Slides 1

Question 1

what is risk management?
define strategic risk

Answer 1

Risk management refers to the process or discipline by which an individual/ organization assesses, controls, finances and monitors risk in order to minimize the effects or impacts.

Strategic risk refers to uncertainty regarding a firm’s financial goals and objectives. eg. new products introduced may be unprofitable.

Question 2

describe the steps in the risk management process

Answer 2

1. identify potential losses
2. evaluate potential losses
3. develop and select methods for managing risk
4. administer or implement method most suitablr

Question 3

What is Risk?

Answer 3

Risk is any situation based on uncertainty which may have positive or negative outcomes.

Question 4

What are the basic categories of risks?

Answer 4

PSPF.
Pure risks,
Speculative risks,
Particular risks
Fundamental risks

Question 5

Explain
i. Pure Risks
ii. Speculative risks
iii. Particular risks
iv. Fundamental Risks

2. Differentiate between operational and financial risks

Answer 5

i) Pure risks are risks that only pose the possibility of loss or no change. eg. banking operational risks where outcomes are only loss or neutral.

ii Speculative risks are risks where there is a possibility of a gain or loss. eg. betting / buying of stocks

iii. Particular risks (unsystematic) are risks that only affect particular individuals or bodies and not the entire community, nation or economy. eg. car theft/ armed robbery/house fires.

iv. Fundamental risks (systematic) are uncertain situations that affect a whole population/ economy or entire community. eg. breakout of diseases, earthquakes, inflation, floods.

2. Operational risks are uncertainties that result from a firms operations and comes with the job. eg. banks that may incur losses is hackers get to its system.
   Financial risks are possibilities of loss based on changes in commodity prices, exchange rates, interest rates and the value of money

Question 6

1.a) Give reasons for distinction between pure and speculative risks.
b) Differentiate between Objective and Subjective risks

Answer 6

1. the law of large numbers is more easily applied to pure risks than speculative risks.
2. Society may benefit from speculative risks even though loss occurs, but is only harmed in the case of a pure risk
3. Private insurance typically insure only pure risks.

b) Objective risk also called degree of risk is the variation of actual loss from expected loss
Subjective risk is uncertainty based on an individual’s experiences/ state of mind/ mental condition.

Question 7

Define
i) Perils
ii) Risk averse
iii) Insurance

Answer 7

i) Peril refers to the immediate cause of a loss

ii) Risk averse refers to the taking of minimal or no risk at all due to dislike of losses

iii) Insurance is a financial arrangement that redistributes the cost of unexpected losses.
It involves the transfer of potential losses into an insurance pool where potential losses are combined and redistributed to those affected/ exposed.

Question 8

Define Hazard
explain any 4 types

Answer 8

Hazard is any situation that poses danger or possibility of loss

Types
1. Physical hazard - physical situations that pose threat of a loss or danger.

2. Moral hazard - character defect/ dishonesty of individuals that increase possibility of a loss / poses danger. eg arson to get insurance payouts from insurers.
3. Morale hazard - carelessness of an individual or body to a loss due to the presence of insurance. people who drive / act reckless jus cos they know their vehicle or property is insured.
4. Legal hazards - these are characteristics of the legal system/ environment that increase the possibility or severity of losses. eg. loopholes in the constitution that cause large damage awards in liability lawsuits/ prolonged duration of the settlement of some cases.

Question 9

Give examples of burden of risk on society.

Answer 9

Burdens of risk on society are the undesirable social and economic effects of risks on society. These include;

1. Larger emergency fund as people have to set aside larger sums in the absence of insurance to cover their losses. These funds could be used for something more resourceful or to make more profits.
2. Loss of certain goods and services as some companies refrain from producing certain products and services in order to avoid the risk of liability lawsuits .

3 Cause of fear and panic . eg economic crisis with individuals running back to banks for their moneys to avoid losses, leading to most banks failing and worsening the economic crisis

Question 10

1. Give and explain the major types of pure risks
2. Give n explain 4 main examples of personal risks

Answer 10

Types of pure risks include;
1. Personal risks which directly affect an individual.

2. Property risks which is the risk of having properties damaged, lost or stolen
3. Liability risks in which one can be held legally liable for bodily injury or property damage to someone else.
   eg. firms held liable for products causing injury, professionals held liable for acts of malpractice. huge defense costs and legal expenses.
4. Four major personal risks

i) Risk of premature death i.e. death with unfulfilled financial obligations

ii) Risk of poor health - results in payments of expensive medical bills. May lead to loss of earned income / financial insecurity.

iii) Risk of unemployment - loss of jobs leading to financial insecurity/ reduction of income.

iv) Risk of insufficient income during retirement - common risk associated w old age. Results from not saving enough for a comfortable retirement or substantial reduction in incomes after retirement.