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I11 Introduction to Risk Management > Chapter 3 - Types of Risk > Flashcards

Chapter 3 - Types of Risk Flashcards

1
Q

Why do we place risks into types and categories?

A
  • To cope with complexity
  • Understand risk better
  • Increase effectiveness in dealing with risk
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2
Q

Name the 11 types of risk

A
  1. Speculative
  2. Pure
  3. Strategy
  4. Operational
  5. Market
  6. Credit
  7. Liquidity
  8. Business
  9. Insurance
  10. Repetitional
  11. Regulatory and Legal
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3
Q

What are the components of Corporate risks?

A
  • Business Risk
  • Strategic Risk
  • Financial Risk
  • Legal, Regulatory and Compliance Risk
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4
Q

How do business and corporate risk differ?

A

Corporate risk is more encompassing. Business risk is the probability of loss inherent in an organisations operations and environment.

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5
Q

What are strategic risks?

A

Associated with vision, mission and long term objectives

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6
Q

Define Financial Risks

A

Covers complex group of risks associated with the financing of business activities and specific financial transactions.

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7
Q

What makes up financial risks?

A
  • Accuracy of financial reporting of business activity and profit or loss
  • Valuation of properties, commodities, investments, debts, currency
  • Market, liquidity and credit risk
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8
Q

What is systematic risk?

A

(Market risk); the risk of losses in trading positions due to movements of market prices.

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9
Q

What is credit risk?

A

risk that a counter-party will suffer real or perceived deterioration in financial strength or will be unable to pay amounts in full

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10
Q

Categories of credit risk

A
  • Default risk
  • Concentration risk
  • Country risk
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11
Q

The running out of cash to meet financial obligations is called?

A

Liquidity risk

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12
Q

Legal risk/ contract risk is the

A

breach of contract both actual and alleged

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13
Q

Regulatory risk?

A

Associated with factors an organisation needs to consider due to the regulatory environment in which it operated

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14
Q

Failure to comply with laws and regulations is which type of risk?

A

Compliance risk

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15
Q

What is operational risk?

A

risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

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16
Q

Components to control operational risk

A
  1. Staff resourcing
  2. Preventing fraud
  3. Workplace Health and Safety
17
Q

How does outsourcing bring risks?

A
  • Loss of control of the operation
  • Less appreciation of the risk and control environment of the outsourcer
  • Loss of inherent knowledge
  • Reduced ability to monitor client services
  • Too much outsourcing for one provider
18
Q

Define Speculative Risk

A

Ability to make a gain, loss or breakeven

19
Q

Define Pure Risk

A

Only possible to make a loss but not a gain

20
Q

What are Fundamental Risks?

A

Widespread in their effect

21
Q

What are Particular Risks?

A

Localised/Personal in their effect

22
Q

Upside risk?

A

Potential gain

23
Q

Downside risk?

A

Potential loss

24
Q

Risks unique to insurance companies

A
  1. Underwriting risk
  2. Volatility
  3. Pricing
  4. Economic Factors
  5. Accumulation risk
  6. Reserving Risk
  7. Homogenous exposure aid forecasting
25
Q

Risks facing insurance brokers and advisors

A
  1. Errors and Omissions

2. Insurer Security

26
Q

Examples of strategic failures are:

A
  • Poor/unsuitable products
  • Failure of partnerships
  • Inappropriate Merges and Acquisitions
27
Q

Which area has the highest potential for Legal risk

A

USA/Europe

28
Q

What is underwriting risk for insurance companies?

A
  • Policy wording is too broad and hence in court will be in favour of the Policyholder
  • Quoting incorrect premiums
  • Accepting/Rejecting incorrect risks
29
Q

What is volatility risks for insurance companies?

A

Inability to predict total amount of claims in a year and the timing of their occurrence.

30
Q

What is economic risks for insurance companies?

A

Insurers carry large amount of funds as solvency margins/claims margins. Risk is these will be insufficient

31
Q

What is accumulation risks for insurance companies?

A

Exposure to a single risk event or source

32
Q

What is the difference between financial and liquidity risk?

A

Financial is in regards to financing and financial transactions.
Liquidity is the need to have money fast

33
Q

Non-Financial risks include…

A

any association with physical loss i.e. destruction of a building in a fire. However, this is expressed in monetary terms

I11 Introduction to Risk Management (7 decks)

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