Chapter 8 Introduction to Risk Management

Question 1

Why are smaller companies more likely to use insurance as their primary risk financing tool?

Answer 1

Because a smaller company is less able to retain loss exposures so it transfers them to an insurance company.

Question 2

What are the five steps in the risk management process

Answer 2

1. Identify the loss exposures inherent in owning or managing commercial properties
2. determine the likelihood, severity, and possible frequency of hazards
3. determine best methods for dealing with the identified exposures
4. implement the chosen methods
5. monitor the program to ensure it is achieving the desired results

Question 3

All of the following are important sources for identifying exposures to loss EXCEPT:

a. making physical inspections of the property.
b. communicating with other employees.
c. installing alarm systems and fire/police response channels.
d. using published checklists.

Answer 3

c. installing alarm systems and fire/police response channels.

Question 4

You have recently installed sip-resistant surfaces on the stairs in your building. This is an example of:

a. seperation
b. a contractual risk transfer
c. a loss reduction program.
d. a loss prevention program

Answer 4

d. a loss prevention program

Question 5

What is seperation of loss exposure?

Answer 5

A loss control method I which a business divides a loss exposure into parts to decrease the severity of a loss.

• all corporate officers cannot fly on same plane
• renting to multiple tenants rather than to a single tenant.
• fire walls
• keeping duplicate records
• using multiple suppliers

Question 6

A key component in risk management is ensuring that the right entities are involved in the loss control process. Four parties that share responsibility in the loss control process are:

a. individual businesses, property management firms, insurance companies, and customers.
b. individual businesses, government, insurance companies, and customers.
c. individual businesses, property management firms, insurance companies, and government.
d. individual businesses, property management firms, government, and customers.

Answer 6

c. individual businesses, property management firms, insurance companies, and government.

Question 7

Which of the following describes the meaning of the law of large numbers?

a. companies with a large number of losses cannot regularly predict loss because of the variety of employee accidents
b. companies with a small number of losses are at a management advantage and have less liability
c. large companies have a statistical advantage when predicting loss because of the frequency of claims
d. small companies with large numbers of claims have greater liability based on the firsthand knowledge of those claims

Answer 7

c. large companies have a statistical advantage when predicting loss because of the frequency of claims

Question 8

What is required in order to make logical decisions about the identification of loss exposures, specifically for making predictions and knowing what exposures can be eliminated?

a. property valuations
b. records of past losses
c. a risk management manual
d. copies of insurance policies

Answer 8

b. records of past losses

Question 9

The FIRST step in the risk management process if to:

a. monitor loss exposures.
b. identify loss exposures.
c. measure loss exposures.
d. implement a loss reduction plan.

Answer 9

b. identify loss exposures.

Question 10

Even if you are not in a hurricane zone, if you are evaluating the worst case scenario for a hurricane, what would you focus on?

Answer 10

• the cost to demolish an undamaged portion of the building before construction repairs can begin
• the cost to reconstruct the building with new materials and to be in compliance with current building codes and regulations
• lost income from not being able to use the building
• replacement cost of personal property contained in the building
• costs of temporarily relocation business operations
• costs of getting new tenants
• cost of reconstructing valuable documents such as blueprints

Question 11

What is an example of indirect property loss?

Answer 11

results from direct damage to the property

ex. loss of revenue due to building shutdown from hurricane damage

Question 12

Why are large business more accurate in predicting loss frequency and severity?

Answer 12

Large business have more resources available for predicting future loss severity and frequency

• years of actual loss data
• may have greater number of smaller units with similar loss exposures
• access to more sophisticated loss estimating techniques

Question 13

In measuring and analyzing their loss exposure, as well as establishing a positive risk management focus, the building owners appropriately focused on the following key loss exposure areas as related to consequences for business operations.

a. frequency and severity
b. frequency and small loss
c. easily predictable and irritatingly time consuming
d. easily predictable and easy to calculate

Answer 13

a. frequency and severity

Question 14

What are the five steps of documentation necessary for managing risk?

Answer 14

Property valuations

Records of past losses

Copies of insurance policies

Current and historical records of payrolls, vehicles, and sales

Risk management manual

Question 15

Who is responsible for providing the insurance company underwriter with firsthand information concerning the business being insured and its compliance with safety standards, as well as assisting the business in implementing and monitoring a loss control program?

a. claims adjusters
b. insurance-mamabgement liaisons
c. loss control engineers
d. insurance providers

Answer 15

c. loss control engineers

Question 16

It it more important to identify and prepare for the infrequent and severe loss or for the frequent and small loss?

Answer 16

Infrequent and severe

Question 17

What are four tools used for identifying loss exposures?

Answer 17

1. using published checklists
2. making physical inspections of the property
3. communicating with other employees
4. consulting outside experts

Question 18

Advantages of purchasing insurance for your company rather than retaining loss exposures include all of the following EXCEPT:

a. insurance premiums are full deductible.
b. purchase of insurance lessens the uncertainty of loss occurrence.
c. insurance is viable when the time value of money is essential to the company.
d. having insurance increases the confidence of companies doing business with yours.

Answer 18

c. insurance is viable when the time value of money is essential to the company.

Question 19

The responsibility for standardizing codes and workforce safety standards and enforcing them rests with:

a. the government
b. industry organizations
c. insurance companies
d. individual businesses

Answer 19

a. the government

Question 20

Who has the responsibility for standardizing codes and workforce safety standards as well as enforcing them?

Answer 20

The government

Question 21

What is a loss prevention program?

Answer 21

A program designed to prevent losses from occurring or at least to reduce the chances that a loss will occur.

Question 22

What are three resources where you can likely get published checklists to help identify loss exposures?

Answer 22

• Insurance companies
• Risk and Insurance Management Society
• American Management Association’s Insurance and Employee benefits division

Question 23

Which of the following is NOT a reason to favor buying insurance over retention?

a. insurance lessens worry
b. insurance premiums are a deductible business expense.
c. insurance plans can help reassure the viability of a business
d. insurance is less costly than retention

Answer 23

d. insurance is less costly than retention

Question 24

Mac is a property manager who has done an excellent job protecting his property against loss exposure from its own operations. Which has he likely already addressed?

a. examined contractors for potential exposure
b. trained managers and employers to refrain from risky behavior.
c. procured flood insurance, if necessary, and made sure that computer equipment is in a dry, cool room
d. All of the above.

Answer 24

d. All of the above.

Question 25

Companies that can accurately predict losses and have great financial strength and reserves may choose to:

a. use retention for handling major losses
b. settle all cases against them to avoid the risk of their mushrooming into larger claims.
c. purchase an abundance of insurance
d. set up a captive insurance company in the Cayman Islands.

Answer 25

a. use retention for handling major losses

Question 26

What are the factors involved with those companies that can effectively use planned risk retention as a risk financing tool?

Answer 26

The business should be large so they are in a good position to predict future losses and extremely strong financially to absorb those losses.

Question 27

Who has responsibility for helping a business implement and monitor a loss control program?

Answer 27

The insurance company

Question 28

You decide to buy two four-story buildings in a new complex rather than an eight-story building in the adjoining business park. this action is an example of:

a. risk separation.
b. risk transfer.
c. undesirable risk.
d. loss prevention.

Answer 28

a. risk separation.

Question 29

Fred had a customer who slipped while shopping in his store. What type of loss exposure does this represent to Fred?

a. direct property
b. liability
c. unconsidered exposure
d. indirect property

Answer 29

b. liability

Question 30

What is an example of a liability loss?

Answer 30

bodily injury for slip-and-fall

property damage roof leaks

Question 31

What is direct property loss?

Answer 31

Loss that involves damage to the property itself

-fire, theft, vandalism, wind, explosion, etc

Question 32

What are the three factors that favor the purchase of insurance over risk retention?

Answer 32

• Insurance lessens worry and and uncertainty regarding possible future losses.
• Insurance premiums are a deductible expense and are regularly occurring.
• Companies that do business with a company that has insurance can be more confident of the ongoing viability of that insured company