Study 3: Risk Management and Commercial Insurance

Question 1

What is risk management?

Answer 1

Analyzing a risk to quantify the potential for losses in a specific investment and to decide what is the appropriate action to take.

Question 2

What is loss exposure?

Answer 2

A situation or physical circumstance that makes an individual or an organization vulnerable to loss, damage, or injury and will lead to financial loss.

Question 3

What is risk transfer?

Answer 3

For a non-insurance company, the risk insured. For an insurance company, the risk reinsured.

Question 4

What is enterprise risk management (ERM)?

Answer 4

An approach to managing all of an organization’s key business risks and opportunities with the intent of maximizing shareholder value.

Question 5

What is frequency of loss?

Answer 5

This is a measure of how often losses are likely to occur in the future.

Question 6

What is severity of loss?

Answer 6

This is the average size of the losses.

Question 7

What is retention?

Answer 7

The amount of liability the ceding company (primary insurer) retains for its own account. Also, the part of the risk retained by clients without insuring it.

Question 8

What is a hold-harmless agreement?

Answer 8

An agreement that allows any one party to protect another party against any future losses or claims that may result from a particular activity.

Question 9

What is insurance?

Answer 9

A contract in which one party, the insurer, for monetary consideration agrees to reimburse another, the insured for loss or liability for a loss on a defined subject caused by specified hazards or perils.

Question 10

What is a hazard?

Answer 10

A risk or probability that the event insured against might occur.

Question 11

What is an asset?

Answer 11

Anything that has financial value.

Question 12

What is an intangible asset?

Answer 12

Valuables such as trademarks, goodwill and copyrights owned by a business.

Question 13

What is real property?

Answer 13

Land and nay property that is tangible and usually fixed or attached to the land.

Question 14

What is personal property?

Answer 14

Legally, any property of an insured other than real property.

Question 15

What is negligence?

Answer 15

Failure to use the degree of care expected from a reasonable and prudent person.

Question 16

What is vicarious liability?

Answer 16

A situation in which one party is held partly responsible for the unlawful actions of a third party.

Question 17

What is absolute liability?

Answer 17

Liability associated with very dangerous actions.

Question 18

What is an indirect loss?

Answer 18

Loss resulting from direct damage to property.

Question 19

What is net income?

Answer 19

The income of an individual or company, during a specified period, after consideration of all deductions, expenses, and taxes.

Question 20

What is business interruption insurance?

Answer 20

Insurance against loss of profits and continuing fixed expenses resulting from a fire or other insured peril that prevents business from continuing in its normal operations.

Question 21

What is extra expense insurance?

Answer 21

A form of insurance policy covering the extra expense of an insured in carrying on a business following a loss by an insured peril.

Question 22

What is a supply chain risk?

Answer 22

The potential for disruption to a firm’s product supply or product demand.

Question 23

What is contingent business interruption insurance?

Answer 23

Insurance against loss due to the interruption of business by fire or other insured peril occurring at another’s premises.

Question 24

What is a peril?

Answer 24

The event that caused a loss covered by the policy.

Question 25

What is a physical hazard?

Answer 25

A hazard arising from the physical condition or characteristics of the object that is insured.

Question 26

What are 6 steps businesses use to manage risks?

Answer 26

1) Identify loss exposures2) Analyze loss exposures 3) Examine the feasibility of risk management techniques 4) Select the appropriate risk management technique 5) Implement the selected risk management technique 6) Monitor the results

Question 27

What are the 3 objectives of the risk management process?

Answer 27

1) To determine key loss exposures that need to be managed 2) Provide a plan of action to manage those risks 3) Recommend insurance coverage for those risks

Question 28

What are the 4 ways that you add value through risk management?

Answer 28

1) Risk identification and assessment 2) Risk control 3) Risk financing 4) Risk monitoring