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.