Risk Management: Chapter 1 & 2 Questions And Answers

Risk - ANS Uncertainty concerning the occurrence of a loss In the insurance industry, RISK is? - ANS used to identify the property or life that is being considered for insurance Loss Exposure - ANS Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs Subjective probability is the - ANS individual's personal estimate of the chance of loss Chance of loss - ANS The probability that an event will occur Peril - ANS the cause of the loss. Hazard - ANS condition that increases the chance of the loss Physical Hazard - ANS a physical condition that increases the frequency or severity of loss ex. windstorm, hurricane Moral Hazard - ANS dishonesty or character defects in an individual that increase the frequency or severity of loss Attitudinal Hazard (Morale Hazard) - ANS is carelessness or indifference to a loss, which increases the frequency or severity of a loss Speculative Risk - ANS a situation in which either profit or loss is possible (gambling) Pure Risk - ANS a situation in which there are only the possibilities of loss or no loss (earthquake) Diversifiable Risk - ANS affects only individuals or small groups (car theft). It can be reduced or eliminated by diversification. Nondiversifiable Risk - ANS affects the entire economy or large numbers of persons or groups within the economy (hurricane). It is also called fundamental risk. Enterprise Risk - ANS encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk Strategic Risk - ANS refers to uncertainty regarding the firm's financial goals and objectives. Operation Risk - ANS results from the firm's business operations. Financial Risk - ANS refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. Enterprise Risk Management combines into a single unified treatment program all major risks faced by the firm: - ANS Pure risk Speculative risk Strategic risk Operational risk Financial risk Diversifying the risk: - ANS take steps to address more than one risk Systemic Risk - ANS the risk of collapse of an entire system or entire market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system important in regards to large financial institutions that are too large to fail without doing major financial harm to the US economy Related to macro issues of the market and financial institutions and funds transfer system, credit card processors, etc. This can affect the economy Personal Risk - ANS are risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expenses or depletion of financial assets, due to: Premature death Inadequate retirement income Poor health Unemployment Property Risks - ANS involve the possibility of losses associated with the destruction or theft of property Direct Loss - ANS a financial loss that results from the physical damage, destruction, or theft of the property, such as fire damage to a home ex. happens to something that you own: cars, homes, etc. Indirect or Consequential Loss - ANS a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss (e.g., the additional living expenses after a fire). expenses of temporary items to replace direct loss Liability Risks - ANS involve the possibility of being held legally liable for bodily injury or property damage to someone else There is no maximum upper limit with respect to the amount of the loss A lien can be placed on your income and financial assets Legal defense costs can be enormous Major Commercial Risks: Firms face a variety of pure risks that can have serious financial consequences if a loss occurs: - ANS Property Risks Liability Risks Loss of Business Income Cyber-security and identity theft other risks faced by business firms include: - ANS Human resources exposures, such as job-related injuries Foreign loss exposures, such as acts of terrorism Intangible property exposures, such as damage to the market reputation and public image of the company Government exposures, such as violation of safety standards Risk Control - ANS refers to techniques that reduce the frequency or severity of losses: -Avoidance -Loss prevention refers to activities to reduce the frequency of losses Loss Reduction - ANS refers to activities to reduce the severity of losses: