FIN334 Exam 1
Explain the historical definition of risk
Historically risk has been defined as the uncertainty regarding loss or the chance of loss
Non Insurance transfers
shifting risk to another party via contracts (ex. Lease or service agreement)
Separation
spreading out assets or activities to minimize impact in any one location.
Legal hazards
stem from the possibility of legal action (ex. Court notice about a property)
Financial risk
such as credit risk, market risk, liquidity risk and interest rate risk
Loss prevention
taking measures to prevent the occurrence of a loss (ex. installing fire alarms)
Physical hazards
tangible conditions that increase the likelihood of a loss (ex. Icy roads)
Diversification
spreading investments across different areas to reduce financial risk
Reputational risks
the impact on a company's reputation due to various factors.
Insurance
transferring risk to an insurance company in exchange for payment of a premium
Pure risk
Pure risk involves situations that can only result in loss or no change (like natural disasters).
Speculative risk
Speculative risk involves a chance of loss, no change, or gain (like investing in the stock market).
Direct loss
A direct loss is a result of direct physical damage to property of persons, such as the costs to repair a car after an accident
Hazard risk
A hazard is a condition that increases the chance of a peril occurring (like faulty electrical wiring)
Peril risk
A peril is the cause of a loss (like fire)
Indirect/Consequential Loss
An indirect or consequential loss is a result of the direct loss, such as the loss of income while a damaged business premises is being repaired.
Subjective probability
Based on an individual's personal estimate of the likelihood of an event
Objective probability
Derived from factual data like historical records
Explain the meaning of enterprise risk
Enterprise risk is a broad concept that includes all the risks a business faces.
What is financial risk?
Financial risk involves the possibility of losing financial resources.
Attitudinal hazards/Morale hazards
Involve carelessness (ex. Financial recklessness)
What is enterprise risk management?
It's a comprehensive approach to managing all of a businesses risk in a coordinated way.
Avoidance
Not engaging in activities that carry risk
Identify the major risks faced by business firms.
Operational risk Financial risk Strategic risk Compliance risk Reputational risks
*Steps in risk management:
Step 1 Identify loss exposures Step 2 Measure/analyze the loss exposures Step 3 elect the appropriate combination techniques of Risk Control & Risk Financing Step 4 Implement and monitor the risk management program
Personal risk management
Step 1: Identify loss exposure Step 2: Measure/analyze the loss exposure Step 3: Select techniques for treating the loss exposure Step 4: Implement and review the risk management periodically
Describe the major social and economic burdens of risk on society
Social and economic burdens of risk can include increased social welfare costs, reduced productivity, increased prices for goods and services due to higher insurance premiums, and the psychological impact on individuals and communities.
What is systematic risk?
Systematic risk affects a whole system (like the financial sector) rather than just individual parts.
Longevity risk
The financial risk of outliving one's savings and investments
Subjective risk
The individual perception of risk, which can be influenced by personal judgment and experiences.
Objective risk
The measurable variation in uncertain outcomes based on facts and data.
Property loss
The risk of damage or loss to personal property that can impact financial stability
Unemployment
The risk of losing one's job and the subsequent income.
Illness oro disability
The risk that a health issue may impede the ability to earn income
Define chance of loss
This is the probability or likelihood that a loss will occur
Identify the major types of personal risks that are associated with economic insecurity.
Unemployment Illness or disability Longevity risk Property loss
Non-diversifiable risks
affect the entire market or large groups and cannot be easily reduced through diversification (like inflation)
What is loss exposure?
any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
Moral hazards
arise from an individual's character (ex. fraud)
Diversifiable risk
can be minimized through diversification (like investment risk)
Duplication
creating copies of critical documents or data
Retention
deliberately retaining a certain amount of risk, self-insuring or accepting a deductible
Strategic risks
including competition, market changes, and management decisions.
Operational risk
including production, supply chain, and employee-related risk
Enterprise risk management
looks at a broader scope of risks including financial, strategic and operational.
Loss reduction
mitigating the severity of losses that do occur (ex. having sprinkler systems to minimize fire damage)
Traditional risk management
often focuses on insurable risks
Cost of insurance
provides social/economic benefits to society
Compliance risks
relating to legal and regulatory obligations.