Chapter 1 Intro To RM

Question 1

Pure Risk

Answer 1

A chance of loss or no loss, but no chance of gain

Question 2

Speculative Risk

Answer 2

A chance of loss, no loss, or gain

Example: Investments

• inflation risk
• market risk
• interest rate risk
• liquidity risk

Question 3

Credit Risk

Answer 3

The risk that customers or other creditors will fail to make promised payments as they come due

Question 4

Probability

Answer 4

The likelihood that an outcome or event will occur

Question 5

Subjective Risk

Answer 5

The perceived amount of risk based on a individuals or organization’s opinion

Question 6

Objective Risk

Answer 6

The measurable variation in uncertain outcomes based on facts and data

Question 7

Diversifiable Risk

Answer 7

A risk that affects only some individuals, businesses, or small groups

Question 8

Systemic risk

Answer 8

The potential for a major disruption in the function of an entire market or financial system

Question 9

Market risk

Answer 9

Uncertainty about an investment’s future value because of potential changes in the market for that type of investment

Question 10

Liquidity risk

Answer 10

The risk that an asset cannot be sold on short notice without incurring a loss

Question 11

Risk Source

ISO 31000

Answer 11

Element which alone or in combination has the intrinsic potential to give rise to risk

Question 12

Risk Management

Answer 12

The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization

Question 13

Loss exposure

Answer 13

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs

Question 14

Hazard

Answer 14

A condition that increases the frequency or severity of a loss

Question 15

Moral Hazard

Answer 15

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss

Example: filing a false claim

Question 16

Morale Hazard

Answer 16

A condition of carelessness or indifference that increases the frequency or severity of loss

Example: driving carelessly

Question 17

Physical Hazard

Answer 17

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss

Question 18

Legal Hazard

Answer 18

A condition of the legal environment that increases loss frequency or severity

Example: decisions against tobacco manufacturers

Question 19

Property Loss Exposure

Answer 19

A condition that presents the possibility hat a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest

Question 20

Risk Management Process

Answer 20

1) Identifying loss exposures
2) Analyzing loss exposures
3) Examining the feasibility or RM techniques
4) Selecting the appropriate RM techniques
5) Implementing the selected RM techniques
6) Monitoring results and revising the RM program

Question 21

Tangible Property

Answer 21

Property that has a physical form

Question 22

Real Property (Realty)

Answer 22

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land

Question 23

Personal Property

Answer 23

All tangible or intangible property that is not real property

Question 24

Intangible Property

Answer 24

Property that has no physical form

Question 25

Liability Loss Exposure

Answer 25

Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party

Question 26

Personnel Loss Exposure

Answer 26

A condition that presents the possibility of loss caused by a person’s death, disability, retirement, or resignation that deprives an organization of the person’s special skill or knowledge that the organization cannot readily replace

Question 27

Personal Loss Exposure

Answer 27

Any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment

Question 28

Net Income Loss Exposure

Answer 28

A condition that presents the possibility of loss caused by a reduction in net income

Question 29

Pre-loss goals

Answer 29

Goals to be accomplished before a loss, involving social responsibility, externally imposed goals, reduction of anxiety, and economy

Example:

• Economy
• Tolerable uncertainty
• Legality
• Social responsibility

Question 30

Post-loss Goals

Answer 30

Risk management program goals that should be in place in the event of a significant loss

Example:

• Survival
• Continuity of operations
• Profitability
• Earnings stability
• Social responsibility
• Growth

Question 31

Financial Consequences of Risk

Answer 31

Expected cost of losses or gains

Expenditures on risk management

Cost of residual uncertainty