CHAPTER 1
...
What are the two elements of risk?
-Uncertainty of outcome - Time of the outcome and type of outcome are uncertain
-possibility of
... [Show More] a negative outcome - at least 1 outcome is negative
What is the difference between probability and possibility?
Possibility - an outcome or event may or may not occur. It does not quantify the risk, only verifies the risk is there
Probability - the likelihood than an outcome will occur, quantifies the risk. It is measurable and has value between zero and one
How does probability help an organizations risk management exposure?
-by understanding the probability of an exposure, an organization can focus its risk management efforts to avoid it.
-helps organization decided what projects and activities to undertake
How does classifying a risk help an organizations risk management process?
-can help with assessing risk cause many risks in the same classification have similar attributes
-helps manage risks
-helps administrative function of RM by helping to ensure the risks in same class are less likely to be overlooked
-Compare pure risk with speculative risk
-why is it important to distinguish between the 2 what making risk management proceduces
pure risk - change of loss or no loss but no gain
speculative risk - involves a chance of gain
type of SR includes: price risk and credit risk (financial investments involve a distinct set of speculative risks)
its important when making RM decisions cause the 2 types must often be managed different. most insurance policies are not designed to handle speculative risks
insurable risks are generally classified as pure, objective, and diversafiable
- How does subjective and objective risk differ?
subjective risk - perceived amount of risk based on individuals or organizations opinion
objective risk - measurable variation in uncertain outcomes based on facts and data
where they differ (see page 1.8):
1. Familiarity and control
2. consequences over likelihood
3. Risk Awareness
-Contracts diversifiable and nondiversifiable risk?
diversifiable risk - is not highly correlated and can be managed through diversification
non-d risk - is correlated, losses and gains occur together (type: systemic risk - potential for a major disruption in the function of an entire market or financial system
- Describe the quadrants of risk
way of categorizing risk is putting them in quadrants:
-hazard risk - property, liability, and personnel loss, generally the subject of insurance
-operational risks - fall outside hazard cat, arise from people or failure in process, system, or control, including info tech
-financial risks - effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk and price risk
-strategic risks - arise from trends in the economy and society, including changes in econ, political and competitive environments, as well as from demographic shirts
see graph on 1.10
What are the 3 components to constitute the financial consequence of risk faced by individuals or organizations?
- expected cost of losses or gains
- expenditures on RM
- cost of residual uncertainty
What are hidden costs that can affect an organization's calculation of expected costs of loss?
-time lost by the injured employee
-time lost by other employees who stop work
-time lost by foremen, supervisors or other execs
-time spent on the case by first-aid attendants and hospital department staff
-damage to equipment
-interference with production
-continuation of injured employees wages
-loss of profit on injured employees productivity and on idle machines
-lost productivity because of employees excitement or weakened moral from the accident
-overhead per injured employee that continues while the employee is not productive
What are the costs of residual uncertainty?
residual uncertainty is the level of risk that remains after individuals or organizations implement their RM programs
-cost of this uncertainty is hard to measure
-for individ - cost includes lost salary or forgone invest opportunities
- for organiz - includes effect that uncertainty has on consumer, investors, and suppliers
How does risk management practices differ between individuals and organizations?
for individ - practice RM by buying insurance policies and contributing to savings plans
for smaller org - RM is not usually a dedicated function, usually carried out by senior management
for large org - the RM is conducted as part of a formalized RM program
What is the difference in scope between traditional risk management and enterprise-wide risk management?
-how does the focus of risk management differ between the 2?
scope of traditional risk - is on losses generated by pure, as opposed to speculative risks
scope of enterprise-wide RM - encompasses all types of risks with the intent of maximizing the org value
TRM - focuses on managing safety, purchasing insurance, controlling financial recovery from losses generated by hazard
EWRM - focuses on managing all of the org's key risks and opportunities with the intent of maximizing the org's value
Define:
tangible property -
Intangible property -
Real Property (realty) -
Personal property -
- prop that has a physical form
- prop that has no physical form, like patent or copyright
- is tangible prop consisting of land, all structures permanently attached to the land and whatever is growing on the land
-personal prop is all tangible prop other than real prop
Define:
property loss exposure -
Liability loss exposure -
personnel loss exposure -
net income loss exposure -
- loss results from damage to prop in which the person has financial interest
- loss results from claim alleging that the person or org is legally responsible for BI/PD
-loss can result from key person's death, disability, retirement, or resignation that deprives org of their skill set
- loss results from a reduction in net income, often the result of property, liability, or personnel loss
List three elements necessary to describe a loss exposure
1. an asset exposed to a loss
2. cause of loss (also called a peril)
3. financial consequences of that loss
What types of assets can be loss exposures for:
-organization -
-individual -
org - property, investments, money that is owed to the org, intangible assets and HR
ind - property, investments, money that is owed to the ind, cash, professional qualifications, a unique skill set, and valuable experience
What are the 4 classifications of hazards?
1. moral hazard - loss resulting from a person acting dishonestly
2. morale hazard - loss resulting from careless or indifferent behavior
3. physical hazard - loss resulting from property persons or organization
4. legal hazard - loss resulting from legal environment (i.e. courts in some district award higher settlements)
What are three factors that affect the financial consequence of a loss?
1. type of loss exposure
2. the cause of loss
3. the frequency and severity
What are the costs used to compute the overall financial consequence of risk for a given asset or activity?
-cost of losses no reimbursed by the insurance or other external sources
-cost of insurance premium
-cost of external sources of funds, such as interest payments to lenders or transaction costs associated with the non insurance indemnity
-cost of measures to prevent or deuce the size of potential losses
-cost of implementing and administering risk management
What are ways the RM benefits each of the following:
-individuals
-organizations
-society
-thru preserving financial resource by reducing and ind expected losses and thru reducing anxiety
-by preserving financial resources, providing a sense of confidence that capital is protected against future costs, reducing the deterrence effect of risk
- by lowering expected losses and improving allocation of productive resources
Describe four pre-loss operational goals supported by an effective and efficient RM program?
1. economy of operations - organization should not incur substantial costs in exchange for slight benefits
2. tolerable uncertainty - keeping manager uncertainty about losses at a tolerable level
3. legality - satisfying legal obligations
4. social responsibility - acting ethically and fulfilling obligations to the community and society as a whole
List six possible post-loss goals for an organization after a significant foreseeable loss has occured
- survival
-continuity of operations
-profitability
-earnings stability,
-social responsibility,
-growth
What are the steps an organization might take to forestall an intolerable shut-down and ensure continuous operations after a loss?
1. identify activities whose interruptions cannot be tolerated
2. identify the types of events that could interrupt such activities
3. determine the standby resources that nust be immediately available to counter the effect of those losses
4. ensure the availability of the standby resources at even the most unlikely and difficult times
How does the following RM program goals conflict with pre-losss goal of economy of operations?
-Tolerable uncertainty
-legality
-social responsibility
-because the cost of RM efforts necessary to reduce uncert. to a tolerable level may be excessive
-because some required safety standards could require substantial expense to implement
-because obligations such as a charitable contribution may be expensive
What are the six steps in the RM process?
1. identify loss exposure
2. analyze loss exp
3. examine feasibility of rm techniques
4. selecting the appropriate rm tech
5. implementing selected rm tech
6. monitoring results and revising the rm program
What are the four dimensions used to analyze a loss exposure?
-loss frequency
-loss severity
-total dollar loss
-timing
Describe how an organization uses risk control and risk financial techniques to manage loss exposures
risk control - reduces severity and frequency
rick financing - generates funds to finance losses that risk control tech cannot entirely prevent or reduce
What are the forecasts an organization might use to analyze costs of a RM technique
-a forecast of the dimensions of expected losses
- a forecast, for each feasibility combination of rm tech, of the effect on the frequency, severity, and time of these expected losses
- a forecast of the after-tax costs involved in applying various rm tech
What are the 4 steps required to monitor and revise a RM program?
1. establishing standard of acceptable performance
2. comparing actual results with these standards
3. correcting substandard performance or revising standards that prove to be unrealistic
4. evaluating standard that have been substantially exceed
CHAPTER 2
CHAPTER 2
What types of internal and external documents an organization may use to analyze loss exposures
internal docs- financial statements, accounting records, contracts, insurance policies, policy and procedure manuals, flowcharts and org charts, and loss histories
what are the advantages and disadvantages of using questionnaires in assessing loss exposures?
adv - that they capture more descriptive info than checklists
disadv- that they typically require considerable expense, time, and effort to complete and may still not identify all loss exposures
Describe how an organization uses the following documents to identify loss exposures:
1. financial statements
2. contracts
3. insurance policies
4. organization policies and records
5. flowcharts and organization charts
6. loss histories
1. balance sheet, income statement, statement of cash flows, and supporting statements help identify major categories of current and past loss exposures and can be used to identify future plans that could lead to new loss exposures. ex - asset entries on a balance sheet indicate prop values that could be reduced by loss.
2. contracts help identify prop and liab loss exp assumed or transferred by contract and help determine who has assumed responsibility
3. insurance policeis can reveal many of the org's insurable loss exp
Describe how an organization uses the following documents to identify loss exposures:
4. organization policies and records
5. flowcharts and organization charts
6. loss histories
4. Corporate by-laws, board minutes, employee manuals, procedure manuals, mission statements, and rm policies may identify existing loss exposures and indicate impending changes that may create new loss exposures
5. Flowcharts show the nature and use of resources involved in an org's operations and the sequence of and relationships between the operations. May also reveal bottlenecks where losses could have substantial effects on business ops. An org chart helps identify key personnel for whom the org may have a personnel loss exp
6. an org's loss history, or that of a comparable org, can indicate current or future loss exp
describe how a compliance review may facilitate the identification of loss exposures
-determines an org's compliance with local, state, and federal statutes and regs and can help organization minimize or avoid liability loss exp associated with non compliance
What relevant data does an org use to asses the following types of loss exposures:
1. prop loss
2. liability loss
3. personnel losses
4. net income losses
-data should include prop's repair or replacement cost at the time it is to be restored
-Data should relate to past claims that are substantially the same as the potential future claims being assessed
-data must relate to personnel with similar experience and expertise as those being considered as future loss exposures
-data should involve similar reductions in revenue and similar additional expenses to those of the loss exposures under consideration [Show Less]