Ch 3

Question 1

___ is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.

Answer 1

Risk management

Question 2

A(n) ___ is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

Answer 2

Loss exposure

Question 3

Name the three pre-loss objectives of risk management.

Answer 3

• Prepare for potential losses in the most economical way
• Reduce anxiety
• Meet any legal obligations

Question 4

Name the 5 post-loss objectives of risk management.

Answer 4

• Survival of the firm
• Continue operating
• Stability of earnings
• Continued growth of the firm
• Minimize the effects that a loss will have on other persons and on society

Question 5

Name the 4 main steps of the risk management process.

Answer 5

1. Identify potential losses
2. Measure and analyze the loss exposures
3. Select the appropriate combination of techniques for treating a loss exposure
4. Implement and monitor the risk management program

Question 6

The ___ is the worst loss that could happen to the firm during its lifetime.

Answer 6

Maximum possible loss

Question 7

The ___ is the worst loss that is likely to happen.

Answer 7

Probable maximum loss

Question 8

___ refers to techniques that reduce frequency and severity of losses.

Answer 8

Risk control

Question 9

___ means that a certain loss exposure is never acquired/undertaken, or an existing loss exposure is abandoned.

Answer 9

Avoidance

Question 10

___ refers to measures that reduce the frequency of a particular loss.

Answer 10

Loss prevention

Question 11

___ refers to measures that reduce the severity of a loss after it occurs.

Answer 11

Loss reduction

Question 12

___ refers to having back-ups or copies of important documents or property available in case a loss occurs.

Answer 12

Duplication

Question 13

___ means dividing the assets exposed to loss to minimize the harm from a single event.

Answer 13

Separation

Question 14

___ means spreading the loss exposure across different parties, securities, or transactions, to reduce the chance of a loss.

Answer 14

Diversification

Question 15

___ refers to techniques that provide for the payment of losses after they occur. Examples include retention, non-insurance transfers, and commercial insurance.

Answer 15

Risk financing

Question 16

___ means that the firm retains part or all of the losses that can result from a given loss.

Answer 16

Retention

Question 17

Name the three criteria that must be fulfilled in order for retention to be used effectively.

Answer 17

• No other method of treatment is available
• The worst possible loss is not serious
• Losses are highly predictable

Question 18

The ___ is the dollar amount of the losses that the firm will retain.

Answer 18

Retention level

Question 19

Name the four main methods for paying retained losses.

Answer 19

• Current net income: Losses are treated as current expenses
• Unfunded reserve: Losses are deducted from a bookkeeping account
• Funded reserve: Losses are deducted from a liquid fund
• Credit line: Funds are borrowed to pay losses as they occur

Question 20

A(n) ___ is an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures.

Answer 20

Captive insurer

Question 21

A(n) ___ is an insurer owned by several parent firms.

Answer 21

Association (Group captive)

Question 22

___ is a special form of planned retention by which part or all of a given loss exposure is retained by the firm.

Answer 22

Self insurance (self-funding)

Question 23

A(n) ___ is a group captive that can write any type of liability coverage except for employers’ liability, workers compensation, and personal lines.

Answer 23

Risk retention group

Question 24

A(n) ___ is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party.

Answer 24

Non-insurance transfer

Question 25

A(n) ___ is a specified amount subtracted from the loss payment otherwise payable to the insured.

Answer 25

Deductible

Question 26

In a(n) ___, the insurer pays only if the actual loss exceeds the amount that a firm has decided to retain.

Answer 26

Excess insurance policy

Question 27

Throughout a(n) ___, the market will go between “hard” and “soft.” In a “hard” market, profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain. In a “soft” market, profitability is improving, standards are loosened, premiums decline, and insurance becomes easier to obtain.

Answer 27

Underwriting cycle

Question 28

Implementation of a risk management program begins with a risk management policy statement. What are the four main purposes of this statement?

Answer 28

• Outlines the firm’s objectives and policies
• Educates top-level executives
• Gives the risk manager greater authority
• Provides standards for judging the risk manager’s performance

Question 29

When implementing a risk management program, a risk management manual may be used for what two purposes?

Answer 29

• Describe the risk management program
• Train new employees

Question 30

___ refers to the identification and analysis of pure risks faced by an individual or family, and to the selection of the most appropriate technique(s) for treating such risks.

Answer 30

Personal risk management