CPCU 500 - Foundations of Risk Management and Insurance 100% Correct Answers Verified Latest 2024 Version

CHAPTER 1 What are the two elements of risk? - -Uncertainty of outcome - Time of the outcome and type of outcome are uncertain -possibility of a negative outcome - at least 1 outcome is negative What is the difference between probability and possibility? - Possibility - an outcome or event may or may not occur. It does not quantify the risk, only verifies the risk is there Probability - the likelihood than an outcome will occur, quantifies the risk. It is measurable and has value between zero and one How does probability help an organizations risk management exposure? - -by understanding the probability of an exposure, an organization can focus its risk management efforts to avoid it. -helps organization decided what projects and activities to undertake How does classifying a risk help an organizations risk management process? - -can help with assessing risk cause many risks in the same classification have similar attributes -helps manage risks -helps administrative function of RM by helping to ensure the risks in same class are less likely to be overlooked -Compare pure risk with speculative risk -why is it important to distinguish between the 2 what making risk management proceduces - pure risk - change of loss or no loss but no gain speculative risk - involves a chance of gain type of SR includes: price risk and credit risk (financial investments involve a distinct set of speculative risks)its important when making RM decisions cause the 2 types must often be managed different. *most insurance policies are not designed to handle speculative risks* *insurable risks are generally classified as pure, objective, and diversafiable* - How does subjective and objective risk differ? - subjective risk - perceived amount of risk based on individuals or organizations opinion objective risk - measurable variation in uncertain outcomes based on facts and data where they differ (see page 1.8): 1. Familiarity and control 2. consequences over likelihood 3. Risk Awareness -Contracts diversifiable and nondiversifiable risk? - diversifiable risk - is not highly correlated and can be managed through diversification non-d risk - is correlated, losses and gains occur together (type: systemic risk - potential for a major disruption in the function of an entire market or financial system - Describe the quadrants of risk - way of categorizing risk is putting them in quadrants: -hazard risk - property, liability, and personnel loss, generally the subject of insurance -operational risks - fall outside hazard cat, arise from people or failure in process, system, or control, including info tech -financial risks - effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk and price risk -strategic risks - arise from trends in the economy and society, including changes in econ, political and competitive environments, as well as from demographic shirts *see graph on 1.10* What are the 3 components to constitute the financial consequence of risk faced by individuals or organizations? - - expected cost of losses or gains - expenditures on RM- cost of residual uncertainty What are hidden costs that can affect an organization's calculation of expected costs of loss? - -time lost by the injured employee -time lost by other employees who stop work -time lost by foremen, supervisors or other execs -time spent on the case by first-aid attendants and hospital department staff -damage to equipment -interference with production -continuation of injured employees wages -loss of profit on injured employees productivity and on idle machines -lost productivity because of employees excitement or weakened moral from the accident -overhead per injured employee that continues while the employee is not productive What are the costs of residual uncertainty? - residual uncertainty is the level of risk that remains after individuals or organizations implement their RM programs -cost of this uncertainty is hard to measure -for individ - cost includes lost salary or forgone invest opportunities - for organiz - includes effect that uncertainty has on consumer, investors, and suppliers How does risk management practices differ between individuals and organizations? - for individ - practice RM by buying insurance policies and contributing to savings plans for smaller org - RM is not usually a dedicated function, usually carried out by senior management for large org - the RM is conducted as part of a formalized RM program What is the difference in scope between traditional risk management and enterprise-wide risk management? -how does the focus of risk management differ between the 2? - scope of traditional risk - is on losses generated by pure, as opposed to speculative risks scope of enterprise-wide RM - encompasses all types of risks with the intent of maximizing the org value