Assignment 7 - risk management

fifth step of the risk management process

implementing selected risk management techniques

pure risk

A chance of loss or no loss, but no chance of gain.

Speculative risk

A chance of loss, no loss, or gain

risk control

A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.

Avoidance

A risk control technique that involves ceasing or never undertaking an activity so that the possibility of a future loss occurring from that activity is eliminated.

loss prevention

A risk control technique that reduces the frequency of a particular loss.

loss reduction

A risk control technique that reduces the severity of a particular loss.

retention

A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses.

The risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is Select one: A. Avoidance. B. Duplication. C. Loss Prevention. D. Loss reduction.

A. Avoidance.

Which one of the following best describes how effective risk management benefits society? Select one: A. Causing fewer disruptions in the economic and social environment B. Creating a positive effect on an insurer's underwriting results C. Providing more thoughtful consumers of insurance D. Increasing the types of charitable and governmental agencies available to the general public

A. Causing fewer disruptions in the economic and social environment

In implementing risk management techniques, the risk manager usually Select one: A. Depends on others to implement the techniques based on the risk manager's advice. B. Relies on consultants outside the organization to implement the techniques. C. Is responsible for communicating guidelines but is otherwise not involved in implementing techniques. D. Has complete authority to make decisions and implement the techniques.

A. Depends on others to implement the techniques based on the risk manager's advice.

Which one of the following will individuals gain as a benefit of applying sound risk management to automobile loss exposures? Select one: A. Greater peace of mind B. No future increases in insurance premiums C. A loss free future D. Economic growth

A. Greater peace of mind

Which one of the following lists the steps in the risk management process in the correct order? Select one: A. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program B. Implement techniques, monitor and revise the program, identify loss exposures, analyze loss exposures, examine techniques, and select techniques C. Identify loss exposures, analyze loss exposures, select techniques, examine techniques, implement techniques, monitor, and revise the program D. Select techniques, examine techniques, identify loss exposures, analyze loss exposures, implement techniques, monitor, and revise the program

A. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program

Sound risk management benefits society in each of the following ways, EXCEPT: Select one: A. Increasing opportunity costs B. Reducing the number of people dependent on society for support C. Stimulating economic growth D. Causing fewer disruptions in the economic and social environment

A. Increasing opportunity costs

Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their new home? Select one: A. Inspect the home for loss exposures B. Purchase a homeowners insurance policy C. Determine the value of the home and contents D. Hire a professional risk manager

A. Inspect the home for loss exposures

loss exposure

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

Chuck and Sally discovered they have flaking lead paint on the walls and trim inside their recently purchased house. They researched lead paint hazards and abatement techniques on the Internet and discovered the best action they can take is to remove loose paint chips and dust, replace the windows, and seal the walls with a paint designed for that purpose. Which one of the following risk management techniques does this activity involve? Select one: A. Loss control B. Noninsurance transfer C. Avoidance D. Retention

A. Loss control

A document listing potential loss exposures that a household or an organization may face is a Select one: A. Loss exposure survey or checklist. B. Loss exposure analysis. C. Flowchart. D. Method of monitoring loss exposures.

A. Loss exposure survey or checklist.

Analyzing the potential frequency and severity of a loss exposure enables the risk manager to Select one: A. Prioritize loss exposures. B. Avoid loss exposures. C. Transfer loss exposures. D. Retain loss exposures.

A. Prioritize loss exposures.

Which one of the following identifies the two broad categories of risk management techniques? Select one: A. Risk control and risk financing B. Loss prevention and loss reduction C. Separation and duplication D. Insurance and noninsurance

A. Risk control and risk financing

Malvern Imports has several retail stores in a three-state area. They receive and store imports in a large central warehouse. The risk manager is considering ways to lower the severity exposure due to a fire loss to the warehouse. Which one of the following would most effectively decrease the severity exposure of fire loss to the warehouse? Select one: A. Separation B. Loss prevention C. Avoidance D. Duplication

A. Separation

In managing loss exposures using the risk management process, the key to identifying loss exposures is Select one: A. Understanding how the household or organization operates. B. Understanding the loss frequency and loss severity. C. A financial analysis of customers and suppliers. D. An organizational process flowchart.

A. Understanding how the household or organization operates.

Non-Diversifiable Risk

Are highly correlated and include things like -inflation -unemployment -natural disasters -intrest rate increases -geopolitical events

Hazard risk

Arises from property liability or personal losses

Financial risk

Arises from the effect of market forces on financial assets or liabilities

First step of the risk management process

identifying loss exposure

Risk management activities under the enterprise-wide risk management approach occur at the Select one: A. Business unit level. B. Enterprise level. C. Departmental level. D. Regional level.

B. Enterprise level.

Gauging the severity of property losses is easier than gauging the severity of liability losses because property losses Select one: A. Tend to be insured. B. Have a calculable value. C. Have an infinite value. D. Tend to happen more frequently.

B. Have a calculable value.

Risk management departments of large organizations generally rely on a manual to inform others of how to identify new exposures, what risk management techniques are currently in place, how to report insurance claims, and other important information. This communication of risk management information is part of which one of the following steps in the risk management process? Select one: A. Examining the feasibility of techniques B. Implementing the selected risk management techniques C. Monitoring results D. Analyzing loss exposures

B. Implementing the selected risk management techniques

A business installs bars on windows and door deadbolts to prevent burglaries. This is an example of Select one: A. Separation. B. Loss prevention. C. Loss reduction. D. Avoidance.

B. Loss prevention.

Jane's son, Joe, is 15-years-old and he will obtain his driver's license this summer when he becomes 16. Joe has expressed an interest in driving Jane's car once he has his license. Jane owns a compact car and is concerned that Joe might be hurt if he is involved in an accident while driving her car. Jane has read reports indicating that people occupying sport utility vehicles suffer less severe injuries when involved in accidents. If Jane trades her compact car in for a sport utility vehicle, which one of the following risk management techniques will she be applying? Select one: A. Avoidance B. Loss reduction C. Noninsurance transfer D. Loss prevention

B. Loss reduction

Which one of the following is the goal of enterprise-wide risk management (ERM)? Select one: A. Coordinate loss reduction efforts B. Maximize the organization's value C. Decentralize control of business decisions D. Reduce risk management costs

B. Maximize the organization's value

Risk manager Maria Sanchez is evaluating her employer's current fleet of vehicles to ensure they are roadworthy and determine if any replacements are needed. Maria's activities are part of which one of the following steps in the risk management process? Select one: A. Analyzing loss exposures B. Monitoring results and revising the risk management program C. Implementing the selected risk management techniques D. Identifying loss exposures

B. Monitoring results and revising the risk management program

Monitoring a risk management program is an Select one: A. Every-three-year activity. B. Ongoing activity. C. Occasional activity. D. Once and done activity.

B. Ongoing activity.

Traditionally, the risk management professional's role has been associated with loss exposures related to Select one: A. Speculative risk. B. Pure risk. C. Operational risk. D. Business risk.

B. Pure risk.

John Young is a risk manager of a medium-size business with both auto and real property exposures. John is looking for ways to save money on insurance premiums. John should consider Select one: A. Retaining the property loss exposures. B. Retaining some or all of the auto physical damage exposures. C. Retaining the auto liability loss exposures. D. Canceling the insurance and implementing noninsurance transfer techniques.

B. Retaining some or all of the auto physical damage exposures.

Wanlett Enterprises has a risk manager who is charged with making sure the organization has the necessary property and liability insurance policies in place to respond to hazard risks that were identified over twenty years ago. Wanlett still creates and manufactures the same products it did decades ago. Which one of the following is true given this scenario? Select one: A. Wanlett is managing all its loss exposures that arise from speculative risk. B. Wanlett is mostly concerned with pure, as opposed to speculative risks. C. Wanlett shows it wants the risk management process to occur at the enterprise level. D. Wanlett's risk management efforts are intended to maximize the organization's value.

B. Wanlett is mostly concerned with pure, as opposed to speculative risks.

Wanlett Enterprises has a risk manager who is charged with making sure the organization has the necessary property and liability insurance policies in place to respond to hazard risks that were identified over twenty years ago. Wanlett still creates and manufactures the same products it did decades ago. Which one of the following is true given this scenario? Select one: A. Wanlett shows it wants the risk management process to occur at the enterprise level. B. Wanlett is mostly concerned with pure, as opposed to speculative risks. C. Wanlett's risk management efforts are intended to maximize the organization's value. D. Wanlett is managing all its loss exposures that arise from speculative risk.

B. Wanlett is mostly concerned with pure, as opposed to speculative risks.

Randy and Ida are concerned that a buried heating oil tank in their yard might be leaking, but they have decided that replacing that tank must wait until they have the funds in a year or two. Randy and Ida have discovered that pollution resulting from a leak would not be covered by their homeowners insurance policy. They fear the oil might seep into the water table and contaminate their neighbors' well water. Illness and damage that might result could be very expensive. Randy and Ida can purchase an endorsement that will provide coverage for this pollution exposure. The endorsement would cost $50 per year. Is this an effective risk management selection for Randy and Ida until they can replace the tank? Select one: A. No, they are spending a lot of money for little protection. B. Yes, they are exchanging a large exposure for a little premium. C. Yes, they should do this indefinitely and not replace the tank. D. No, each neighbor will have insurance to cover any damage to their wells.

B. Yes, they are exchanging a large exposure for a little premium.

Individuals and families benefit from effective risk management in which one of the following ways? Select one: A. Creating a positive effect on an insurer's underwriting results B. Stimulating economic growth because fewer losses mean that more funds are available for other uses C. Continuing activities following an accident or other loss, and thus reducing inconvenience. D. Increasing their personal cash flows by retaining rather than insuring their property exposures

C. Continuing activities following an accident or other loss, and thus reducing inconvenience.

Which one of the following is true regarding enterprise-wide risk management (ERM)? Select one: A. In practice, implementation of ERM occurs at the departmental or business unit level. B. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk. C. ERM is an approach to managing all of an organization's key risks and opportunities. D. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity.

C. ERM is an approach to managing all of an organization's key risks and opportunities.

Analyzing loss exposures requires Select one: A. A physical inspection of all locations, operations, and maintenance routines. B. Understanding how a household or organization operates. C. Estimating how large the losses may be and how often they may occur. D. Interviews and the analysis of a flowchart.

C. Estimating how large the losses may be and how often they may occur.

Which one of the following lists the steps in the risk management process in the correct order? Select one: A. Identify loss exposures, analyze loss exposures, select techniques, examine techniques, implement techniques, monitor, and revise the program B. Implement techniques, monitor and revise the program, identify loss exposures, analyze loss exposures, examine techniques, and select techniques C. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program D. Select techniques, examine techniques, identify loss exposures, analyze loss exposures, implement techniques, monitor, and revise the program

C. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program

In smaller organizations and in households, the person making risk management decisions is often the person Select one: A. Settling the claims. B. Least qualified. C. Implementing the program. D. Causing the losses

C. Implementing the program.

Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice to a client. Which one of the following would most likely be the best risk management technique for Jeff's use in this situation? Select one: A. Avoidance B. Duplication C. Insurance D. Retention

C. Insurance

Chuck and Sally discovered they have flaking lead paint on the walls and trim inside their recently purchased house. They researched lead paint hazards and abatement techniques on the Internet and discovered the best action they can take is to remove loose paint chips and dust, replace the windows, and seal the walls with a paint designed for that purpose. Which one of the following risk management techniques does this activity involve? Select one: A. Retention B. Noninsurance transfer C. Loss control D. Avoidance

C. Loss control

There have been several recent burglaries in Sally's neighborhood. Which one of the following best describes a risk management technique and a corresponding example of that technique that Sally should consider due to the recent increase in burglaries? Select one: A. Loss prevention, such as installing a safe in her home B. Separation, such as installing a new alarm system C. Loss prevention, such as keeping doors and windows locked D. Loss reduction, such as keeping doors and windows locked

C. Loss prevention, such as keeping doors and windows locked

Households and organizations should review their current insurance programs with their agent or broker each year. This is done as part of which one of the following steps in the risk management process? Select one: A. Identifying loss exposures B. Selecting the appropriate risk management techniques C. Monitoring results and revising the risk management program D. Analyzing loss exposures

C. Monitoring results and revising the risk management program

Sally went downhill skiing on vacation. On the back of her lift ticket was printed an agreement that the skier would not hold the ski resort responsible for any injury incurred. From the ski resort's perspective, this is an example of Select one: A. Loss reduction. B. Insurance. C. Noninsurance transfer. D. Retention.

C. Noninsurance transfer.

Loss histories can offer great insight into an organization's loss exposures. The problem with depending too heavily on this one source is that some past events might Select one: A. Have been insured. B. Still be unresolved. C. Not have been recorded. D. Not have been insured.

C. Not have been recorded.

A physical inspection can help to identify loss exposures that are not identified through other means because it Select one: A. Is based on direct information from others. B. Requires the use of a thorough checklist. C. Provides the opportunity to see things firsthand. D. Is required in any sound physical fitness program.

C. Provides the opportunity to see things firsthand.

Traditionally, the risk management professional's role has been associated with loss exposures related to Select one: A. Business risk. B. Operational risk. C. Pure risk. D. Speculative risk.

C. Pure risk.

Alan Peachtree owns a hobby shop, which he runs from a detached garage on his property. Alan has set aside funds to pay for possible property losses rather than purchasing insurance. Which one of the following risk management techniques is Alan using? Select one: A. Loss control B. Avoidance C. Retention D. Non-Insurance transfer

C. Retention

Outdoor Designs Company (ODC) makes cedar patio furniture. ODC's lumber supplier, L&L Wood Products, is the largest and most competitive supplier of lumber in the area. ODC's risk manager is concerned that a disruption in the supply of lumber from L&L due to a large fire loss would adversely affect its production. Which one of the following would best minimize the adverse effect to ODC of a large loss experienced by L&L? Select one: A. Loss prevention B. Avoidance C. Separation D. Duplication

C. Separation

Some businesses require key executives to fly on different flights. This is an example of which one of the following risk control techniques? Select one: A. Avoidance B. Loss prevention C. Separation D. Duplication

C. Separation

Risk management concepts in one form or another apply Select one: A. To all companies but not families. B. Only to international companies. C. To all companies and families. D. Only to large companies.

C. To all companies and families.

When implementing selected risk management techniques, a risk manager must Select one: A. Base decisions on financial criteria. B. Base decisions on informal guidelines. C. Analyze the benefits of the risk management program. D. Determine how to allocate the costs of the program.

D. Determine how to allocate the costs of the program.

Loss exposure surveys, or checklists, are methods used to Select one: A. Examine the feasibility of techniques. B. Analyze loss exposures. C. Monitor results. D. Identify loss exposures.

D. Identify loss exposures.

Sho Ching is risk manager for Market Sales Company. Market Sales owns a large fleet of autos used by the sales employees. The fleet is insured with $1,000 physical damage deductibles. Sho Ching is concerned about an increasing frequency of auto accidents in recent years. Which one of the following is the best risk management option for addressing the increased frequency of accidents from the fleet of autos? Select one: A. Increase the deductible to $2,000 B. Implement loss reduction programs C. Decrease the deductible to $500 D. Implement loss prevention programs

D. Implement loss prevention programs

Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance? Select one: A. Stimulating economic growth B. Reducing the number of persons dependent on society for support C. Increased use of exposure avoidance D. Improved access to affordable insurance

D. Improved access to affordable insurance

In the selection of appropriate risk management techniques, financial management decisions are often made with the objective of Select one: A. Decreasing expenses. B. Decreasing the worry factor. C. Increasing the cost of risk. D. Increasing operating efficiency.

D. Increasing operating efficiency.

Katie and Kevin have a small stream in their back yard. Last year was exceptionally rainy and they were concerned about flood exposures to their home. They recently had a contractor regrade the back yard, building a large berm, which provides a raised barrier to divert the flow of water away from the house. In this situation, Katie and Kevin are using which one of the following risk management techniques? Select one: A. Loss reduction B. Avoidance C. Separation D. Loss prevention

D. Loss prevention

A business installs a sprinkler system to reduce the amount of fire damage from potential fires. This is an example of Select one: A. Separation. B. Loss prevention. C. Avoidance. D. Loss reduction.

D. Loss reduction.

The use of a seatbelt while driving a car is an example of Select one: A. Loss prevention. B. Avoidance. C. Separation. D. Loss reduction.

D. Loss reduction.

For loss exposures with high frequency and low severity, the two best risk management alternatives are retention and Select one: A. Transfer. B. Insurance. C. Avoidance. D. Risk control.

D. Risk control.

Which one of the following is true regarding loss histories? Select one: A. Loss histories are not commonly used to identify loss exposures. B. Changing environments have little effect on the quality of loss histories. C. Changes in an organizations operations have little effect on the quality of loss histories. D. The quality of loss histories depends on whether they are organized and consistent.

D. The quality of loss histories depends on whether they are organized and consistent.

It is easier to gauge the potential severity of property losses than of liability losses because property loss exposures Select one: A. Have a calculable frequency. B. Are confined to the building and contents. C. Can be determined as an average according to the type of business. D. Typically have a finite value.

D. Typically have a finite value.

An insurer wants to identify all of the potential loss exposures at a customer's business. Which one of the following is the most straightforward method of identifying the business's loss exposures? a.Analyzing data sent to the insurer through smart devices and sensors b.Physically inspecting the operation c.Conducting a loss exposure survey of the operation d.Performing a loss history analysis

Feedback: b. The most straightforward method of identifying loss exposures is to physically inspect all locations, operations, maintenance routines, safety practices, work processes, and other activities in which a household or an organization is involved.

Risk quadrants are...

Hazard risk Operational risk Financial risk Strategic risk

Scenario Analysis

Identifies risk and predicts the potential consequences of those specific risks.

5 step risk manangment process (in a circle)

Identifying risk Analyze Risk Treat risk Monitor and review Scan environment

diversifiable risk

Is not highly correlated, such risk can be managed through diversification. -An investor can diversify their holdings by investing in many stocks instead of a few. -An insurance company can diversify the risks associated with fire by insuring many buildings in different locations.

SWOT

Strengths Weakness Opportunities Threats Used for a specific goal less useful for analyzing current process and procedures.

T OR F All risk management processes are designed to assess, control, and finance risk.

T

second step of the risk management process

analyzing loss exposure

Which one of the following is an advantage of risk management over merely buying insurance? a.Availability of higher insurance coverage limits b.Enjoying greater peace of mind c.Enhances speculative risk opportunities d.Satisfies state financial responsibility obligations

b.Enjoying greater peace of mind

Which one of the following describes what a risk manager for an organization usually does when he or she obtains a completed loss exposure survey? a.The risk manager usually trusts that the survey identifies all of the organization's loss exposures. b.The risk manager usually discusses the survey with managers and other employees to gain a better understanding of the organization's operations and risk exposures. c.The risk manager usually files the survey for future reference and depends more heavily on the organization's loss history analysis to identify its loss exposures. d.The risk manager usually disregards the completed survey and identifies the organization's loss exposures based on personal observations.

b.The risk manager usually discusses the survey with managers and other employees to gain a better understanding of the organization's operations and risk exposures.

When selecting a risk management technique, a.Families should choose to retain a loss exposure with high potential severity and low frequency. b.Families should insure their personal risk rather than apply risk management. c.Families should spend insurance dollars if they cannot absorb the cost of a loss as easily as the cost of insurance. d.Families should choose to insure a small loss exposure with high frequency.

c.Families should spend insurance dollars if they cannot absorb the cost of a loss as easily as the cost of insurance.

A manufacturer stores equipment and component parts (for the products it produces) in warehouses that are located in three different states. Which one of these risk control techniques is the manufacturer using? a.Retention b.Duplication c.Separation d.Avoidance

c.Separation

third step of the risk management process

examining the feasibility of risk management techniques

To help ensure the success of a business or household, a risk manager must identify and analyze any __________.

loss exposures.

sixth step of the risk management process

monitoring results and revising the risk management program

fourth step of the risk management process

selecting the appropriate risk management techniques

Facilitated workshops

A neutral party who has no stake in the outcome or participation responsibilities runs the workshop and propels the group to achieve their goal.

predictive modeling

A process in which historical data based on behaviors and events is blended with multiple variables and used to construct models of anticipated future outcomes.

HAZOP

A team of subject matter experts and stake holders identifies the risks associated with a given process and recommends a solution.

Exposures with the potential of low frequency but high severity should generally be Select one: A. Written with a large deductible to reduce premium costs. B. Retained because they are fairly predictable. C. Retained because this would encourage loss control. D. Insured because they are highly unpredictable.

D. Insured because they are highly unpredictable.

Six months after implementing their risk management program, Tony and Maria considered building a new house in a neighborhood that is next to a river. Maria's elderly mother lives in that neighborhood, and moving there would allow them to help her more readily should an emergency or another need arise. However, Tony and Maria are concerned because this new neighborhood has a history of flooding in the spring and late summer. Evaluate each of these risk management techniques, and explain how each technique could apply to Tony and Maria's potential flood loss exposure: -Avoidance -Loss prevention or loss reduction -Insurance -Retention

Feedback: These answers provide examples of how these techniques could apply, but other answers may be acceptable as well: Avoidance—Tony and Maria could decide not to build a house in that location. Instead, they might build in a neighborhood that is not subject to flooding but is still reasonably near Maria's mother's home. Loss prevention or reduction—Tony and Maria might consider building the house on a built-up lot or building it according to a plan with an elevated first floor and no basement to prevent or reduce flood damage. Insurance—Tony and Maria could buy federal flood insurance and accept the possibility that their property may flood, knowing that the insurance would pay most of their loss. Retention—Choosing to retain the entire flood risk would be a poor risk management decision, as Tony and Maria could lose the entire value of their home and personal property. However, Tony and Maria could buy flood insurance subject to a larger deductible (compared with their deductible for other perils) to enable them to save money on the cost of insurance. To improve their risk management program, Tony and Maria could create a special savings account and have money deducted from their paychecks until they have sufficient savings to fund the uninsured portion of their flood loss exposure.

Delphi Technique

Use the opinions of a select group of experts which typically don't meet but respond to a survey or inquiry instead. Anonymous responses are shared.