7 - Risk Management

Pure risk

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

Speculative risk

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

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

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.

Estimating how large the losses may be and how often they may occur is required under which one of the steps of the risk management process? A. Identifying loss exposures B. Monitoring results C. Examining the feasibility of risk management techniques D. Analyzing loss exposures

Analyzing loss exposures

Loss exposure

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

Martha works in the city and drives to work each day. She is concerned about her auto exposures due to driving in the city. If Martha sells her vehicle and begins using public transportation, which one of the following risk management techniques will she be applying to her situation? A. Retention B. Avoidance C. Loss control D. Noninsurance transfer

Avoidance

Waking up on a cold February morning, Amy discovers the roads are icy and snow covered. Concerned about driving to work and possibly having an accident, she decides to take the day off. Amy's decision is an example of which one of the following risk management techniques? A. Avoidance B. Loss reduction C. Loss prevention D. Separation

Avoidance

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

Causing fewer disruptions in the economic and social environment

Which one of the following best describes the monitoring and revising step in the risk management process be simply described? A. Create a new workflow and identify new bottlenecks that have occurred. B. Check to make sure the decisions made are still valid and make changes as needed. C. Identify noninsurance transfers through hold harmless agreements. D. Make sure insurance is not being used as a substitute for loss control.

Check to make sure the decisions made are still valid and make changes as needed

Which one of the following statements describes the monitoring and revising step in the risk management process? A. Make sure insurance is not being used as a substitute for loss control. B. Create a new workflow and identify new bottlenecks that have occurred. C. Identify noninsurance transfers through hold-harmless agreements. D. Check to make sure the decisions made are still valid, and make changes as needed.

Check to make sure the decisions made are still valid, and make changes as needed

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

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

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

Determine how to allocate the costs of the program

Barton Industries keeps copies of key documents stored at a second location. The risk control technique Barton Industries is using is: A. Avoidance. B. Duplication. C. Loss prevention. D. Separation.

Duplication

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

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

Which one of the following best describes how effective risk management benefits insurers? A. Encourages insurers to create innovative products and offer competitive prices B. Causing fewer disruption in the social environment C. Increased ability to accurately predict future losses D. Stimulating economic growth

Encourages insurers to create innovative products and offer competitive prices

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

Enterprise level

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

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

As part of the risk management process, determining how to allocate the costs of the risk management program is important. All of the following are risk management costs that should be allocated, EXCEPT: A. Costs of loss control B. Losses retained C. Insurance premiums D. General overhead expenses

General overhead expenses

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

Greater peace of mind

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

Have a calculable value

Exposures with the potential of low frequency but high severity should generally be insured because they are: A. Less expensive. B. More expensive. C. Highly predictable. D. Highly unpredictable.

Highly unpredictable

In order to monitor and modify the risk management program, the risk manager must periodically: A. Purchase insurance. B. Rewrite the risk management mission statement. C. Identify and analyze new and existing loss exposures. D. Change insurers.

Identify and analyze new and existing loss exposures

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

Identify loss exposures

The first step in the risk management process is to: A. Analyze loss exposures. B. Implement the selected technique. C. Select the appropriate technique. D. Identify loss exposures.

Identify loss exposures

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

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

Financial statement analysis, loss history analysis, and flowcharts are used in: A. Implementing risk management techniques. B. Identifying loss exposures. C. Selecting risk management techniques. D. Analyzing loss exposures.

Identifying loss exposures

Larger organizations often have a written risk management statement outlining procedures and authority for: A. Implementing risk management techniques. B. Eliminating risk management techniques. C. Analyzing risk management techniques. D. Identifying risk management techniques.

Implementing risk management techniques

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

Implementing the program

Helen, the risk manager of a supermarket, has decided that the store needs a sprinkler system. She needs to check on the local water supply and building permits and decide what is necessary to comply with local ordinances as well as decide how much the supermarket can afford to spend on the system. Helen is making these decisions as part of: A. Implementing the selected risk management technique. B. Selecting the appropriate risk management technique. C. Analyzing loss exposures. D. Examining the feasibility of the risk management technique.

Implementing the selected risk management technique

In preparation for installing a new alarm system at a business location, Risk Manager Tony Marcelli has consulted with his insurance agent to make sure that appropriate property and liability coverages are in place during installation. Also, Tony wants to be sure the insurer provides the proper insurance credit for the new alarm system. Tony's actions described above are part of which one of the following steps of the risk management process? A. Selecting the appropriate risk management technique. B. Monitoring results of the risk management technique. C. Examining the feasibility of the risk management technique. D. Implementing the selected risk management technique.

Implementing the selected risk management technique

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? A. Monitoring results B. Examining the feasibility of techniques C. Analyzing loss exposures D. Implementing the selected risk management techniques

Implementing the selected risk management techniques

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? A. Increased use of exposure avoidance B. Stimulating economic growth C. Reducing the number of persons dependent on society for support D. Improved access to affordable insurance

Improved access to affordable insurance

Businesses, individuals, and families that practice sound risk management can benefit society in all of the following ways, EXCEPT: A. Stimulating economic growth B. Increasing interest in leisure activities C. Controlling medical expenses through reduced injuries D. Reducing the overall number of losses

Increasing interest in leisure activities

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

Increasing operating efficiency.

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

Increasing opportunity costs

When selecting the appropriate risk management techniques, financial management decisions are typically made with the objective of: A. Increasing the cost of risk. B. Decreasing the worry factor. C. Decreasing expenses. D. Increasing profits.

Increasing profits

Properly estimating loss severity is essential in treating a loss exposure because the potential severity is a major consideration in determining whether to: A. Insure or retain a particular loss exposure. B. Use loss avoidance or loss prevention. C. Use risk control or risk financing. D. Physically inspect or rely on a loss exposure survey.

Insure or retain a particular loss exposure

The last step in the risk management process, monitoring results and revising the risk management program: A. Is a return to the first step and begins the risk management process once again. B. Is complete once expected results are achieved. C. Is not a necessary step for households but is an important step for organizations since their needs often change over time. D. Does not include complex decisions as do the previous steps of the risk management process.

Is a return to the first step and begins the risk management process once again

Which one of the following identifies a benefit that a business can receive by applying sound risk management? A. It will not have to worry about losses. B. It will be able to attract and retain talented employees and managers. C. It will have a better opportunity to achieve business goals. D. It will meet state and federal safety regulations.

It will have a better opportunity to achieve business goals

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

Loss exposure survey or checklist

A risk manager in an industrial plant is trying to determine where she needs to spend most of her time in reducing the number of work-related accidents. Which one of the following should the risk manager measure to determine where she should expend her efforts? A. Loss severity B. Loss frequency C. Flow chart bottlenecks D. Number of workers in each area

Loss frequency

Grocers' Warehouse is a newly created business that will open next month. It will include a retail operation as well as 500,000 square feet of warehouse space with loading docks. Which one of the following methods of identifying loss exposures would be least applicable in this situation? A. Loss histories B. Loss exposure survey C. Interviews with management D. Physical inspection

Loss histories

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

Loss prevention

Dudley drives to work in the city each day and until recently, parked on a street near his office. Dudley began parking in a lot that has an attendant to reduce the chance of his vehicle being damaged while it is parked. Which one of the following risk management techniques is Dudley applying? A. Avoidance B. Noninsurance transfer C. Loss prevention D. Retention

Loss prevention

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

Loss reduction

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

Loss reduction

The monetary amount of damage that results from a loss is known as: A. The retention. B. Loss frequency. C. The deductible. D. Loss severity.

Loss severity

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

Maximize the organization's value

Loss exposure surveys or checklists are comprehensive and apply to almost any organization. The survey's major weakness is that they: A. Are expensive. B. Have to be custom designed for each business. C. May omit an important exposure. D. Take too long to complete.

May omit an important exposure

The last step in the risk management process is to: A. Identify loss exposures. B. Select the appropriate technique. C. Monitor results. D. Implement the selected technique.

Monitor results

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? A. Analyzing loss exposures B. Identifying loss exposures C. Selecting the appropriate risk management techniques D. Monitoring results and revising the risk management program

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: A. Noninsurance transfer. B. Loss reduction. C. Retention. D. Insurance.

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: A. Still be unresolved. B. Not have been recorded. C. Have been insured. D. Not have been insured.

Not have been recorded

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

Ongoing activity

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

Prioritize loss exposures

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

Provides the opportunity to see things firsthand

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

Pure risk

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

Risk control

The technique that is used to decrease the frequency and/or severity of losses is: A. Retention. B. Transfer. C. Risk control. D. Risk financing.

Risk control

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

Risk control and risk financing

Financial management decisions are made during which one of the following steps in the risk management process? A. Examining the feasibility of risk management techniques B. Implementing the selected risk management techniques C. Selecting the appropriate risk management techniques D. Analyzing loss exposures

Selecting the appropriate risk management techniques

Which one of the following is true regarding loss exposure surveys? A. Risk managers can depend solely on a comprehensive survey to identify loss exposures. B. Surveys usually group questions on similar exposures together. C. Households and organizations are likely to face all of the loss exposures detailed in surveys. D. Loss exposures for unique operations are usually identified on surveys.

Surveys usually group questions on similar exposures together

An accurate measure of loss frequency is important because: A. The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur. B. Loss frequency is a major consideration in determining whether a physical inspection is necessary. C. If loss frequency has been increasing, loss reduction methods will likely need to be implemented. D. Loss frequency is a major consideration in determining whether a flowchart is required.

The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur

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

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

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

To all companies and families

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

Typically have a finite value

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

Understanding how the household or organization operates

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? A. Wanlett's risk management efforts are intended to maximize the organization's value. B. Wanlett shows it wants the risk management process to occur at the enterprise level. C. Wanlett is managing all its loss exposures that arise from speculative risk. D. Wanlett is mostly concerned with pure, as opposed to speculative risks.

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

Amy has decided to apply a retention risk management technique to reduce her automobile insurance premium. She is deleting the physical damage coverage (collision and other-than-collision) on her car. Her car is currently worth $3,000. She will be able to save $250 every six months. Based on informal guidelines for selecting risk management techniques, is this a good decision? A. Yes, if Amy can afford to lose $3,000. B. No, because the plan does not include loss control. C. No, this type of coverage is required in most states. D. Yes, Amy will save $500 per year.

Yes, if Amy can afford to lose $3,000