ERM - Lesson 1

Question 1

The process by which economic entities identify, assess, and treat their exposures to loss.

Answer 1

Risk Management Process

Question 2

Entity-wide focus

Answer 2

Enterprise Risk Management

Question 3

Focus on pure risk

Answer 3

Corporate Risk Management

Question 4

3 Reasons Why Interest in Risk Management Is Growing

Answer 4

1. Catastrophe loss events,
2. Corporate financial failures
3. Shrinking employee benefits

Question 5

Exposure that can result in a loss or no change

Answer 5

Pure Risk

Question 6

Exposure that can result in a loss, no change, or gain

Answer 6

Speculative Risk

Question 7

Firms and individuals prefer to take less risk rather than more.

Answer 7

Risk Aversion

Question 8

If taking more risk, firms and individuals expect a higher return

Answer 8

Risk - Return Trade-Off

Question 9

Risks that can be offset by diversification

Answer 9

Diversifiable Risks

Question 10

May be used to capture advantages of diversification

Answer 10

Risk Pooling

Question 11

Some, including insurer, use the _________ to benefit from pooling

Answer 11

Law of Large Numbers

Question 12

6 Benefits Compared to No Insurance

Answer 12

1. Stability of families
2. Aids planning ability to businesses
3. Facilitates credit transactions
4. Anti-monopoly device
5. Reduces credit costs
6. Increases capital efficiency

Question 13

The default strategy is _________, to retain the possible loss.

Answer 13

Retention

Question 14

When the subject has not identified the exposure or underestimates the potential severity of the exposure

Answer 14

Passive Retention

Question 15

A better alternative is _____________.

Answer 15

Personal Insurance Protection

Question 16

2 Types of Personal Insurance Protection

Answer 16

a. Social insurance
b. Private insurance

Question 17

Offset particular risks

Answer 17

Employee Benefit Plans

Question 18

Looks at the exposures of a firm and seeks to treat them in a logical manner

Answer 18

Corporate Risk Management

Question 19

Is a financial agreement in which an individual pays a premium to transfer the financial consequences to a risk pool.

Answer 19

Insurance

Question 20

Administered and funded by governmental bodies

Answer 20

Social Insurance

Question 21

Independently owned and operated

Answer 21

Private Insurance

Question 22

Provided by firms as a protection from a number of personal pure risks:

Answer 22

Nonwage compensation

Question 23

4 Nonwage compensation

Answer 23

1. Health
2. Life
3. Disability
4. Retirement

Question 24

Steps in the Risk Management Process

Answer 24

1. Establish the Goals of the Risk Management Function
2. Identify Potential Loss Exposures
3. Measure Potential Loss Exposures
4. Choose Risk Handling Technique
5. Implement Techniques and Monitor Effectiveness

Question 25

3 Risk Handling Techniques

Answer 25

1. Loss Control 2. Loss Transfer 3. Loss Financing

Question 26

Reduce the frequency and/or severity.

Answer 26

Loss Control

Question 27

(Contractual) arrangement to transfer risk to party that is best at mitigating, controlling, or bearing it.

Answer 27

Loss Transfer

Question 28

Arrangement to pay for future costs.

Answer 28

Loss Financing

Question 29

What is TRM?

Answer 29

Treasury Risk Management

Question 30

3 Measure Potential Loss Exposures

Answer 30

1.Frequency of the loss 2. Severity of the loss 3. Occupational Health and Safety

Question 31

4 Identify Potential Loss Exposures

Answer 31

1. Property Risks 2. Liability Risks 3. Human Resource Risks 4. Indirect Losses

Question 32

4 Loss Transfer

Answer 32

1. Hold harmless agreements 2. Hedging 3. Financial Risk Management 4. Leases

Question 33

Transfer of risk through a contract.

Answer 33

Hold Harmless Agreements

Question 34

Take equal but opposite position on an even based on chance.

Answer 34

Hedging

Question 35

Techniques to deal with interest rate, currency value, and crop price changes.

Answer 35

Financial Risk Management

Question 36

Transfers risk of obsolescence

Answer 36

Leases

Question 37

4 ERM - Integrated Framework

Answer 37

1. Top-Down Corporate Focus 2. Broad Scope of Loss Exposures 3. Portfolio Perspective for Diversification Opportunities 4. Systematic Process of Risk Identification, Assessment, and Treatment

Question 38

4 Types of Exposures

Answer 38

1. Pure risk 2. Operational 3. Financial 4. Strategic

Question 39

What type of exposure is product development?

Answer 39

Strategic

Question 40

What type of exposure is credit risk and currency risk?

Answer 40

Financial

Question 41

What type of exposure is supply chain and distribution chains?

Answer 41

Operational

Question 42

A new concept and a new occupant of the “C-Suite”

Answer 42

Chief Risk Officer