Topic 2A: Enterprise Risk Management

Question 1

What are the objectives of risk management?

Answer 1

1. business continuity
2. maintain a level of tolerable uncertainty
3. legal and regulatory compliance

Question 2

What four costs of risk are most common? Describe them.

Answer 2

1. cost of accidentall losses that occur–not reimbursed by insurance
2. cost of risk control techniques–lower frequency and/or severity
3. cost of risk transfer techniques–insurance premiums
4. loss of goodwill–damage to reputation

Question 3

What’s the main difference between traditional and enterprise RM?

Answer 3

traditional: RM is delegated to each department
enterprise: holistic, entire org responsible for all RM

Question 4

List the four quadrants of risk.

Answer 4

hazard risk
operational risk
financial risk
strategic risk

Question 5

Describe each of the exposures of hazard risk.

Answer 5

property exposures: legal interest in property

liability exposures: firm could be legally held responsible for injury of third party

consequential loss: org suffer primary loss -> org suffer secondary loss

personnel exposures: employee suffer primary loss -> org suffer secondary loss

Question 6

What’s the difference between a primary and secondary loss?

Answer 6

primary: direct property, liability, etc.
secondary: decrease in revenue, increase in expenses, or both

Question 7

What operational risks is a firm exposed to?

Answer 7

people/employees
process
systems
external events

Question 8

What three types of financial risk do firms face?

Answer 8

market risk: unsure about asset future value due to changes in market for that asset

credit risk: uncertainty of third party defaults an agreement

price risk: uncertainty of changing revenue or cost due to changes in input/output prices