Chapter 1 Flashcards
Risk management makes those who own or run an organization more willing to undertake risky activities.
effects of risk management on individuals, organizations, and society in general
Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses.
expected cost of losses or gains
Failing to respond to changing customer demand and preferences in the design of golf clubs could cost Company G significant market share. Categorized according to the quadrants of risk, this exposure to loss is classified as
A strategic risk.
Risk management program goals are typically divided into pre-loss goals and post-loss goals. Pre-loss goals
Describe an organization’s need to meet responsibilities as an ongoing operation.
Buildings, investments, patents, and human resources are all examples of
Assets exposed to loss
Delmond Manufacturing is opening a new manufacturing facility in a building that it purchased from a competitor. Using the information below, which one of the following represents the cost of risk of opening the new facility? New building cost $60.0 million Safety system upgrades $6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million
11.5 Million:
$6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million
Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the
cost of residual uncertianty
The second step in the risk management process is analyzing loss exposures.
Loss exposures are analyzed based on loss frequency, loss severity, total dollar losses, and timing in this step.
Achieving any post-loss goal involves expending risk management resources, which may conflict with the pre-loss goal of
economy of operations
Residual Uncertianty
It is the level of risk that remains after implementing risk management plans.
Traditionally, the risk management professional’s role has been associated with loss exposures related to
Pure Risk
The financial consequences depend on the type of loss exposure, the cause of loss, and the loss frequency and severity.
Financial Consequence of Loss
Subjective risk can exist even where objective risk does not.
Subjective v objective risk
Residual uncertainty is the level of risk that remains after organizations implement their risk management plans
Residual uncertainty can be minimized, but doing so is costly because more has to be spent on attempts to control or finance the risks involved.
Probabilities are stated as a decimal figure, a percentage, or a
fraction
Every loss exposure has the element of…
financial consequence of loss
The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations’ goals and economical.
Steps of Risk Management Revision:
- ID Loss Exposures
- Analyze loss exposures
- examine feasibility of RM techniques
- select RM techniques
- Implement
- monitor results / revisions
Pre Loss Goals
Economy of operations, tolerable uncertainty, legality, social responsibility
Post loss goals
survival, continuity of operations, profitability, earnings stability, social responsibility, growth
To monitor results of RM practices
Compare actual results with the established performance standards.
There is a 5 percent chance that John will be injured in an automobile accident while driving to work tomorrow.” is an example of
Quantifying Risk
pure vs speculative risk
pure: chance of loss or no loss, but no chance of gain
speculative: above plus chance of gain
subjective risk v objective risk
subjective: perceived amount / opinion
objective: measurable variation based on facts / data
Diversifiable v non-diversifiable
Div: affects only some
non-div: affect all - IE inflation, hurricanes etc
hazard risks are traditionally managed by
RM professionals
For insurance and traditional risk management purposes, loss exposures are typically divided into four types.
property, liability, personnel, net income
Individuals and organizations vary greatly as to how much _________ ___________ they are willing to accept, and this benefits society and the economy.
residual uncertainty
________ __________ is both a pre-loss and a post-loss risk management goal
social responsibility
Risk is defined as…
Uncertainty of outcome
elements of loss exposure:
- asset exposed to loss
- cause of loss
- financial consequence of loss
Hazard: condition that increases the frequency or severity of loss; types include
moral - intentional
morale - carelessness
physical
legal
tendency to over-invest in loss-prevention measures creates the risk that
financial value of an asset is not being maximized.
Four quadrants
hazard, operational, strategic, financial
