Chapter 2

Question 1

What are the three general categories of perils?

Answer 1

Human-peril caused by human behavior, such as vandalism, arson, and theft
Natural -peril caused by natural forces in the weather and the earth, such as earthquakes, floods, and tornadoes
Economic -such events as changes in consumer currency, fluctuations, depression, stock market declines, and technological advances, may cause economic losses

Question 2

What are ways to identify and analyze exposures?

Answer 2

Surveys
Flow charts
Review of financial statements
Inspections

Question 3

What are the categories for assets subject to loss?

Answer 3

Physical assets-any tangible property
Loss of use of those assets-when a physical asset is damaged or destroyed its use is impaired
Legal liabilities-commonly arise from the legal duty to take care of in relationships with others to prevent causing injury
Intangible assets-not physical in nature
Personal health and earning capacity (human assets)-members of an organization or subject to the possibility of illness, disability or premature death

Question 4

When formulating options, what are the two major categories used to classify the techniques?

Answer 4

Loss control techniques to control the exposure to prevent losses or reduce their severity
Loss financing techniques to pay for losses that do occur

Question 5

What are the loss control techniques?

Answer 5

Avoidance-by eliminate exposure or by not assuming a new exposure a person can avoid the risks associated with it
Loss prevention-business techniques can reduce preventable losses and safety measures can prevent accidents
Loss reduction-activities are used to lessen the severity of those losses that do occur
Separation or diversification-assets subject to loss can be moved to separate locations to reduce the concentration of values should a loss occur at one location
Non-insurance risk transfer -risk can be transferred to others via contractual agreement

Question 6

What are the two methods for loss financing?

Answer 6

Retention
Transfer

Question 7

Define risk retention

Answer 7

For a non-insurance company the risk not insured or self insured. For insurance company the risk not reinsured

Question 8

Define self insurance

Answer 8

A means of assuming and managing risk by setting aside a pool of money that will be used for compensation in the event of a loss occurring

Question 9

What are the different kinds of funds that can be used to meet the cost of retained losses?

Answer 9

Current expensing-losses are paid from current funds
Unfunded reserves-an account is designated to pay for losses
Funded reserves-money assessed to pay for losses
Borrowing-money is borrowed to pay for losses
Captive insurer-the company operates its own insurer

Question 10

Define hold harmless agreement

Answer 10

An agreement that allows one party to protect another party against any future losses or claims that may result from a particular activity
Also known as indemnity agreement

Question 11

What must the risk management plan include for the implementing step?

Answer 11

A plan for implementing the risk control program
A communications plan
A method to allocate costs

Question 12

What must one do when evaluating risk in regard to loss?

Answer 12

Recognize how significant each type of loss will be
Recognize the financial consequences of that loss on the clients business
Consider both loss frequency and loss severity

Question 13

What are some resources one might use to evaluate risk?

Answer 13

Surveys
Client records
Clients website
Media reports
Intermediary’s personal observations
Inspections

Question 14

What are you evaluating when assessing client records?

Answer 14

How the organization is run
It’s loss exposures
It’s prior loss history

Question 15

What must one consider effects of the risk management method might have?

Answer 15

Clients social responsibility
Externally imposed obligations
Peace of mind
Cost of risk
Survival and operational continuity
Ability to maintain stable earnings and grow after a loss

Question 16

Why should one continue to monitor the risk management plan?

Answer 16

New or evolving areas of exposure can be addressed
Recommendations to be made on how to further reduce or eliminate a risk

Question 17

What should intermediary do during the monitoring and modification of a risk management step?

Answer 17

-Compare the actual results of clients risk management program to the standards and benchmarks established when these plans were implemented
-Evaluate ways to improve any plan if the program is not effective

Question 18

Define self insured retention (SIR)

Answer 18

A dollar amount specified in insurance policy (usually a liability policy) that must be paid by the insured before the insurance policy respond to a loss

Question 19

Explain contractual risk transfer

Answer 19

Is a non-insurance contract or agreement between two or more parties that transfers the potential for loss from one party to another through a legal document

Question 20

What are the drawbacks to contractual risks transfers?

Answer 20

Court’s voiding the transfer
Cost control
Incompleteness of the risk transfer
Lack of control of the risk