Exam One Study Guide: Risk and Risk Management

Vocabulary flashcards covering key risk, hazard, and risk management concepts from the lecture notes.

Risk

Uncertainty about outcomes, with the possibility of negative outcomes.

Pure risk

Two possible outcomes: loss or no loss.

Speculative risk

Three outcomes: loss, no loss, or gain.

Static risk

Risks that don’t change significantly over time (e.g., theft, flood, fire, wind, tornado).

Dynamic risk

New and emerging risks (e.g., cyber attack, terrorism, COVID-19).

Diversifiable risk

Risk events that are not highly correlated and can be reduced through diversification.

Non-diversifiable risk

Risk events that are highly correlated (widespread) and affect many.

Subjective risk

An individual’s view of uncertainty or risk.

Objective risk

Actual losses measurable via data and statistical analysis.

Frequency

Number of times a specific loss occurs in a period; expressed as a count or probability, not negative.

Severity

Financial impact of a loss if it occurs; the dollar amount (positive value).

Peril

The immediate cause of a loss (a random event, e.g., slipping).

Hazard

A condition that increases the likelihood or severity of a loss.

Physical hazard

A physical condition of property that increases risk.

Construction hazard

Hazard related to building materials, design, and quality.

Location hazard

Hazard due to the geographic location of the property.

Usage hazard

Hazard related to how a property is used (e.g., chemical processing).

Legal hazard

Hazard in the legal environment that increases loss frequency or severity.

Punitive damages

Damages awarded to punish negligence beyond compensatory damages.

Moral hazard

Probability of loss increases because the person is insured or careless actions could be encouraged by protection.

Peltzman effect

Safety features may lead to riskier behavior due to perceived safety.

Morale hazard

Lack of concern about potential losses due to carelessness, not changes in behavior from conditions.

Direct losses

Actual financial losses incurred (property damage, medical costs, etc.).

Indirect losses

Secondary ripple costs (loss of customers, reduced productivity, etc.).

Expenditures on risk management

Upfront costs to reduce or handle risk (premiums, safety programs, equipment, fire suppression).

Insurance premiums

Payments made to insurers for coverage.

Safety programs

Programs designed to reduce risk through training and procedures.

Equipment/technology for security

Tools and tech used to reduce risk (security systems, sensors, etc.).

Fire suppression

Measures to control and extinguish fires.

Risk management process

Systematic approach to assess, control, and finance risk.

Identify loss exposure

Identify all possible things that may go wrong; determine who/what is at risk and why.

Analyze loss exposure

Measure frequency and severity; forecast using past data or big data; some risks are hard to predict.

Risk management options

Possible strategies to manage risk (control and financing options).

Risk control options

Options to reduce frequency or severity (training, safety programs).

Risk financing options

Ways to fund losses (insurance, budgeting).

Decision rules

Choice criteria influenced by attitude toward risk (risk lover, risk neutral, risk averse).

Implement chosen options

Put selected risk management measures into action.

Periodically re-evaluate strategies

Regularly review risk exposure and the effectiveness/cost-benefit of strategies.

Property risk exposures

Property at risk of loss; includes real, personal, tangible and intangible property; includes ownership and user interests.

Causes of loss

The events that cause losses (theft, fire, tornado, snow).

Ownership interest

Present or future ownership rights in property.

User interest

Interest related to lease or user rights in property.

Free on board (FOB)

Point at which financial responsibility shifts from seller to buyer.

Bailee

Party who receives property from others for a specific purpose.

Bailor

Owner of the property.

Liability risk exposures

Risk of being legally responsible for the financial loss of others; elements include assets exposed and cause of loss.

Negligence

Failure to exercise reasonable care, resulting in damage or loss.

Social host liability

Laws holding hosts liable for alcohol-related injuries to minors or intoxicated guests in many states.

Renter's liability

Liability for damages or injuries caused by the renter.

Personnel risk exposures

Risks to the organization from loss of key personnel (assets = value added by key people; causes include death, disability, retirement, layoff).

Life insurance for key employees

Life insurance to offset financial impact of losing a key employee.

Succession planning

Planning for leadership continuity and transition.

Cross training

Training employees to perform multiple roles to reduce dependency on a single individual.

Workers' compensation

Insurance for employee work-related injuries.

Net income risk exposures

Risk to future net income cash flow from property, liability, or personnel losses; net income = revenues minus expenses.

Net income calculation

Net income equals revenues minus expenses; a key metric in assessing financial risk exposure.