ERM - Lesson 4

Question 1

4 Categories Under Loss or Risk Control

Answer 1

1. Avoidance
2. Loss Reduction
3. Loss Prevention
4. Diversification

Question 2

3 Risk Handling Techniques

Answer 2

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

Question 3

4 Categories Under EXTERNAL Loss Financing

Answer 3

1. Insurance
2. Hedging
3. Contractual Transfer
4. Limited Liability

Question 4

2 Categories Under INTERNAL Loss Financing

Answer 4

1. Retention
2. Self-Insurance

Question 5

A risk management strategy that involves taking an offsetting position in a financial instrument to reduce the risk of loss

Answer 5

Hedging

Question 6

3 choice of risk-handling techniques is a function of:

Answer 6

1. Frequency and severity of loss;
2. The size of the firm or economic entity; and
3. The supply of insurance

Question 7

6 Loss or Risk Control (All techniques designed to reduce frequency or severity of loss)

Answer 7

1. Loss prevention
2. Avoidance
3. Loss reduction
4. Duplication and separation
5. Diversification
6. Loss control and Federal Regulatory Agencies

Question 8

Techniques : Frequency

Answer 8

Loss Prevention

Question 9

Techniques : Frequency and severity both zero

Answer 9

Avoidance

Question 10

Techniques : severity, might occur post-loss, e.g., salvage

Answer 10

Loss Reduction

Question 11

Techniques : (frequency and severity), examples are redundant records or geographic dispersion of exposure units

Answer 11

Duplication and separation

Question 12

Techniques : Multiple Product Lines

Answer 12

Diversification

Question 13

Techniques : (OSHA, CPSC, EPA impose specific requirements, compliance costs may result)

Answer 13

Loss control and Federal Regulatory Agencies

Question 14

How we pay the losses

Answer 14

Loss Financing

Question 15

You bear the risk

Answer 15

Retention

Question 16

Low frequency, low severity

Answer 16

Retain
Risk Assumption and Loss Control

Question 17

Low frequency, high severity

Answer 17

Transfer (Don’t retain)
Insurance and Loss Control

Question 18

High frequency, low severity

Answer 18

Retain, Control (Don’t Transfer)
Self- Insurance (for larger firms)
Loss Control

Question 19

High frequency, high severity

Answer 19

Avoid (Don’t Retain)
Avoidance (if possible)
Loss Control

Question 20

Can be seasonal in nature

Answer 20

Problems

Question 21

Difficult to measure

Answer 21

Problems

Question 22

Best measurement still can only be an estimate

Answer 22

Problems

Question 23

Must be cost-efficient

Answer 23

Loss Prevention

Question 24

Activities that prevent losses

Answer 24

Loss Prevention

Question 25

Aim is to minimize impact when losses occur

Answer 25

Loss Reduction

Question 26

Examples are Duplication and Seperation

Answer 26

Loss Reduction

Question 27

An estimate (numerical or verbal) as to the number of times the loss will occur.

Answer 27

Relative Frequency

Question 28

Always ___________ in, if ____________

Answer 28

Always engage in, if beneficial

Question 29

Take various steps to reduce the probability of losses occurring.

Answer 29

Loss Prevention

Question 30

Steps designed to reduce the severity

Answer 30

Loss Reduction

Question 31

Take steps to reduce the damage before and after a loss.

Answer 31

Loss Reduction

Question 32

6 Government and Loss Control

Answer 32

1. Occupational Safety and Health Act of 1970 (OSHA) 2. Consumer Product Safety Act of 1972 (CPSA) 3. Comprehensive Environmental Response, Compensation Liability Act of 1980 (CERCLA) (Superfund) 4. Food and Drug Administration (FDA) 5. The Clean Air Act 6. The Water Pollution Control Act

Question 33

Risk-bearing financial institutions,

Answer 33

Risk Transfer

Question 34

Hold-harmless agreements

Answer 34

Risk Transfer

Question 35

Choosing form of business organization to transfer risk from individuals to entity

Answer 35

Risk Transfer

Question 36

Take on financial risk for free

Answer 36

Risk-bearing financial institutions

Question 37

Transfers risk to another party

Answer 37

Contractual transfer agreements

Question 38

Transfer of risk through a contract

Answer 38

Hold harmless agreements

Question 39

Provided to the owners of certain types of business organizational forms.

Answer 39

Limited Liability

Question 40

6 Categories under Loss Financing

Answer 40

1. Insurance 2. Insurance with deductibles (and self-insured retentions [SIRs]) 3. Hedging 4. Retention 5. Self-insurance 6. Captive insurers (dedicated risk-financing units)

Question 41

Transfers of risk to an insurer for a premium

Answer 41

Insurance

Question 42

Appropriate when loss-frequency is low, but potential severity is high.

Answer 42

Insurance

Question 43

Financial advantages of insurance

Answer 43

Tax Issues

Question 44

2 Categories under Insurance

Answer 44

1. Moral Hazard 2. Deductibles

Question 45

What we pay in insurance

Answer 45

Insurance Premium

Question 46

Not aware that there are existing risks

Answer 46

Risk Risk

Question 47

2 Reasons Why do companies self-insure?

Answer 47

1. Save money 2. Better control

Question 48

3 Categories under Better Control

Answer 48

1. Loss Prevention Incentives 2. Improved claims settlement 3. Profitability and investment earnings

Question 49

Is when an organization sets aside funds to cover potential losses.

Answer 49

Self-Insurance

Question 50

This can be done for a specific type of risk, such as property damage or employee injury, or for a general pool of risks.

Answer 50

Self-Insurance

Question 51

Is when an organization decides to bear the risk of loss without any form of financial protection.

Answer 51

Risk assumption

Question 52

This can be a risky strategy, as it exposes the organization to the full financial impact of any losses that occur.

Answer 52

Risk assumption

Question 53

A method of self-insuring

Answer 53

Captive Insurance Companies

Question 54

A company formed to write insurance for a parent company

Answer 54

Captive Insurance Companies

Question 55

3 Motives for starting a captive

Answer 55

1. Save the overhead and profits of the insurance company. 2. Earn investment income on the premium. 3. Tax advantages