Introduction to Risk Management – Exam 2, 2026 – Study Material
and Practice Questions
What is risk financing? - correct answer ✔✔ techniques that provide for the funding of losses
Two types of Risk financing
and explain both - correct answer ✔✔ External:
-seek external 3rd party to transfer financial responsibility to, not the asset itself
-still have assets exposed to loss
ex. insurance
Internal:
- non-insurance financing
- contracts that allow risk to be accepted
-ex. leases, hold harmless agreement
retention - correct answer ✔✔ firm or individual assumes the financial responsibility of a loss,
as it occurs
ex. not buying insurance, insurance w a deductible
Funded Retention - correct answer ✔✔ - a firm sets aside funds every period to pay for losses
- for losses that are predictable and high in severity
Unfunded Retention - correct answer ✔✔ -no separate fund to pay for losses
-pay for losses as they occur from money you have or money you borrow
-better for losses that are low frequency and low in severity
, Active Retention - correct answer ✔✔ means that an individual is aware of the risk and
deliberately plans to retain all or part of it
Passive Retention - correct answer ✔✔ means risks may be unknowingly retained, commonly
failure of identity
Self-insurance is a form of : - correct answer ✔✔ a special form of planned retention, Active and
funded
self- insurance is used when - correct answer ✔✔ there are significant loss exposures where
many exposure units exist
Characteristics of self-insurance - correct answer ✔✔ -Fairly predictable: medical insurance for
employees
-long payout period: workers compensation
Pros of self-insurance - correct answer ✔✔ -flexible, cover what u want
-avoid state mandated benefit law
-No premium, no admin cost, no marketing expenses
-savings goes into pocket, not insurance co.
Cons of self-insurance - correct answer ✔✔ -One loss could wipe out
-Only large organizations can handle
- stop loss
- firm may have to perform administrative functions
- hard to return to insurance after
-PR nightmare
and Practice Questions
What is risk financing? - correct answer ✔✔ techniques that provide for the funding of losses
Two types of Risk financing
and explain both - correct answer ✔✔ External:
-seek external 3rd party to transfer financial responsibility to, not the asset itself
-still have assets exposed to loss
ex. insurance
Internal:
- non-insurance financing
- contracts that allow risk to be accepted
-ex. leases, hold harmless agreement
retention - correct answer ✔✔ firm or individual assumes the financial responsibility of a loss,
as it occurs
ex. not buying insurance, insurance w a deductible
Funded Retention - correct answer ✔✔ - a firm sets aside funds every period to pay for losses
- for losses that are predictable and high in severity
Unfunded Retention - correct answer ✔✔ -no separate fund to pay for losses
-pay for losses as they occur from money you have or money you borrow
-better for losses that are low frequency and low in severity
, Active Retention - correct answer ✔✔ means that an individual is aware of the risk and
deliberately plans to retain all or part of it
Passive Retention - correct answer ✔✔ means risks may be unknowingly retained, commonly
failure of identity
Self-insurance is a form of : - correct answer ✔✔ a special form of planned retention, Active and
funded
self- insurance is used when - correct answer ✔✔ there are significant loss exposures where
many exposure units exist
Characteristics of self-insurance - correct answer ✔✔ -Fairly predictable: medical insurance for
employees
-long payout period: workers compensation
Pros of self-insurance - correct answer ✔✔ -flexible, cover what u want
-avoid state mandated benefit law
-No premium, no admin cost, no marketing expenses
-savings goes into pocket, not insurance co.
Cons of self-insurance - correct answer ✔✔ -One loss could wipe out
-Only large organizations can handle
- stop loss
- firm may have to perform administrative functions
- hard to return to insurance after
-PR nightmare
