Chapter 6 Risk Management

Question 1

Name the 5 steps to developing a risk management program

Answer 1

Identify and analyze loss exposure
Examine alternative risk management techniques
Select risk management technique
Implement technique
Monitor results

Question 2

Define Risk Management

Answer 2

The process of making and carrying out decisions that will minimize the adverse effects of accidental losses to an organization.

Question 3

What are 2 dimensions of the risk management process

Answer 3

1. A decision process
   drives the most cost effective means available to deal with loss exposures
   2.Management or administrative process
   relies on the organizations ability to plan, organize ,lead and control

Question 4

What type of results can a broker achieve if they use the risk management approach?

Answer 4

A more informed clientele
Increased retention
Increased referrals
Increased claim satisfaction
Reduction in errors and omissions

Question 6

Identify the purpose of Identification and Analysis

Answer 6

Identification: Recognizing the loss that might occur
Analysis: estimating the likely significance of those possible losses

Question 7

What are 3 classifications of loss exposures?

Answer 7

Type of value exposed to the loss
Peril causing the loss
financial consequences of the loss

Question 8

Name 4 broad categories of possible values subject to a loss

Answer 8

Property values
Net income values
Liability loss
Personnel loss

Question 9

Name 2 types of property values

Answer 9

Tangible property
Intangible property

Question 10

Tangible Property

Answer 10

Property that is real, can be touched, forms a substance

Question 11

Real Property

Answer 11

Land and what is growing on or affixed to the land

Question 12

Personal Property

Answer 12

Includes all tangible property other then real estate
EX money, stocks , furniture

Question 13

Debris removal

Answer 13

Removing debris after a loss to restore property

Question 14

Demolition expense

Answer 14

Damage so severe bylaws required undamaged portion to be demolished

Question 15

Undamaged property

Answer 15

Property undamaged when loss occurs but may decline in value or be rendered useless

Question 16

Increased cost of construction

Answer 16

Building codes continuously being revised
cost to meet new building code standards

Question 17

Pair or set value

Answer 17

loss to 1 item of property compromises a pair or set
value remaining item usually diminished to half its value

Question 18

Intangible property

Answer 18

No physical substance
consists of legal rights rather then things
EX bonds, stocks

Question 19

2 factors that would effect the net value of an organization

Answer 19

Decrease in revenue
Increase in expenses

Question 20

Business interruption
Contingent business interruption

Answer 20

1. when an organization is unable to operate after a loss
2. occurs away from the premise of the business

Question 21

5 increases that follow a loss

Answer 21

increased operating expenses
Increased rental exposures
Expediting costs

Question 22

2 categories that give arise to Liability loss exposure

Answer 22

society
source of legal duty

Question 23

Personnel loss

Answer 23

loss arising from
disability
resignation
retirement
death

Question 24

Origins of perils causing loss

Answer 24

Natural perils - lightening
Human perils- theft
Economic perils - fluctuation in currency

Question 25

What formula is used for financial consequences of a loss exposure

Answer 25

Frequency X Severity = Total costs

Question 26

Name 4 categories of loss severity

Answer 26

Almost nil- very unlikely Slight- could happen - hasn't yet Moderate- happened once in awhile Definite - happens regularly

Question 27

Name 3 categories of loss severity

Answer 27

Slight- business can retain the loss Significant- organization can't retain each loss - some needs to be transferred Severe- needs to transfer all of loss or endangered survival

Question 28

6 methods of exposure identification and analysis

Answer 28

Standardized surveys / questionnaires Financial statements & underlying records Other records and documents Flow charts Personal Inspections Consult with experts outside of business

Question 29

Risk control

Answer 29

Reduce frequency and severity of losses

Question 30

Techniques considered to control risk

Answer 30

Exposure avoidance - Loss prevention Loss reduction Pre-loss measures

Question 31

2 ways segregation of exposure units

Answer 31

Separation - dividing single asset or operation into 2 or more separate units Duplication- complete reproduction of standby asset or facility kept in reserve

Question 32

Contractual Transfer

Answer 32

organization may shift legal and financial responsibility for loss of asset of activity to others

Question 33

2 groups of Risk Financing

Answer 33

Retention Contractual Transfer

Question 34

Retention Techniques

Answer 34

Current expensing of losses Unfunded reserves Funded reserves Borrowed funds Captive Insurer

Question 35

Reasons for retention options

Answer 35

Forced retention - losses from uninsurable perils, deductible Optional retention- individual loss exposures that are within organizations capacity, unlikely to cause large number of loss in short period

Question 36

Uncertainties under a non - insurance contractual transfer for risk financing

Answer 36

Party accepting the risk may not have insurance Transferred exposures aren't clearly defined Enforceability of contract can be challenged in courts

Question 37

3 uncertainties that exist with commercial insurance

Answer 37

Insurer may become insolvent Disagreement between insurer and insured whether loss is covered Inadequate limits at time of loss

Question 38

Identify the 2 steps to be followed before reaching a decision as to which Risk management or Risk financing should be applied

Answer 38

Forecasting Selection Criteria

Question 39

3 Forecasts established priorities in threatening loss exposure

Answer 39

Frequency and severity of losses expected Effects Risk control or Risk financing will have over projected losses Cost of techniques

Question 40

Name 2 selection criteria once loss exposures have been forecasted

Answer 40

How well chosen techniques achieve desired goals Economy