Module 1

Question 1

Risk Financing:

Answer 1

A conscious act or decision not to act that generates funds to offset the variability in cash flows that may occur as an outcome or risk.

Question 2

Retention:

Answer 2

technique that involves assumption of risk in which gains and losses are retained within the organization

Question 3

Transfer:

Answer 3

In the context of risk management, a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party.

Question 4

Hazard Risk

Answer 4

Risk from accidental loss, including the possibility of loss, or no loss

Question 5

Speculative Risk:

Answer 5

A chance of loss, no loss, or gain

Question 6

Hold Harmless or indemnity agreements:

Answer 6

a contractual provision that obligates one of the parties to assume the legal liability of another party

Question 7

Risk:

Answer 7

Uncertainty about outcomes that can be either negative or positive

Question 8

Hedging:

Answer 8

A financial transaction in which one asset is held to offset the risk associated with another asset`

Question 9

Futures Contract:

Answer 9

an exchange-traded agreement to buy or sell a commodity or security at a future date at a price that is fixed at the time of the agreement

Question 10

Describe the two categories of Risk Financing Techniques and three ways to do each

Answer 10

1. Retention - org pays for costs
   Planned/unplanned
   Complete/Partial
   Funded or Unfunded
2. Risk Transfer - transfer potential consequences of loss exposure to another party
   Contractual/Hold Harmless or indemnity agreements
   Hedging
   Insurance

Question 11

What does Risk Transfer Shift to the other party?

Answer 11

Financial consequences of an event to which one is exposed

Question 12

Explain when Hedging is Practical

Answer 12

When used to offset the consequences of risk to which one is naturally, voluntarily or naturally exposed

Question 13

Liquid Asset:

Answer 13

property that can be quickly converted to cash

Question 14

Risk Management Framework:

Answer 14

A foundation for applying the risk management process throughout the org.

Question 15

Describe Org’s sources of Liquidity

Answer 15

cash flows
borrowing capacity
ability to issue stock

Question 16

Describe standards set by Sarbanes Oxley 2002

Answer 16

sets high standards for US public company boards

requires senior executives to take personal responsibility for the accuracy/completeness of reports

modifies reporting requirements for financial transactions

Question 17

Name the Primary measure used by many orgs to gauge the effectiveness of their insurance risk mgmt program

Answer 17

Managing the cost of risk is the primary measure

Question 18

Risk Criteria

Answer 18

information used as a basis for measuring the significance of risk

Question 19

Soft Market

Answer 19

market conditions in which:
insurer competition is intents
widely available coverage
premiums lower
insurer profit decreases

Question 20

Hard Market

Answer 20

Market conditions in which:
insurer competition diminishes, 
buyers have difficulty finding coverage
premiums increase
insurer profitability rises

Question 21

Describe what the frequency of losses is

Answer 21

number of losses occurring within a specified period

Question 22

Describe what the severity of losses is

Answer 22

amount of a loss, usually measured in monetary units/dollars

Question 23

Enterprise Risk management

Answer 23

an approach to managing all of an organization’s key business risks and opportunities with the intent of maximizing shareholder value also know as Enterprise Wide Risk Management

Question 24

Business Risk

Answer 24

risk that is inherent in the operation of a particular org, including the possibility of loss, no loss, or gain

Question 25

Explain why an org may decide to manage its business risk using an ERM approach

Answer 25

Maximize Shareholder Value

Question 26

identify the ERM Categories of Risk

Answer 26

Strategic Risks

Operational Risks

Financial Risks

Hazard Risks

Question 27

Describe the differences between Enterprise Risk management and Trad. Risk Management

Answer 27

Type of Risk: ERM both hazard and business Risks; Trad = Hazard Risk

Impact of Risks: ERM enables org to fulfill its greatest productive potential; Trad focuses on returning to the pre-loss condition

Value: ERM focus on the value of org; Trad focus value of the accidental loss

Scope: ERM focus on org as a whole: trad own discipline and part of broader ERM discipline