R.M. Ch. 3

Question 1

Risk Management

Answer 1

is a process that identifies risks faced by an organization and selects the most appropriate techniques for treating such risks.

Question 2

Risk Management Process

Answer 2

a) Identify Risk
b) Evaluate Risk
c) Select the appropriate risk management techniques
d) Implement and monitor the risk management program

Question 3

Risk Control

Answer 3

refers to techniques that reduce the frequency and/or severity of losses

Question 4

Risk Financing

Answer 4

refers to techniques that provide for the funding of losses

Question 5

Retention

Answer 5

means that the firm retains part or all of the losses that can result from a given loss

Question 6

Non-insurance transfer

Answer 6

is a method other than insurance by which risk is transferred to another party

Question 7

Advantages Retention

Answer 7

save money
encourage loss prevention
increase cash flow

Question 8

Cost of Risk

Answer 8

is a risk management tool that measures certain costs.

includes premiums paid, retained losses, outside risk management services and other expenses

Question 9

Types of Financing

Answer 9

a) Retention
b) non-insurance transfers
c) commercial insurance

Question 10

Deductible

Answer 10

is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured.

is a form of risk retention

Question 11

Avoidance

Answer 11

a loss exposure is never acquired or an existing loss exposure is abandoned.

Question 12

Loss Prevention

Answer 12

refers to measures that reduce the frequency of a particular loss

Question 13

Loss Reduction

Answer 13

refers to measures that reduce the severity of a loss after it occurs.

Question 14

Disadvantages of Retention

Answer 14

possible higher losses
possible higher expenses
possible higher taxes

Question 15

Advantages of Non-ins. Transfer

Answer 15

• Save money
• Can transfer some losses that are not insurable
• Can transfer loss to someone who is in a better position to control losses

Question 16

Disadvantages of Non-ins. Transfer

Answer 16

• Transfer may not be legally enforceable
• If the other party fails to pay, firm is still responsible for the loss
• Insurers may not give credit for transfers

Question 17

Insurance

Answer 17

is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses

Question 18

Advantages of Insurance

Answer 18

• Firm is indemnified for losses
• Uncertainty is reduced
• Insurers may provide other risk management
  services
• Premiums are tax-deductible

Question 19

Disadvantages of Insurance

Answer 19

• Premiums may be costly and are usually paid up front
• Negotiation of contracts takes time and effort
• Possible reduction in loss control

Question 20

When is insurance appropriate to use?

Answer 20

low frequency and high severity