Insurance and Risk Management Test 1

Avoidance, Reduction, Prevention, Diversification

four types of loss control

Reduction

Loss Control Technique: A warehouse installs a sprinkler system

Diversification

Loss Control Technique: A retailer sells both online and in physical stores

Avoidance

Loss Control Technique: A company decides not to manufacture a hazardous chemical

Prevention

Loss Control Technique: A delivery company requires driver safety training

Reduction, Diversification, Avoidance, Prevention

4 Kinds of Risk Transfer

Hedging

Risk Transfer: An airline uses futures contracts to lock in jet fuel prices

Contractual Transfer 

Risk Transfer: A construction company requires subcontractors to assume liability for their own work

Insurance 

Risk Transfer: A homeowner buys property coverage so the insurer pays for fire damage 

Limited Liability

Risk Transfer: An entrepreneur forms an LLC to protect personal assets from business debts

Insurance, Hedging, Retention, Self-Insurance

Four Kinds of Loss Financing

retention

Loss Financing: A small business pays out-of-pocket for minor changes

hedging

Loss Financing: A farmer uses commodity futures to protect against falling crop prices

Self-Insurance 

Loss Financing: A large corporation sets up a health claims fund for employees instead of buying insurance 

Insurance 

Loss Financing: A homeowner files a claim after storm damage and receives money from their policy

pure risks

loss exposures that can result in two possible financial outcomes

speculative risks

loss exposures that can result in 3 financial outcomes, gain, loss, no change

Pure Risk

What kind of risks are catastrophic events, terrorism, and earthquakes

Speculative Risk

What kind of risks are starting a new business and investing your money in the stock market

Pure

Property Risk, liability risk, and human resource risk are ___ risks 

direct loss

The loss of a building from a fire

indirect loss

The loss of profit from building fire

diversifying

Risk pooling is ___ risk

The Law of Large Numbers

Risk pooling is also known as …

catastrophic 

9/11 and Hurricane Katrina are examples of ____ events

hazard risks

the adverse financial risks associated with pure risks

Hazard Risks

encompass areas such as financial risks, operational risks, and strategic risks

Establish the Goals of the Risk Management Function

Step one of the risk management process

Identify Potential Loss Exposures

Step two of the risk management process

Measure the potential loss exposures

Step three of the risk management process

Choose the risk handling techniques

step four of the management process

implement techniques and monitor effectiveness 

step five of the risk management process

prevention of risk

Group insurance, employee benefits, and social insurance are examples of…

risk handling

loss control, loss transfer, and loss financing are examples of …

Self-insurance and loss control

High frequency, low severity

avoidance if possible and loss control

high frequency and high severity

risk assumption and loss control

low frequency and low severity

Insurance and loss control

low frequency and high severity

avoidance, prevention, reduction

3 main ways to manage risk

loss control 

risk avoidance, prevention, and reduction are all a part of …

Insurance 

A contractual relationship between two parties in which one party, the insurer, is paid a premium by the other party and insured. In return for the premium, the insurer promises of indemnify the insured in the event of a covered loss. Redistributes losses among 

Hazard 

supply chain issues are not a ___ risk 

identification

the most difficult step in the risk management process

True

Loss/risk identification is the same thing (T/F)

pure, speculative 

enterprise risk management involves ___and___risks

enterprise risk management 

one of the most influential ideas of the millenium

property risks, liability risks, human resource risk, and indirect losses 

risk identification/loss identification identifies what four kinds of risk

external risk

risk out of your control

internal risk

risk under your control

Tangible Risks

risks to physical assets like buildings, vehicles, and inventory 

intangible risks 

risks to intellectual property like copyrights, patents, and research 

damaged reputation

most challenging risk

reputation

effects of __ risk include loss of clients, and business crash overnight

operational

disruption to supply chains complicate risk and cause ___risk

hazard risk

product liability 

hazard risk

worker's compensation

hazard risk

loss of key facility

hazard risk

general liability

hazard risk 

tornado, wind damage, heavy rain

financial risk

inadequate financial control

financial risk

debt, credit rating

financial risk

health care, pension costs

financial risk

adverse change in regulation

financial risks

currency fluctiations

financial risks 

economic recession 

operational risk

accounting system failure

operational risk

HR risk, skill shortage

operational risk

IT system failure

operational risk

Product recall issue

operational risk

logistics provider failure 

operational risk

supplier failure to deliver

operational risk

utilities failure

strategic risk

ethics violations

strategic risk

inadequate management oversight

strategic risk

loss of intellectual property

strategic risk

poor tech decisions

strategic risk

attack on brand loyalty

strategic risk

new or foreign competition

strategic risk

negative media coverage

liability risk

loss exposures in the form of monetary judgements owed to plaintiffs who were harmed financially by the negligent acts of the organization

risk assessment

estimating the financial impact of losses

frequency, severity

loss is measured by ___ and ___

frequency, severity

average loss is average ___times average ___

control

loss frequency and severity are sometimes out of management ___

standard deviation

measures the variation around the average

standard deviation

the #1 way to manage risk

loss or risk control, risk transfer, loss financing

3 methods of risk handling

risk avoidance

ending the production of harmful products

reduce

increasing the pool size is one way to ___ risk

loss prevention

training worker how to drive semi trucks

True 

risk assumption and risk retention are the samething (T/F)

risk retention/assumption

paying losses from internal cash flows

loss reduction

Duplication and physical separation are examples of ___

occupational safety and health act

What does OSHA stand for

OSHA

provides requirements for workplace safety

hold-harmless agreements

contracts entered into prior to a loss in which one party agrees to assume a second party’s financial responsibility should a loss occur

limited liability

Businesses can transfer risk by taking advantage of the protection provided to the owners of certain types of business organization forms, can’t loose personal assets

loss financing

insurance, hedging, and risk retention are all types of what

internal risk financing 

risk retention, self-insurance, and captive insurance are types of what