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Risk Test 3 > Chapter 3 - Introduction To Risk Management > Flashcards

Chapter 3 - Introduction To Risk Management Flashcards

1
Q

What is the process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.

A

Risk management

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2
Q

Define loss exposure

A

is any situation of circumstance in which a loss is possible, regardless of whether a loss actually occurs.

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3
Q

Risk management has two important objectives. these objectives are?

A

Pre-loss Objectives

Post-loss Objectives

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4
Q

Pre-loss objectives- important objectives before a loss occurs include _____, ______, and ________. (3)

A

Economy, reduction of anxiety, and meeting legal obligations

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5
Q

Post-loss objectives- important objectives after a loss occurs include ________, _______,______,______, and _____. (5)

A

Survival of the firm, continued operations, stability of earnings, continued growth, and social responsibility.

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6
Q

What are the four steps in the risk management process?

A
  • identify loss exposures
  • measure and analyze the loss exposures
  • select the appropriate combination of techniques for treating the loss exposures
  • implement and monitor the risk management program
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7
Q

What are the NINE important loss exposures? (Mahaha)

A
  • property loss exposures
  • liability loss exposures
  • business income loss exposures
  • human resources loss exposures
  • crime loss exposures
  • employee benefit loss exposures
  • foreign loss exposures
  • intangible property loss exposures
  • failure to comply with government laws and regulations
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8
Q

What are the five sources of information to identify the preceding loss exposures?

A
  • risk analysis questionnaires and checklists
  • physical inspection
  • flowcharts
  • financial statements
  • historical loss data
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9
Q

What does the loss frequency refer to?

A

refers to the probable number of losses that may occur during some given time period.

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10
Q

What refers to the probable size of the losses that may occur?

A

Loss severity

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11
Q

What refers to techniques that reduce the frequency or severity of losses?

A

risk control

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12
Q

What does risk financing refer to?

A

refers to techniques that provide for the funding of losses.

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13
Q

What are the three major risk-control techniques?

A
  • Avoidance
  • Loss prevention
  • Loss reduction
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14
Q

What are the three major risk financing techniques?

A
  • Retention
  • Non-insurance transfers
  • Commercial insurance
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15
Q

Define retention

A

means that the firm retains part or all of the losses that can result from a given loss.

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16
Q

Retention can be effectively used in a risk management program under the following conditions: (3)

A
  • no other method of treatment is available
  • the worst possible loss is not serious
  • losses are fairly predicable
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17
Q

If retention is used, the risk manager must have some method for paying losses. the following methods are typically used: (4)

A
  • current net income: losses are treated as current expenses
  • unfunded reserve: losses are deducted from a bookkeeping account
  • funded reserve: losses are deducted from a liquid fund
  • credit line: funds are borrowed to pay losses as they occur
18
Q

Define captive insurer

A

an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures.

19
Q

Define a single parent captive (pure captive)

A

an insurer owned by only one parent, such as a corporation.

20
Q

Define association or group captive

A

is an insurer owned by several parents

21
Q

What are the six main reason captive insurers are formed?

A
  • Parent company may have difficulty in obtaining insurance
  • To take advantage of favorable regulatory environment
  • lower costs
  • easier access to a re-insurer
  • formation of a profit center
  • may be income-tax advantages to the parent under certain circumstances
22
Q

True or False

premiums paid to a single parent captive (pure Captive) are NOT income- tax deductible

A

True
The IRS argued that there is no substantial transfer of risk from an economic family to an insurer, and that the premiums paid are similar to contributions to a self-insurance reserve.

23
Q

Premiums paid to captives are not income-tax deductible unless some or all of the following factors are present: (4)

A
  • The transaction is a bona fide insurance transaction, and the captive insurer takes some risk under a defensible business plan.
  • the captive insure’s owner is organized such that subsidiaries, and not the parent, pay premiums to the captive insurer under a “brother-sister” relationship. (the term brother-sister refers to separate subsidiaries owned by the same parent, such as a captive insurer and an operating subsidiary.)
  • The captive insurer writes a substantial amount of unrelated business.
  • ownership of the captive insurer is structured so that the insureds are not the same as the shareholders.
24
Q

Define risk retention group (RRG)

A

is a group captive that can write ant type if liability coverage except employers’ liability, workers compensation, and personal lines.

25
Q

What are the four advantages of the risk retention technique?

A
  • save on loss costs
  • save on expenses
  • encourage loss prevention
  • increase cash flow
26
Q

What are the three disadvantages of the retention technique?

A
  • Possible higher losses
  • Possible higher expenses
  • Possible higher taxes
27
Q

Define non-insurance transfers

A

are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. Ex: contracts, leases, and bold-harmless agreements.

28
Q

What are the three advantages of a non-insurance transfers?

A
  • the risk manager can transfer some potential losses that are not commercially insurable
  • non-insurance transfers often cost less than insurances
  • the potential loss may be shifted to someone who is in a better position to exercise loss control.
29
Q

What are the three disadvantages of a non-insurance transfers?

A
  • the transfer of potential loss may fail because of the contract language is ambiguous
  • if the part to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim
  • an insurer may not give credit for the transfers, and insurance costs may not be reduced
30
Q

What are the five key areas that must be emphasized when using commercial insurance?

A
  • selection of insurance coverage
  • selection of an insurer
  • negotiation of terms
  • dissemination of information concerning insurance coverages
  • periodic review of the insurance program
31
Q

What are the four advantages of commercial insurance in a risk management program?

A
  • the firm will be indemnified after a loss occurs.
  • uncertainty is reduced, which permits the firm to lengthen its planning horizon
  • insurers can provide valuable risk management services, such as risk-control services, loss exposure analysis, and claims adjusting
  • insurance premiums are income-tax deductible as a business expense
32
Q

What are the three disadvantages of commercial insurance in a risk management program?

A
  • The payment of premiums is a major cost because the premiums consists of a component to pay losses, an amount to cover the insurer’s expenses, and an allowance for profit and contingencies. There is also an opportunity cost.
  • Considerable time and effort must be spent in negotiating the insurance coverage.
  • the risk manager may have less incentive to implement loss-control measures because the insurer will pay the claim if a loss occurs.
33
Q

What is the appropriate risk management technique for a low frequency and low severity of loss? Ex: potential theft of office supplies.

A

Retention because the loss occurs infrequently and, when it does occur, it seldom causes financial harm

34
Q

What is the appropriate risk management technique for a loss occur frequently, but severity is relatively low? Ex: physical damage losses to automobiles, workers compensation claims, shoplifting, and food spoilage.

A

Loss prevention and retention
Loss prevention should be used here to reduce the frequency of losses. loesses occur regularly and are predicable, the retention technique can also be used

35
Q

What is the appropriate risk management technique for a low-frequency, high-severity losses. High severity means that a catastrophic potential is present, while a low probability of loss indicates that the purchase of insurance is economically feasible. Ex: fires, explosions, natural disasters, and liability lawsuits.

A

Transfer including insurance

The risk manager could also use a combination of retention and commercial insurance to deal with these exposures.

36
Q

What is the appropriate risk management technique for a high frequency and high severity. Ex: harmful side effects of a new drug.

A

Avoidance. The exposure to liability arising from this drug can be avoided of the drug is not produced and sold.

37
Q

What happens during a period of hard market conditions?

A

Profitability is declining, or the industry is experiencing underwriting losses.
As a result, underwriting standards tighten, premiums increase, and insurance becomes expensive and more difficult to obtain. A risk manager may decide to retain more of a given loss exposure and cut back on the amount of insurance purchased.

38
Q

What happens during a period of soft market conditions?

A

profitability improving, underwriting standards loosen, premiums decline, and insurance is easier to obtain. Insurance may be viewed as relatively inexpensive. A risk manager may decide to retain less of a given loss exposure and increase the amount of insurance purchased.

39
Q

What are the four benefits of risk management?

A
  • a formal risk management program enables a firm to attain its pre-loss and post-loss objectives more easily
  • the cost of risk is reduced which may increase the company’s profits
  • the adverse financial impact of pure loss exposures is reduced, a firm may be able to implement an enterprise risk management program that treats both pure and speculative loss exposures
  • society also benefits since both direct and indirect losses are reduced.
40
Q

Define personal risk management

A

the identification and analysis of pure risks faced by an individual or family, and to the selection and implementation of the most appropriate technique for treating such risks.

41
Q

What are the four steps that is involved in a personal risk management program?

A
  • identify loss exposures
  • measure and analyze the loss exposures
  • select appropriate techniques for treating the loss exposures
  • implement and review the risk management program periodically.
42
Q

What are the four implementation of a risk management program that involve the risk management policy statement?

A
  • outlines the firm’s objectives and polices
  • educates top-level executives
  • gives the risk manager great authority
  • provides standards for judging the risk manager’s performance

Risk Test 3 (9 decks)

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