Study 3 - Risk Management and Commercial Insurance

Question 1

Typically, what are the six steps to manage a risk?

Answer 1

• Identify loss exposures
• Analyze loss exposures
• Examine the feasibility of risk management techniques
• Select the appropriate risk management technique(s)
• Implement the selected risk management technique(s)
• Monitor the results

Question 2

What are the four types of hazard loss exposure?

Answer 2

• Property
• Liability
• People
• Net income

Question 3

What are the objectives of the risk management process?

Answer 3

• To determine the commercial client’s key loss exposures that need to be managed
• To provide a plan of action to manage those risks
• To recommend insurance coverage for those risks that are best served by insurance coverage

Question 4

What are four ways you can add value through risk management?

Answer 4

• Risk monitoring
• Risk identification and assessment
• Risk control
• Risk financing

Question 5

Define enterprise risk management (ERM)

Answer 5

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

Question 6

What are some methods commonly used to identify loss exposures?

Answer 6

• Risk registers and assessment questionnaires
• Financial statements and other documents
• Loss histories
• On site inspections by qualified loss control engineers or subject matter experts

Question 7

What are the two things to review regarding the impact of a loss?

Answer 7

Frequency and severity

Question 8

How are qualitative and quantitative analyses used to determine the impact of a loss?

Answer 8

• Qualitative assess non numerical data, such as observations
• Quantitative reviews numerical data or figures, such as cost, finances, or population
• Sometimes a combination of both techniques is used

Question 9

What are some other common techniques used to assess losses?

Answer 9

• Root cause analysis
• Fault modes and effect analysis
• Gap analysis

Question 10

What are the best techniques for dealing with exposure?

Answer 10

• Risk control

- Risk financing (retention & transfer)

Question 11

What are some common loss control techniques?

Answer 11

• Avoidance
• Loss prevention
• Loss reduction
• Seperation
• Diversification
• Non insurance risk transfer

Question 12

Define active decision

Answer 12

Conscious decision to do or not do something

Question 13

Define passive retention

Answer 13

An exposure is retained but never identified

Question 14

What are some ways to pay for the costs of retained losses?

Answer 14

• Current expenses
• Unfunded reserves
• Funded reserves
• Borrowing
• Captive insurance company

Question 15

What are the advantages and disadvantages of using current expenses?

Answer 15

A: Easy to administer, no special accounting required

D: Funds may not be available, funds may be needed for business

Question 16

What are the advantages and disadvantages of using unfunded reserves?

Answer 16

A: Losses identified in an accounting entry

D: If many losses occur, funds to pay for them must be gathered

Question 17

What are the advantages and disadvantages of using funded reserves?

Answer 17

A: Money is available to pay for losses, fund can be built slowly

D: Control is needed to avoid spending funds, management of reserves require accounting, option has an opportunity cost

Question 18

What are the advantages and disadvantages of using borrowing?

Answer 18

A: Easy if company has assets to cover a loan

D: Lender may believe company planned poorly, reduces the company’s line of credit

Question 19

What are the advantages and disadvantages of using captive insurance companies?

Answer 19

A: Company can capitalize on good loss experience, direct access to reinsurance, custom policies, commitment to loss control is conscientious

D: Complex and costly to set up / administer, significant commitment from senior management

Question 20

Define hold harmless agreement

Answer 20

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

Question 21

What are the two methods of transferring responsibility to pay for losses?

Answer 21

Contract

Insurance

Question 22

What are the advantages and disadvantages of non-insurance risk transfers?

Answer 22

A: May not be insurable, less expensive than insurance, tailored to meet needs, exposure can be controlled by party best able to do so

D: Risk transfer may not be as complete as intended, agreements subject to litigation/reinterpretation, indemnitor may be unable to pay, strength of agreement susceptible to economy

Question 23

What are the advantages and disadvantages of insurance loss transfers?

Answer 23

A: Known amount of premium is paid, less uncertainty, other loss control services

D: Premium paid may be more than losses, insurance coverage may not be available, loss amounts may exceed limit, may have prohibitive conditions/terms, insolvency could expose insureds to loss

Question 24

What three elements must a risk management plan include?

Answer 24

• Plan for implementing the risk control program
• Communication plan
• Method to allocate costs

Question 25

What composes the cost of risk?

Answer 25

Cost of loss control Insurance premiums Retained losses Overhead of the risk management department

Question 26

What are the four basic categories of risk?

Answer 26

Hazard Operational Financial Strategic

Question 27

What is the general definition of exposure?

Answer 27

A condition or situation that exposes an asset to a loss

Question 28

What are the three elements of a loss exposure?

Answer 28

1) Assets exposed to loss 2) Cause of loss (perils) 3) Financial consequences of the loss

Question 29

What 4 things can assets be broken down into?

Answer 29

Property Liability People Net Income

Question 30

Define intangible assets

Answer 30

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

Question 31

Define real property

Answer 31

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

Question 32

What are the two categories of property?

Answer 32

Real property and personal property

Question 33

What are some examples of real property?

Answer 33

Land, buildings, damns, bridges and towers

Question 34

What are some examples of personal property?

Answer 34

Intended for permanent placement (furniture, fixtures) Subject to movement (photocopier, cash register) Intended for movement (laptops, jewelry)

Question 35

Who may have assets that need to be protected under a policy?

Answer 35

Lenders, landlords and customers

Question 36

What are some types of property that is not an obvious source of loss exposure?

Answer 36

- Property that is owned, borrowed or held for others - Offsite property, such as inventory & equipment - Property under construction - Intangible property

Question 37

What are the three main areas of liability?

Answer 37

Negligence Vicarious liability Absolute liability

Question 38

What is vicarious liability?

Answer 38

When one party is fully or partly responsible for the actions or omissions of another

Question 39

What is absolute liability?

Answer 39

Inherently dangerous activities regardless of the degree of care can be found liabile

Question 40

What two things may you need to review with people loss exposure?

Answer 40

1) Advise the client on dealing with the loss of a key person or persons 2) Advise the client on employee benefits necessary to maintain a stable workforce

Question 41

What are the three types of net income loss exposures?

Answer 41

1) Business interruption 2) Extra expense exposures 3) Supply chain risk

Question 42

Define extra expense insurance

Answer 42

Form of insurance policy covering the extra expense of an insured in carrying on a business

Question 43

Define supply chain risk

Answer 43

Potential for disruption to a firm's product supply (affecting ability to meet customer demand or organizational objectives)

Question 44

Define contingent business interruption insurance

Answer 44

Insurance against loss due to interruption of business by fire or other peril at another's premises

Question 45

What are three of the financial consequences of a loss?

Answer 45

- The reduced value of an asset - The decreased income derived from the asset - The increased expenses to keep the asset operating

Question 46

Risk management is an opportunity to “work with” instead of “sell to” the client. Name at least two (2) of the three main objectives of the risk management process and three (3) of the four ways that brokers add value to their client relationships with risk management.

Answer 46

Risk management process and value to client relationships • The objectives of the risk management process o Determine the commercial client’s key loss exposures o Provide a plan of action to manage those risks o Recommend insurance coverage for those risks • How brokers add value to client relationship through risk management o Risk identification and assessment o Risk control o Risk financing o Risk monitoring

Question 47

The risk management process begins with identification of loss exposures. What are the remaining five (5) steps in the process?

Answer 47

* Analyze loss exposures * Examine the feasibility of risk management techniques * Select the appropriate risk management technique(s) * Implement the selected risk management technique(s) * Monitor the results

Question 48

A broker can use a variety of analysis techniques to determine the impact of a loss as part of the risk management process. Name the two (2) main types of analysis and three (3) additional methods of analysis

Answer 48

``` Two types of analysis o Qualitative analysis assesses non-numerical data o Quantitative analysis reviews numerical data or figures, such as cost, finances, or population. • Additional techniques o Root cause analysis o Fault modes and effects analysis o Gap analysis ```

Question 49

What is a hazard, and the four main areas?

Answer 49

• Hazards are conditions that increase the likelihood and severity of a loss; hazards can be moral (actions of people) or physical (conditions of object or space). • Areas of hazard risk loss exposure: 1. Property * Real property—land and permanent structures * Personal property—personal, movable, and distinct from real property 2. Liability * Negligence—failure to use reasonable care * Vicarious liability—responsibility for the actions or omissions of another * Absolute liability—for activities that are inherently dangerous, regardless of care 3. People * Loss of key person * Maintaining stable workforce 4. Net income * Business interruption * Extra expense exposures * Supply chain risk

Question 50

What are some potential perils that may arise?

Answer 50

``` • Human perils o Vandalism o Arson o Theft • Natural perils o Storms o Floods o Earthquakes o Tornadoes o Wildfires • Economic perils o Consumer tastes o Currency fluctuations o Depreciation o Expropriation o Stock market declines o Technological advances ```

Question 51

What are five ways a client can plan to pay for losses?

Answer 51

``` Financing retained losses • Current expenses • Unfunded reserves • Funded reserves • Borrowing • Captive insurance company ```