Section I: Risk Concepts Flashcards
What is a Risk from an insurance perspective?
Risk is the possibility of a loss or injury, and the uncertainty of outcomes.
What are the two commonly applied technologies in the Risk Management & Insurance Industries?
Risktech & Insurtech
Define Risk Management.
The process of avoiding and reducing the negative possibility of a risk.
What are the two types of Risk Management?
- Enterprise-Wide Risk Management (ERM)
- Traditional Risk Management
Explain Enterprise-Wide Risk Management.
- All levels within an organization are responsible for risk management.
- Often referred to as the “holistic” approach.
- This is typically used to manage regulations in the US and EUR, especially after the 2008 financial crisis.
Explain Traditional Risk Management.
- Focuses on managing pure risk loss exposures.
- Primary focus is Hazard Risk.
- Uses Root Cause Analysis (RCA) to determine underlying cause of a loss.
What are the 6 Benefits of ERM?
- Growth & Profit
- Legal Obligations
- Reduced Cost of Risk
- Reduced Effects of Risk
- Risk Tolerance
- Social Responsibility
What are the three ways ERM aligns with the company goal of Growth & Profit?
- Cross Enterprise Risk (identify risks that impact more than one area)
- Capital (face lower costs of risk)
- Strategic Risk (smarter decisions)
What are the three primary legal obligations?
- Contracts
- Federal, State and Local Laws
- Standard of Care
What expenses make up the total cost to manage risk?
- Risk control & the cost to implement these techniques
- Risk financing costs such as insurance premiums
- The cost of an incurred loss not covered by insurance
- The cost of various risk management activities
What are the benefits of reducing risk?
- Increased Profit
- Less Fear
- Safer Investment
What is Tolerable Uncertainty?
The amount of risk the organization is willing to accept, AKA “risk appetite”
What are the 5 components of Tolerable Uncertainty?
- Continued Operations
- Downside Risk Management
- Emerging Risk Management
- Measure Risk
- Stable Earnings
Explain Continued Operations.
Continuing to operate after a loss without interrupting the organization and without derailing business activities for an extended amount of time.
What is Downside Risk Management?
The risk of loss, failure, or decline in a business.
What is a commonly used method to measure risk?
Value at Risk (VaR) which measures the potential losses from unlikely events that could affect an investment portfolio.
What is the goal of Social Responsibility?
Organizations should strive to benefit society to improve their reputation within the community.
Describe Big Data.
Extremely large datasets that are too large to be analyzed by traditional and manual methods.
What are the three primary areas that Big Data improves?
- Analyzing Data
- Capturing Data
- Storing Data
What are the four primary ways a business can advance using Big Data?
- Innovative Products
- New Data Sources
- New Discoveries
- Organization
Explain Parametric Insurance.
A new type of insurance that pays a set amount of coverage to the insured if a condition is met.
How can Big Data help with organization?
By automatically organizing large volumes of data to improve the business efficiency and help make data-driven decisions easier.
What are the four advances in technology used to capture and retrieve data?
- Internet of Things (machine to machine/machine learning)
- Smart products (collect, process and transmit data)
- Telematics (wireless GPS tracking)
- Text Mining (text recognition/analyze handwritten notes)
What are the two methods of storing and protecting Big Data?
- Blockchain
- Cloud Storage
What is Blockchain?
- Digital Record/Ledger
- Facilitates transactions without bank or third party
- Cannot be edited after encryption
- Mining is the process of validation each block
What is Cloud Storage?
The process of storing data remotely, using the internet, without a single direct server connection.
What are the 5 steps of the Risk Management Process?
- Scan
- Identify
- Analyze
- Treat
- Monitor
What step of the Risk Management Process involves inspections, compliance reviews and documentation analysis?
Step 2 - Identify the Risks
What are the 5 actions that can be taken to mitigate risk?
- Avoid (never take action)
- Exploit (take advantage of risk)
- Modify (reduce frequency or severity of impact)
- Retention (saving/setting aside funds)
- Transfer (purchase of insurance)
What are the 6 Measures of Risk?
- Consequence (end result of event)
- Correlation (mutual relationship or connection)
- Exposure (anything that may result in loss or gain)
- Likelihood (approximation/predictability)
- Time Horizon (length risk will be present)
- Volatility (unknown/unpredictability of situation)
What are the four Risk Classifications?
- Diversifiable and Non-Diversifiable
- Pure and Speculative Risks
- Quadrants of Risk
- Subjective and Objective Risks
What is the difference between Diversifiable and Non-Diversifiable risk?
Diversifiable risk only affects some individuals or organizations (losing business to competitors), whereas Non-Diversifiable risk affects the entire market (like unemployment rates impacting entire industries).
What is Pure Risk?
Either the possibility of a loss or no loss with no possibility of gain.
What is Speculative Risk?
The possibility of a loss, no loss, or a gain (stock price, 401k, etc).
What are the two types of Speculative Risk?
- Credit Risk (customers may/may not pay)
- Price Risk (cost of goods fluctuate)
What are the four Quadrants of Risk?
- Financial
- Hazard
- Operational
- Strategic
What are the four types of Financial Risk?
- Credit
- Liquidity
- Market
- Price
What is the difference between Subjective and Objective Risk?
- Awareness
- Control
- Perception
Subjective is a person’s perception of risk, whereas Objective is based on facts and data.
What are the 5 steps for Effective Communication?
- Body Language
- Communicate Objective & Goal
- Feedback
- Time & Place
- Understand the Audience
What are the three ways to avoid escalating tension in a difficult conversation?
- Avoid blaming the person
- Don’t generalize or exaggerate
- Keep a neutral tone of voice
What are the three steps to being an Active Listener?
- Attention
- Response
- Suspension of Judgement
