?
A
  • There may be possible losses
  • Expenses may actually be higher (ie to implement loss prevention)
  • there may be higher taxes (premiums are generally tax deductible).
55
Q
  1. What are the options for non-insurance transfer?
A
  • contracts
  • hold harmless agreement
  • leases
56
Q
  1. What are the advantages of non-insurance transfer?
A
  • individual can transfer some potential losses that are not commercially insurable
  • Non-insurance transfers often cost less than insurance
  • the potential loss may be shifted to someone who is in a better position to exercise loss control
57
Q
  1. What are the disadvantages to non-insurance transfer?
A
  • the transfer may fail because the contract language is ambiguous
  • if the risk is transferred to someone who cannot pay the individual may still be liable
58
Q
  1. What are the advantages of insurance?
A
  • individual is indemnified after a loss occurs
  • uncertainty is reduced
  • insurers provided services including loss control and claims adjusting
  • insurance premiums are income tax deductible as a business expense.
59
Q
  1. What are the disadvantages of insurance?
A
  • premiums can be a major cost
  • considerable time and effort is spent negotiating insurance coverage
  • individual has less incentive to follow a loss control program

Insurance & Social Security (10 decks)

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