Chapter 3 - Intro To Risk Management

Question 1

Risk Mangement

Answer 1

The process that identifies loss exposures faced by an organization and selects appropriate techniques for treating such exposures.

Question 2

Loss Exposure

Answer 2

Any situation or circumstance when a loss is possible, regardless of whether a loss actually occurs

Question 3

What are the three Pre-Loss objectives?

Answer 3

Prepare for loss in the most economical way
Reduce anxiety around the exposure
Meet any legal obligations

Question 4

What are the five post-loss objectives?

Answer 4

Survival of the Firm
Continue operations 
Create a stability of earnings
Continue growing the firm
Minimize the affect the loss will have on other persons and society

Question 5

What are the four steps of the Risk Management process?

Answer 5

Identify loss exposures
Measure and analyze loss exposures
Select appropriate techniques for treating the loss exposures
Implement and monitor the risk management program

Question 6

What are some sources for identifying loss exposures? (5)

Answer 6

Risk analysis questionnaires and checklists
Physical inspection
Flowcharts 
Financial statements
Historical loss data

Question 7

What two measures are used to quantify the loss exposures?

Answer 7

Loss frequency and loss severity

Question 8

Maximum possible loss

Answer 8

The worst loss that could happen to a firm during its lifetime

Question 9

Probable maximum loss

Answer 9

The worst loss that is likely to happen

Question 10

What are the two broad techniques for treating loss exposures?

Answer 10

Risk control and risk financing

Question 11

What are the three techniques of risk control?

Answer 11

Avoidance, loss prevention, and loss reduction

Question 12

Loss Prevention

Answer 12

Reduce the frequency of a loss before it happens

Security tags on store inventory

Question 13

Loss Reduction

Answer 13

Measures to reduce the severity of the loss after it happens
(Taking excess cash out of a till periodically)

Question 14

What are the three techniques of Risk Financing?

Answer 14

Risk Retention, noninsurance transfers, and commercial insurance

Question 15

Risk Retention

Answer 15

The firm retains part or all of the losses that can result from a given loss. Active or passive retention.

Question 16

The three conditions for Risk Retention are:

Answer 16

No other method to treat the risk available
The worst possible loss is not serious
Losses are fairly predictable

Question 17

What are the two broad techniques for determining retention levels?

Answer 17

Calculate maximum loss it can absorb without affecting earnings
Calculate retention as a percentage of Net Working Capital

Question 18

What are four ways of paying out for losses retained?

Answer 18

Current net income
Unfunded reserve
Funded reserve (set aside on purpose)
Credit line

Question 19

Captive insurer

Answer 19

Insurer owned by a parent firm for the purpose of insuring the parent company’s loss exposures

Question 20

Single parent captive (Pure Captive)

Answer 20

An insurer only owned by one parent (company)

Question 21

Association captive (Group captive)

Answer 21

Insurer owned by several parents (companies)

Question 22

Self-insurance

Answer 22

A special form of planned retention by which part or all of a given loss exposure is retained by the firm

Question 23

Risk Retention Group (RRG)

Answer 23

A group captive that can write any type of liability coverage except employers’ liability, workers comp, and personal lines.

Question 24

Non-insurance transfers

Answer 24

Methods other than insurance where a pure risk and it’s potential financial consequences are transferred to another party.

Question 25

What are three common types of non-insurance transfers?

Answer 25

Contracts
Leases
Hold-harmless agreements

Question 26

What are five key areas to consider when choosing commercial insurance?

Answer 26

Insurance coverage selection, the insurer themselves, term negotiation, understanding the information of the coverage, and periodic review of the program

Question 27

Deductible

Answer 27

A provision where a specified amount is subtracted from the loss payment otherwise paid to the insured.

Question 28

Excess insurance

Answer 28

A plan where the insurer does not participate in the loss until the actual loss exceeds the amount decided to retain.

Question 29

What are the two main documents used to monitor the risk management program?

Answer 29

Risk management policy statement

Risk management manual