Risk Management Test 1

Lee Johnson

know a peril

The actual cause of a loss

know a hazard

A condition that increases the likeligood of a loss occurring

know specific examples of a peril

Fire, wind, tornado, earthquake, burglary, and collision

know the classificaitons of hazards

Moral- Filing a false claim

Morale- Leaving the car unlocked

Physical Hazard- Icy roads, poor lighting, defective equipment, and poor eyesight

give an example of a legal hazard

Using AI or an unreliable source to make a legal claim, and it ends up becoming false

understand how moral hazards are tricky and why they are tricky

because the parties’ intentions are unclear and uncertain if it was done on purpose

understand the difference between a dynamic and static risk

Static risk factors are historical and unchangeable, like age or past criminal offenses, while dynamic risk factors are changeable and can be addressed through interventions, such as substance abuse, negative peer associations, or negative attitudes.

understand a speculative risk

Profit, loss or no loss

undertstand the definition of a fiduciary

involving trust, especially with regard to the relationship between a trustee and a beneficiary

understand traditional risk managment theory and how to minimize certain types of risk

involves a reactive, tactical approach to identifying, assessing, and mitigating risks within specific organizational silos, often focusing on avoiding financial and operational losses

understand what strategic risk

planning risk of what companies are going to take or do

whats the biggest factor a company wants to retain a risk or not

absorbing potential losses

what is liquidity risk

is the risk that a company or institution cannot meet its short-term financial obligations because it cannot convert its assets into cash or access new funding quickly enough

give examples of retaining risk, reducing risk, avoiding risk, and transferring risk

retain-reducing something that is high in frequency and low in severity

tranasfer it- transferring a low-frequency high severity risk to a 3rd party

avoid it-any risk that is high in frequency and high in severity

Retain it- accepting everything that is low in frequency and low in severity

what is the concept of indemnity

the insured is only entitled to compensation to the xtent of the insured’s financial loss. The insured cannot make money from an insurance contract

what is the concept of insurable interest

An insured must have a financial loss resulting from damage, loss, or destruction. For property and liability insurance: The insured must have an insurable interest at the time of policy inception and at the time of loss. For life insurance, one only needs and insurable interest at the time of policy inception

what is the concept of subrogation

If the insurer pays a claim, only the insurer can then sue the responsible party

understand the parts of a legal contract and what makes it legally enforceable and legally valid

• Mutual consent

• Offer and Acceptance

• Performance or delivery

• Lawful Purpose

• Legal Competency of All Parties

what is assumed between both parties when an insurance contract is started

The principle of utmost good faith, the insured must trusthfully disclose everything and honor the contract

understand the concept of contract adhesion

Take it or leave it

understand the concept of the law of large numbers

it says that the number of exposure units increases, the insurer can predict losses more accurately

what does an insurance company look for when determining if something is an insurable risk or not

• A large number of homogeneous exposure units
  – There must be a big enough pool of similar risks (like many houses, cars, or lives) so the law of large numbers applies.

• Losses must be accidental
  – The event has to be unexpected and outside the control of the insured (e.g., a car crash, not intentional damage).

• Losses must be measurable and determinable
  – The insurer needs to know when a loss occurred, how much it costs, and who is responsible.

• Losses must not pose a catastrophic risk for the insurer
  – Risks that could bankrupt the insurer (like nuclear war or a massive asteroid hit) are not insurable.

• Premiums must be reasonable and affordable
  – The cost of coverage must make sense to the insured while still covering the insurer’s potential payouts.

understand the concept of adverse selection

The concept of adverse selection is when the people most likely to need insurance are also the most likely to buy it, while healthier or lower-risk people often opt out.

know what fidelity and surety bonds are

Fidelity- Protects an employer against losses caused by dishonest acts of employees- honesty bond (employee theft/fraud).

Surety- Principal, Obligee, Surety- performance bond (contract or job completion).

what is the amount of FICA taxes taken out of your paycheck

7.65%

what is the limit of FDIC insurance coverage of bank deposits

$250,000

when thinking about insurance, what is the most important factor you should consider

The most important factor to consider is the probability and severity of loss for the risk

what’s the cheapest type of health insurance you can buy

An HMO plan

whats the greatest advantage of a group policy

it provides coverage at a reasonable premium because the risk and administrative costs are spread across a large pool of participants

what does a major medical policy pay for, and what does it NOT pay for

Pays for- Hospital expenses, Physicians’ and surgeons’ fees, Medications, Durable medical equipment

Not- routine physicals, preventive care, dental or vision, cosmetic procedures, expenses beyond policy limits or excluded conditions

A major advantage of an HMO

its low cost and lower premiums than a PPO, Low or no deductibles and smaller copays, strong focus on preventive care

Taxability of benefits received from benefits

• Life insurance death benefits → Income-tax free to the beneficiary (in most cases).

• Disability insurance benefits →

  • If the employee pays the premiums with after-tax dollars, benefits are tax-free.

  • If the employer pays the premiums (or employee uses pre-tax dollars), benefits are taxable as ordinary income.

• Health insurance benefits (like reimbursements for medical bills) → Tax-free.

• Workers’ compensation benefits → Generally not taxable.

• Unemployment benefits → Taxable as income.

What are the features of an HSA that make it so powerful

• Tax-deductible contributions → Money you put in reduces your taxable income.

• Tax-free growth → Earnings (interest, investments) grow tax-deferred inside the account.

• Tax-free withdrawals → If used for qualified medical expenses, you don’t pay taxes when you take money out.

What do you have to have to have an HSA

A High-Deductible Health Plan

if your employer offers an FSA, how long do you have to spend it

You have 2 and a half months or up to February 15th

Explain what COBRA is

Consolidated Omnibus Budget Reconciliation Act

applies to employers with 20 or more employees coverage is up to 18 or even 36 months if you are released from and job and the individual pays 100% of the premium

What are the advantages of an HSA that we talked about in class

Triple tax benefit

Funds roll over

Portability

Retirement backup

Investment growth

From the Richest Man in babylon: What’s the concept of a man is not what he carries in his purse

true wealth is not about the money you possess, but about the consistent, reliable flow of income that replenishes it

From the Richest man in Babylon: Understand the concept of the golden stream

it refers to passive income the steady and continous flow of earnings generated by your investments. The book teaches that true wealth is not he money you keep in your purse, but the income stream you build that keeps your purse full

From the richest man in babylon: What is the power of setting aside 10% of your income

Paying yourself first

From the richest man in babylon: What is significant about the first cure for a lean purse

Start thy purse to fattening, saving a portion of one’s income, specifically at least ten percent, regardless of the amount earned.