EXAM 2 CHAPTER 3,4 AND ARTICLE 2 RISK
MANAGEMENT 105 QUESTIONS WITH VERIFIED
ANSWERS 2025/2026
Uncertainty about outcomes that can be either positive or negative. - CORRECT
ANSWER Risk
The process of making and implementing decisions that enable an organization to
optimize its level of risk.
-identify
-select techniques - CORRECT ANSWER Risk Management
. Identify potential losses
• Measure and analyze the loss exposures
• Select the appropriate combination of techniques for treating the loss exposures
• Implement and monitor the risk management program - CORRECT ANSWER Risk
Management Process
1. Identify loss exposure
2. Measure and analyze the loss exposure
3. Select the appropriate combination of technique for treating the loss exposure
include risk control ( use for the Hazard risk)
- Avoidance
- Loss prevention
,- Loss reduction
And risk financing
- retention
- Non insurance transfers
- Insurance
4. Implement and monitor the risk management program - CORRECT ANSWER
Steps in the Risk Management Process
Estimate for each type of loss exposure:
- Loss frequency refers to the probable #number# of losses that may occur during
some time period
- Loss severity refers to the probable# size# of the losses that may occur
• Rank exposures by importance
• Loss# severity# is more important than loss frequency:
- The maximum possible loss is the worst loss that could happen to the firm during
its lifetime
- The probable maximum loss is the worst loss that is likely to happen - CORRECT
ANSWER Measure and Analyze Loss Exposures
Loss prevention refers to measures that reduce the frequency of a particular loss
- e.g., installing safety features on hazardous products
• Loss reduction refers to measures that reduce the severity of a loss after it
occurs
- e.g., installing an automatic sprinkler system - CORRECT ANSWER 1. Risk control
refers to techniques that reduce the frequency and severity of losses
, • Methods of risk control include:
- Avoidance
- Loss prevention
- Loss reduction
Retention means that the firm retains part or all of the losses that can result from
a given loss
- Retention is effectively used when:
• No other method of treatment is available • The worst possible loss is not
serious
• Losses are highly predictable - CORRECT ANSWER 2. Risk financing refers to
techniques that provide for the payment of losses after they occur
Methods of risk financing include:
- Retention
- Non-insurance Transfers
- Commercial Insurance
- Current net income: losses are treated as current expenses
- Unfunded reserve: losses are deducted from a bookkeeping account
- Funded reserve: losses are deducted from a liquid fund
- Credit line: funds are borrowed to pay losses as they occur - CORRECT ANSWER A
risk manager has several methods for paying retained losses:
A risk retention group (RRG) is a group captive that can write any type of liability
coverage except employers' liability, workers compensation, and personal lines
MANAGEMENT 105 QUESTIONS WITH VERIFIED
ANSWERS 2025/2026
Uncertainty about outcomes that can be either positive or negative. - CORRECT
ANSWER Risk
The process of making and implementing decisions that enable an organization to
optimize its level of risk.
-identify
-select techniques - CORRECT ANSWER Risk Management
. Identify potential losses
• Measure and analyze the loss exposures
• Select the appropriate combination of techniques for treating the loss exposures
• Implement and monitor the risk management program - CORRECT ANSWER Risk
Management Process
1. Identify loss exposure
2. Measure and analyze the loss exposure
3. Select the appropriate combination of technique for treating the loss exposure
include risk control ( use for the Hazard risk)
- Avoidance
- Loss prevention
,- Loss reduction
And risk financing
- retention
- Non insurance transfers
- Insurance
4. Implement and monitor the risk management program - CORRECT ANSWER
Steps in the Risk Management Process
Estimate for each type of loss exposure:
- Loss frequency refers to the probable #number# of losses that may occur during
some time period
- Loss severity refers to the probable# size# of the losses that may occur
• Rank exposures by importance
• Loss# severity# is more important than loss frequency:
- The maximum possible loss is the worst loss that could happen to the firm during
its lifetime
- The probable maximum loss is the worst loss that is likely to happen - CORRECT
ANSWER Measure and Analyze Loss Exposures
Loss prevention refers to measures that reduce the frequency of a particular loss
- e.g., installing safety features on hazardous products
• Loss reduction refers to measures that reduce the severity of a loss after it
occurs
- e.g., installing an automatic sprinkler system - CORRECT ANSWER 1. Risk control
refers to techniques that reduce the frequency and severity of losses
, • Methods of risk control include:
- Avoidance
- Loss prevention
- Loss reduction
Retention means that the firm retains part or all of the losses that can result from
a given loss
- Retention is effectively used when:
• No other method of treatment is available • The worst possible loss is not
serious
• Losses are highly predictable - CORRECT ANSWER 2. Risk financing refers to
techniques that provide for the payment of losses after they occur
Methods of risk financing include:
- Retention
- Non-insurance Transfers
- Commercial Insurance
- Current net income: losses are treated as current expenses
- Unfunded reserve: losses are deducted from a bookkeeping account
- Funded reserve: losses are deducted from a liquid fund
- Credit line: funds are borrowed to pay losses as they occur - CORRECT ANSWER A
risk manager has several methods for paying retained losses:
A risk retention group (RRG) is a group captive that can write any type of liability
coverage except employers' liability, workers compensation, and personal lines
