Chapter 6

Question 1

Describe four advantages brokers realize when using risk management in their sales process.

Answer 1

i) Clients who are more knowledgeable about their insurance
ii) Clients will be more likely to renew coverages
iii) Clients will be more likely to refer others to brokerage
iv) Clients will be more satisfied with claims process

Question 2

Describe the process of identification of loss exposures.

Answer 2

This process recognizes losses that may occur.

Question 3

Describe the process of analysis of loss exposures.

Answer 3

This process estimates the impact losses may have

Question 4

What are the three criteria used when classifying loss exposures?

Answer 4

i) Identifying type of value exposed to losses
ii) Identifying perils causing losses
iii) Identifying financial impact of losses

Question 5

What are four values exposed to loss?

Answer 5

i) Property Valuses
ii) Net Income Values
iii) Liability Loss
iv) Personnel Loss

Question 6

What are two types of property values exposed to loss?

Answer 6

i) Tangible Property
ii) Intangible Property

Question 7

Explain the following property loss exposure: Debris removal

Answer 7

Expenses that are incurred while removing debris after losses.

Question 8

Explain the following property loss exposure: Demolition Expense

Answer 8

Expenses incurred demolishing undamaged portion of buildings after losses.

Question 9

Explain the following property loss exposure: Undamaged property

Answer 9

Loss in value property occurring after losses to related structures (Drop in value of silo after barn is lost in fire.)

Question 10

Explain the following property loss exposure: Increased cost construction.

Answer 10

Expenses incurred bringing buildings up to code while repairing damage after losses.

Question 11

Explain the following property loss exposure: Pair or set value

Answer 11

Decrease in value of remaining item in a pair or set after loss to other portion of pair or set.

Question 12

Explain the following property loss exposure: Going concern value

Answer 12

Difference in value of property that must be sold after losses and value of operating business.

Question 13

What are four intangible properties exposed to loss?

Answer 13

i) Securities
ii) Trademarks
iii) Right to collect accounts
iv) Copyrights

Question 14

What are two factors that impact on net income?

Answer 14

i) Decrease in revenues
ii) Increase in expenses

Question 15

State five loss exposures that will result in decreases in revenues.

Answer 15

i) Business interruption
ii) Contingent business interruption
iii) Loss of profits on finished goods
iv) Reduced rental income
v) Decreased collection of accounts receivable

Question 16

State three loss exposures that will result in increase in expenses.

Answer 16

i) Increase in accounts receivable
ii) Increased in rental expenses
iii) Expediting expenses

Question 17

When assessing liability exposures, what are two factors to consider?

Answer 17

i) Entity to whom duty is owed
ii) Source of legal duty

Question 18

What are three expenses court action may cause.

Answer 18

i) Costs to investigate
ii) Payment of an award for damages or costs of corrective actions
iii) Amounts of out of court settlements

Question 19

Identify three peril categories and provide three examples of each.

Answer 19

i) Category: Natural perils
Examples: Cave-in, collapse, drought

ii) Category: Human perils
Examples: Arson, change or temperature, chemical leakage

iii) Category: Economic perils
Examples: War, currency fluctuations, depression

Question 20

Which peril category is beyond human control?

Answer 20

Natural perils

Question 21

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Cave-in

Answer 21

Natural

Question 22

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Depression

Answer 22

Economic

Question 23

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Arson

Answer 23

Human

Question 24

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Fungi

Answer 24

Natural

Question 25

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Water Hammer

Answer 25

Human

Question 26

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Earthquake

Answer 26

Natural

Question 27

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: War

Answer 27

Economic

Question 28

Identify which peril category the following loss exposures belong, Natural, Human, or Economic: Embezzlement

Answer 28

Human

Question 29

When assessing financial impact of losses, what factors will impact his assessment?

Answer 29

i) Loss frequency ii) Loss severity

Question 30

When reviewing loss frequency, what categories have been established? Also describe and provide an example of each.

Answer 30

i) Category: Almost nil Description: Almost no possibility, very unlikely Example: Meteorite impact ii) Category: Slight Description: It may happen, but hasn’t Example: Loss from uncontrolled wildfire iii) Category: Moderate Description: It occurs from time to time Example: Windstorms or hailstorms iv) Category: Definite Description: It occurs regularly Example: Shoplifting

Question 31

When reviewing loss severity, what categories are assessed? Also describe and provide an example of each.

Answer 31

i) Category: Slight Description: Organization can easily pay for loss Example: Paper damaged during printer jam ii) Category: Significant Description: Organization cannot pay for entire loss, part must be transferred Example: Damage caused by summer hailstorm iii) Category: Severe Description: Organization must transfer loss or risk failure Example: Major loss due to fire

Question 32

State if you would treat the following loss exposure: Frequency = definite Severity = slight

Answer 32

No

Question 33

State if you would treat the following loss exposure: Frequency = slight Severity = significant

Answer 33

Yes

Question 34

Describe the inverse relationship between loss frequency and severity.

Answer 34

When loss severity goes down, frequency goes up. When loss frequency goes down, severity goes up.

Question 35

State five tools used by risk managers to identify and analyze loss exposures.

Answer 35

i) Standardized surveys and questionnaires ii) Financial statements and underlying records iii) Other records and documents iv) Flowcharts v) Personal inspections

Question 36

Identify an advantage and disadvantage of the following: Standardized Surveys

Answer 36

Advantage – Easy to complete Disadvantage – No requirement to go beyond questions asked

Question 37

Identify an advantage and disadvantage of the following: Balance Sheets

Answer 37

Advantage – Helps identify existence of assets Disadvantage – Values will be inaccurate

Question 38

Identify an advantage and disadvantage of the following: Other Records and Documents

Answer 38

Advantage – Helps in identifying future changes in organization Disadvantage – All documents not available

Question 39

Identify an advantage and disadvantage of the following: Flowcharts

Answer 39

Advantage – Identifying bottlenecks in production Disadvantage – Does not indicate probability of losses

Question 40

What is the best method to identify and analyze loss exposures?

Answer 40

Personal inspections cannot be replaced with other methods.

Question 41

What are two ways to avoid loss exposures and provide a weakness of this method?

Answer 41

i) Completely avoiding exposure ii) Eliminating exposure Weakness: Avoiding one exposure, usually creates another exposure

Question 42

What is the purpose of loss prevention techniques?

Answer 42

Loss prevention techniques address frequency of losses.

Question 43

What is the purpose of loss reduction techniques?

Answer 43

Loss reduction techniques address severity of losses.

Question 44

Describe pre-loss, loss reduction measures, and provide an example when reviewing property loss exposures.

Answer 44

Pre-loss, loss reduction measures attempt to reduce amount of loss prior to losses occurring. These measures would include placing all flammable liquids in flammable liquid storage cabinets.

Question 45

Describe post-loss, loss reduction measures, and provide an example when reviewing property loss exposures.

Answer 45

Post loss, loss reduction measures attempt to reduce amount of loss by halting its progress. These measures would include installation of sprinkler systems.

Question 46

What two methods may be used when using segregation of exposure units?

Answer 46

i) Separation ii) Duplication

Question 47

Describe separation and provide an example when reviewing property loss exposures.

Answer 47

Separation occurs when organizations split a single asset or function into two or more locations. Separation of property values occurs when organizations store merchandise in more than one warehouse.

Question 48

What is a weakness of separation?

Answer 48

Although separation sounds good on paper, separation may interrupt normal operations of businesses.

Question 49

Describe duplication and provide an example when reviewing property loss exposures.

Answer 49

Duplication occurs when complete asset or structure is held in reserve to replace damaged assets or structures.

Question 50

What is a weakness of duplication?

Answer 50

Duplication can be a very expensive method of loss control.

Question 51

Describe contractual transfer and provide an example when reviewing property loss exposures.

Answer 51

Contractual transfer occurs when businesses transfer liability for losses to some other organization or person.

Question 52

What is accomplished with risk financing?

Answer 52

Risk financing provides funding for losses that occur.

Question 53

Describe two risk financing techniques available to risk managers.

Answer 53

i) Retention is using money from within organizations to pay for losses ii) Contractual transfer uses money from outside organizations to pay for losses

Question 54

State two examples when forced retention may be imposed upon organizations.

Answer 54

i) Losses from occurrences that cannot be insured (e.g. war) ii) Money required to pay required deductibles

Question 55

State two examples when optional retention may be used by organizations.

Answer 55

i) When losses are small and are within business’s financial ability (e.g. broken windows) ii) When losses are small and expected, therefore budgeted (e.g. shoplifting)

Question 56

What are two ways businesses may transfer losses in contract?

Answer 56

i) Non-insurance transfer ii) Commercial insurance

Question 57

Describe one type of non-insurance contractual transfer.

Answer 57

Hold harmless agreements are contracts when one organization agrees to hold harmless another organization. (e.g. Landlord held harmless by tenant in lease agreement)

Question 58

When should insurance be recommended?

Answer 58

When no other risk financing technique or loss control technique is sufficient.

Question 59

What are three problems that could still occur when using insurance as the transfer technique?

Answer 59

i) Insurer may declare bankruptcy ii) Loss may not be insured when client expected coverage or amount of settlement is less than client expected iii) Amount of coverage may be insufficient for losses incurred

Question 60

What are the three forecasts risk managers must use when selecting risk management techniques?

Answer 60

i) Forecast frequency and severity of potential losses ii) Forecast effect risk control or risk financing methods will have on potential losses iii) Forecast expenses of methods under consideration