Chapter 1 Intro To RM Flashcards
Pure Risk
A chance of loss or no loss, but no chance of gain
Speculative Risk
A chance of loss, no loss, or gain
Example: Investments
- inflation risk
- market risk
- interest rate risk
- liquidity risk
Credit Risk
The risk that customers or other creditors will fail to make promised payments as they come due
Probability
The likelihood that an outcome or event will occur
Subjective Risk
The perceived amount of risk based on a individuals or organization’s opinion
Objective Risk
The measurable variation in uncertain outcomes based on facts and data
Diversifiable Risk
A risk that affects only some individuals, businesses, or small groups
Systemic risk
The potential for a major disruption in the function of an entire market or financial system
Market risk
Uncertainty about an investment’s future value because of potential changes in the market for that type of investment
Liquidity risk
The risk that an asset cannot be sold on short notice without incurring a loss
Risk Source
ISO 31000
Element which alone or in combination has the intrinsic potential to give rise to risk
Risk Management
The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization
Loss exposure
Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs
Hazard
A condition that increases the frequency or severity of a loss
Moral Hazard
A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss
Example: filing a false claim
Morale Hazard
A condition of carelessness or indifference that increases the frequency or severity of loss
Example: driving carelessly
Physical Hazard
A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss
Legal Hazard
A condition of the legal environment that increases loss frequency or severity
Example: decisions against tobacco manufacturers
Property Loss Exposure
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
Risk Management Process
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
Tangible Property
Property that has a physical form
Real Property (Realty)
Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land
Personal Property
All tangible or intangible property that is not real property
Intangible Property
Property that has no physical form
Liability Loss Exposure
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
Personnel Loss Exposure
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
Personal Loss Exposure
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
Net Income Loss Exposure
A condition that presents the possibility of loss caused by a reduction in net income
Pre-loss goals
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
Post-loss Goals
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
Financial Consequences of Risk
Expected cost of losses or gains
Expenditures on risk management
Cost of residual uncertainty
