Chapter 1 - Components of Risk

Question 1

How is risk used in insurance?

Answer 1

• To describe a type of policy cover
• To name the physical object being insured
• To refer to the chance of an insured loss occurring

Question 2

Distinction between risk and uncertainty

Answer 2

Risk = the statistical probability of an event that can be calculated 
Uncertainty = Too many variables to make the the risk calculation accurately

Question 3

Why do organisations prefer to use the word uncertainty over risk?

Answer 3

Risk has negative connotations whilst uncertainty is neutral

Question 4

What is chance?

Answer 4

A loss or event we cannot predict or prevent

Question 5

What must be taken into consideration in assessment of risk?

Answer 5

Frequency and severity

Question 6

What is a peril?

Answer 6

What gives rise to a loss, e.g. fire or flood

Question 7

What is a hazard?

Answer 7

What influences the operation or effect of the peril

Question 8

What is physical hazard?

Answer 8

The physical characteristics of the risk and includes a measurable dimension of the risk

Question 9

What is moral hazard?

Answer 9

This arises from the attitude and behaviour of people.

Question 10

List the 9 behaviours that influence risk perception

Answer 10

1. Voluntariness
2. Controllability
3. Delay
4. Man made and natural risks
5. Familiarity
6. Expected Benefits
7. Media
8. Dread and unknown risks
9. Other influences on risk perception

Question 11

What is a dread risk?

Answer 11

Risks people feel like they have little control and which have dreadful consequences i.e. Nuclear accidents

Question 12

What is an unknown risk?

Answer 12

Risks which people have limited knowledge about i.e. solar flares or nanotech.

Question 13

What is group think?

Answer 13

Individual members of the group departing (consciously or unconsciously) from their expected response to conform to group pressure

Question 14

Do risk aware organisations follow their risk appetite blindly?

Answer 14

No

Question 15

How is appetite for risk moderated?

Answer 15

By the ability to tolerate types/levels of loss

Question 16

Risk appetite is…

Answer 16

the principles that a company follows with respect to risk taking

Question 17

Risk tolerance is…

Answer 17

the qualitative and quantitative boundaries around risk taking

Question 18

What is risk culture?

Answer 18

A term used to describe the appetite, attitude and understanding shared by a group of people

Question 19

Is risk culture a continuous process?

Answer 19

Yes

Question 20

How is risk culture displayed?

Answer 20

Mixture of formal and informal processes and behaviours

Question 21

What are the characteristics of a problematic organisation?

Answer 21

• Poor leadership sending unclear messages about acceptable levels of risk
• Where is risk is perceived to be managed intuitively

Question 22

What is a risk mature culture?

Answer 22

Recognises and accepts that uncertainty is inevitable and welcomes it as a chance to reap rewards with effective risk management.

Question 23

Is risk management a decision making process?

Answer 23

Yes

Question 24

What is availability bias?

Answer 24

Overestimating the probability of memorable events

Question 25

What is an anchoring effect?

Answer 25

Human tendency to rely heavily on first piece of information offered.

Question 26

What leads to human errors in decision making?

Answer 26

• Mental shortcuts (Heuristics)
• Availability Bias
• Anchoring Effect