RISK MANAGEMENT EXAM 1
QUESTIONS AND ANSWERS
A situation where an individual or business is exposed to the chance of experiencing
a loss. - answer- Risk
A situation where there is a chance of loss; there is uncertainty as to whether or not
a loss will occur. - answer- Pure Risk
A situation where there is a chance of loss or no loss, plus the possibility of gain. -
answer- Speculative Risk
Perceived amount of risk based on opinion rather that verifiable data - answer-
Subjective Risk
Uncertainty that can be measured by facts and data, as well as verified by others -
answer- Objective risk
Risk that affects only specific individuals or organizations rather than simultaneously
affecting a group. - answer- Diversifiable risk
Risk that affects multiple individuals or organizations simultaneously; losses are
correlated. - answer- Nondiversifiable risk
A reduction in value of an asset held by an individual or business - answer- Loss
Something that increases expected losses either by increasing frequency or severity
of loss (or both) - answer- Hazard
Tangible conditions or characteristics that increase the frequency or severity of
losses (e.g., ice on a road) - answer- Physical Hazard
The existence of insurance creates an incentive for individuals to intentionally cause
a loss in order to attempt to profit from insurance, increasing expected losses (e.g.,
insurance fraud) - answer- Moral hazard
The existence of insurance may alter the risk behavior of policyholders, especially
carelessness that leads to increased losses (e.g., skydiving because you have life
insurance) - answer- Morale hazard (attitudinal hazard)
The number of losses occurring in a given time period. Alternatively, the probability
of a loss in a given time period - answer- Frequency
The dollar amount of a given loss or the aggregate dollar amount of all losses for a
given period - answer- Severity
, A situation or activity that may lead to an adverse financial consequence - answer-
Exposure
The specific cause of a loss, e.g., fire, wind, hail, slip and fall - answer- Peril
All costs associated with the risks taken by an organization including all losses and
all expenses associated with managing loss exposures - answer- Total Cost of Risk
(TCOR)
the deliberate process of finding and cataloguing the loss exposures of an
organization. - answer- Risk Identification
The systematic process of controlling managing the uncertainty of loss exposures
that affect an organization's assets and impede goals - answer- Risk Management
One of two major categories of risk management techniques available, it attempts to
engage in activities that reduce uncertainty or the amount of loss experienced by an
organization, either by reducing the frequency of loss or the severity of loss -
answer- Risk Control
One of two major categories of risk management techniques available, it is the
method used to finance losses experienced by an organization; two extremes of it
are retention (fully funded by the organization) and risk transfer (paid by another
party such as an insurer) - answer- Risk Financing
Implementing a risk management program, including establishing and
communicating policy, assigning responsibility, hiring staff, developing risk
management information systems, etc. - answer- Risk Administration
Sometimes called systematic risk, it is uncertainty that is tied to the state of the
economy or business cycle. - answer- Economic Risk
Uncertainty in the applicability or interpretation of contracts, laws, liability, or
regulations. For example, a jury may decide that an insurer's policy is unclear and
require payment for unintended losses - answer- Legal Risk
Uncertainty associated with changes, interpretations, or reinterpretations of
governmental rules and regulations. It is often used to refer to businesses that are
operating in foreign countries with political instability. - answer- Political risk
One of the ERM risk quadrants, these risks are the subject of "traditional" risk
management, which often involved significant use of insurance as a risk
management technique. These risks are pure risks that stem internally and include
property, liability, and personnel (especially employee injury) - answer- Hazard risks
One of the ERM risk quadrants, these risks are pure risks that stem from people or
failures in business processes /systems. Examples include breakdown of computer
systems or inadequate process training - answer- Operational Risks
QUESTIONS AND ANSWERS
A situation where an individual or business is exposed to the chance of experiencing
a loss. - answer- Risk
A situation where there is a chance of loss; there is uncertainty as to whether or not
a loss will occur. - answer- Pure Risk
A situation where there is a chance of loss or no loss, plus the possibility of gain. -
answer- Speculative Risk
Perceived amount of risk based on opinion rather that verifiable data - answer-
Subjective Risk
Uncertainty that can be measured by facts and data, as well as verified by others -
answer- Objective risk
Risk that affects only specific individuals or organizations rather than simultaneously
affecting a group. - answer- Diversifiable risk
Risk that affects multiple individuals or organizations simultaneously; losses are
correlated. - answer- Nondiversifiable risk
A reduction in value of an asset held by an individual or business - answer- Loss
Something that increases expected losses either by increasing frequency or severity
of loss (or both) - answer- Hazard
Tangible conditions or characteristics that increase the frequency or severity of
losses (e.g., ice on a road) - answer- Physical Hazard
The existence of insurance creates an incentive for individuals to intentionally cause
a loss in order to attempt to profit from insurance, increasing expected losses (e.g.,
insurance fraud) - answer- Moral hazard
The existence of insurance may alter the risk behavior of policyholders, especially
carelessness that leads to increased losses (e.g., skydiving because you have life
insurance) - answer- Morale hazard (attitudinal hazard)
The number of losses occurring in a given time period. Alternatively, the probability
of a loss in a given time period - answer- Frequency
The dollar amount of a given loss or the aggregate dollar amount of all losses for a
given period - answer- Severity
, A situation or activity that may lead to an adverse financial consequence - answer-
Exposure
The specific cause of a loss, e.g., fire, wind, hail, slip and fall - answer- Peril
All costs associated with the risks taken by an organization including all losses and
all expenses associated with managing loss exposures - answer- Total Cost of Risk
(TCOR)
the deliberate process of finding and cataloguing the loss exposures of an
organization. - answer- Risk Identification
The systematic process of controlling managing the uncertainty of loss exposures
that affect an organization's assets and impede goals - answer- Risk Management
One of two major categories of risk management techniques available, it attempts to
engage in activities that reduce uncertainty or the amount of loss experienced by an
organization, either by reducing the frequency of loss or the severity of loss -
answer- Risk Control
One of two major categories of risk management techniques available, it is the
method used to finance losses experienced by an organization; two extremes of it
are retention (fully funded by the organization) and risk transfer (paid by another
party such as an insurer) - answer- Risk Financing
Implementing a risk management program, including establishing and
communicating policy, assigning responsibility, hiring staff, developing risk
management information systems, etc. - answer- Risk Administration
Sometimes called systematic risk, it is uncertainty that is tied to the state of the
economy or business cycle. - answer- Economic Risk
Uncertainty in the applicability or interpretation of contracts, laws, liability, or
regulations. For example, a jury may decide that an insurer's policy is unclear and
require payment for unintended losses - answer- Legal Risk
Uncertainty associated with changes, interpretations, or reinterpretations of
governmental rules and regulations. It is often used to refer to businesses that are
operating in foreign countries with political instability. - answer- Political risk
One of the ERM risk quadrants, these risks are the subject of "traditional" risk
management, which often involved significant use of insurance as a risk
management technique. These risks are pure risks that stem internally and include
property, liability, and personnel (especially employee injury) - answer- Hazard risks
One of the ERM risk quadrants, these risks are pure risks that stem from people or
failures in business processes /systems. Examples include breakdown of computer
systems or inadequate process training - answer- Operational Risks
