Chapter 6 – Risk Management

Question 1

Risk Management

Answer 1

Minimize the adverse effects of accidental losses upon an organization

Question 2

Loss exposure

Answer 2

chance of financial loss to the organization as the result of a particular peril striking a thing of value

Question 3

Tangible Property

Answer 3

Is real, can be touched, and has form and substance

Question 4

Real Property

Answer 4

consists of land, and generally whatever is erected or growing upon or affixed to the land

Question 5

Personal Property

Answer 5

includes all tangible property other than real estate

Question 6

Going Concern Value

Answer 6

Certain business property, more valuable when they are involved in producing revenue than when they are considered separately

Question 7

Intangible Property

Answer 7

No physical substance and consists of legal rights rather than things

Question 8

Contingent Business Interruption

Answer 8

Occurs away from the premises of the organization. Premises of a major supplier constitutes a contributing exposure

Question 9

Increased Rental Expenses

Answer 9

Only applies if the rent charged at the new location exceeds that currently paid by the business

Question 10

Expediting Costs

Answer 10

Extra costs incurred in hastening the recovery of a business after a loss

Question 11

Natural Perils

Answer 11

Occurrence of a natural peril is largely beyond human control

Question 12

Human Perils

Answer 12

Perils are those that find their origin in the individual or group and which can cause a loss to occur

Question 13

Economic Perils

Answer 13

Stem from the actions of large numbers of persons or of governments

Question 14

Financial Consequences of Losses Directly Related to

Answer 14

Loss Frequency and Severity

Frequency x Severity = Total Costs

Question 15

Standardized Surveys/Questionnaires

Answer 15

Pro: people who have little risk management experience, such as business owners, can answer

Con: these rarely provide the reasons for the questions, it does not stimulate the user to do anything after the document has been completed

Question 16

Financial Statements & Underlying Records

Answer 16

Analysis of its financial statement and underlying documents can often provide valuable clues regarding loss exposures

Question 17

The Balance Sheet

Answer 17

Listing of the businesses’ assets and liabilities for the end of each accounting period is contained in the balance sheet

Question 18

The Operating (Profit and Loss) Statement

Answer 18

Represents the past performance of the business and

cannot be depended upon to predict what will happen in the future.

Question 19

The Statement of Changes in Financial Position

Answer 19

Analyze changes in the businesses net working capital. Potentially important change in the business’s loss exposures

Question 20

The Opinion Letter

Answer 20

Required to identify any material changes that should have been made to the financial statement. Acts as a disclaimer and warns the risk management professional that something may be amiss.

Question 21

Exposure Avoidance

Answer 21

Eliminates any possibility of loss, achieved by:

• Completely avoiding the exposure; or
• Eliminating the exposure

Question 22

Loss Prevention

Answer 22

Any measure taken to reduce the frequency of a particular loss, focus on how a particular losses are caused

Question 23

Loss Reduction

Answer 23

Reduce the severity of the losses that do occur

Question 24

Pre-Loss Measures

Answer 24

Reduce the amount of property, the number of persons, or other things of value that may suffer loss from a single event

Question 25

Indemnity contract

Answer 25

organization will be reimbursed by the transferee

Question 26

Hold harmless agreement

Answer 26

Agrees to pay losses on behalf of the transferor

Question 27

Hold harmless agreement is subject to the following uncertainties

Answer 27

• party accepting the risk may not have insurance
• the transferred exposures may not be clearly defined
• the enforceability of the contract may be challenged in the courts
  If the transferee cannot pay, the transferor must pay.

Question 28

Commercial Insurance is subject to the following uncertainties

Answer 28

• Insurer may be come insolvent or refuse to meet it policy obligations for some
  other reason
• disagreement between insurer and the insured as to weather a loss is insured,
  or the amount of the loss
• inadequate limits at the time of loss

Question 29

Sound risk management program will incorporate at least one risk ______ and at least one _______

Answer 29

at least one risk control technique and at least one risk financing technique

Question 30

Three forecasts are necessary

Answer 30

a) Forecast of frequency and severity
b) Forecast of the effects that various risk control and risk financing techniques are likely
c) Forecast of the costs of these techniques