Topic 1: Introduction to Risk Management Questions And Answers

Two Elements of Risk - ANS 1. Uncertainty of outcome 2. Possibility of negative outcome Uncertainty - ANS about what will actually happen (Type) and when the outcome will occur (timing) Possibility - ANS that an outcome or event may or may not occur Probability - ANS is measurable and has a value between zero and one Difference between Possibility and Probability - ANS Possibility verifies that risk is present Probability qunatifies risk Classification of Risk - ANS Pure and Speculative Subjective and Objective Static and Dynamic Diversifiable and Non diversifiable Pure (Traditional Risk Management) - ANS Loss or No loss Example: house burning down, death, sickness, flood Speculative - ANS Gain, loss, tie Example: gambling, buying stock, buying a home Static - ANS doesn't change over time, always present Example: weather, fire, illness Dynamic - ANS Arise out changing circumstance, new Example: pollution, hacking Diversifiable - ANS Impacts only some individuals, businesses, or groups Example: Fire Non Diversifiable - ANS Impact large segments of society at once Example: Natural disasters, inflation, and unemplyment Subjective - ANS Perceived amount of risk based on individuals OPINIONS *Not easily measurable or comparable Objective - ANS measured variation in uncertain outcomes based on FACTS and data Variation - ANS what we think will happen vs. what actually happens Hazards - ANS underlying condition that increases the frequency or severity of a loss 4 typesof Hazards - ANS 1. Moral 2. Morale 3. Physical 4. Legal Moral - ANS Act differently because of the existence of insurance Example: Insurance fraud, health care (use more health care) *Costly activity Morale - ANS Carelessness concerning loss (you know their is a risk with certain action yet you continued to do them) Ex: Texting and driving Physical - ANS Characteristic of property, persons, or operations that tends to increase the frequency or severity of loss Ex: A wood house, living at the shore, inadequate ventilation Legal - ANS condition of legal environment that increase the frequency and/or severity of loss Factors Affecting Risk - ANS Peril Frequency Severity hazards Peril - ANS The immediate cause of the loss Ex: flood, fire, theft, injury Frequency of the loss - ANS how often do losses occur Severity of loss - ANS Given that a loss has occurred, how bad is it in $$$ terms *conditional upon frequency being positive 3 cost of Risk - ANS 1. Expected cost of losses or gains 2. Expenditures on Risk Management 3. Cost of residual uncertainty Expected cost - ANS Financial losses- lawsuits and legal fees Goodwill- loss of reputation Time lost Cost to manage/risk management expenditures - ANS Safety programs Policy/security Training Buying insurance Residual Uncertainty - ANS Loss of goods or services because they are deemed "too risky" Ex: Temples Spring Fling sources of pure risk - ANS 1. Person 2. Property and Liability Personal Pure Risk - ANS 1. Human Capital- anything that gets in our way of generating income 2. Retirement/ Unemployment- loss or reduction in income Property and liability pure risk - ANS 1. ownership of financial or physical assets 2. theft/damages 3. wealth losses from liability exposure