Fundamentals of Risk Management Flashcards
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What are some ways to define risk? (p.4)
- a situation where there is exposure to danger or loss.
- the uncertainty involved with a decision or action
What are the two factors that characterize risk? (p.4)
- there is more than one possible outcome
- at least one has a negative element (loss)
What are the two dimensions for classifying risk? (p.4)
Frequency: its probability of occurrence
Severity: the impact of future loss
What is risk management? (p.4)
The process of identifying, evaluating and measuring risk and developing strategies to control it.
What is the purpose of risk management? (p.4)
make the most efficient pre-loss plan for a post-loss balance between resources available to preserve operation of the organization
What is risk capacity? (p.5)
establishes the amount of risk an organization is able to withstand.
What is risk appetite? (p.5)
the amount of risk an organization is willing to take
What are the questions that risk management seeks to answer? (p.5)
- what are the risks?
- how large are they?
- how likely are they?
- how best can these risks be managed?
How does a risk manager calculate exposure? (p.5)
Risk - Control = Exposure
What four techniques can be used to manage risk? (p.5)
- Avoid
- Transfer
- Reduce
- Retain
What is the risk management process? (p.6)
minimize the frequency and severity of risk, while maximizing the opportunities associated with it.
Define frequency (p.6)
the number of times the same loss occurs
Define severity (p.6)
the size (or cost) of the loss based on the amount of damage that is likely to occur
What are the benefits of prioritizing risks? (p.7-8)
- effective strategic planning
- systematic decision making
- supports company governance
- optimizes resource utilization
- reduces capital and operating expenses
- reduces downtime
- reduces liability
What are the steps in the risk management process? (p.8)
- determine the goal of the study
- identify all organizational risks
- Quantify or measure the risk’s frequency and severity
- Examine alternative strategies for managing risks
- Choose and prioritize control strategies
- Plan and implement the fix to manage each risk and liabilities
- communicate the results of risk management process
- Continually monitor the program
What are the four common types of loss exposures? (p.11)
- Property Exposures
- Liability Exposures
- Human Resources and Key Personnel Exposures
- Business Income Exposure
How should risks be documented? (p.12)
title, risk statement and background
What is the difference between maximum possible loss and maximum probable loss? (p.13)
Maximum possible loss: greatest loss the organization might suffer with no loss mitigation present
Maximum probable loss: largest loss the organization is likely to suffer
Why is the impact of loss on cash flow important? (p.13)
without the ability to generate cash, the entity can’t exist. Important to analyze losses relative to their potential harm to cash flow.
Define risk avoidance, retention, reduction and transfer or sharing (p.14)
Risk avoidance: staying away from risk to remove exposure
Risk Retention: accepting the loss when it occurs
Risk Reduction: minimize the severity of a loss or address the frequency of events leading to loss
Risk Transfer or Sharing: accomplished through insurance
Why should the results of the process be communicated throughout an organization? (p.14)
Important to quantify and demonstrate the utility of risk management.
Why should program results be monitored? (p.14)
improvements should be implemented regularly
What is the risk management grid? (p.15)
A tool used to quantify risks in terms of severity and frequency and provide guidance on risk strategies.
Draw the grid (p.15)
