RMI Exam 1

What is Risk

Uncertainty regarding loss

Risk measurement

frequency, severity, expected value, risk profile

Frequency is

Risk likelihood (how often?)

Severity is

Risk impact (How bad?)

Expected value

Combination of frequency and severity (Loss)

Risk Profile

Graphical representation of risks

High risk frequency

An event is expected to occur in most circumstances

Medium likelihood

An event will probably occur in many circumstances

Low Likelihood

An event may occur at some time

High severity

Serious impact on operation, reputation, or funding status

Medium severity

Significant impact on operations, reputation, or funding status

Low severity

Less significant impact on operations, reputation, or funding status

Risk profile categorizes risks based on

frequency and severity

Expected value is

frequency x severity

Doubt about our ability to predict the future is

uncertainty

Categories of risk

pure vs. speculative, static vs. dynamic, fundamental vs. particular, core vs. secondary

Sources of risk

Personal, property, liability, financial

Exposure

Person or property facing risk of loss

Peril

The immediate cause of loss

Hazard

Condition affecting the frequency or severity of loss

Physical hazards

property conditions

Intangible hazards

attitudes or culture

Moral hazard

Behavioral changes that affect the frequency or severity of loss

Morale hazard

Indifference

Societal Hazard

Legal or cultural attitude that affects the frequency/ severity of loss

Pure vs. speculative risk

no loss vs. no loss with gain

Static vs. Dynamic

no change through time vs. change through time

Most risks are __

dynamic

Fundamental vs. Particular

Affects most people vs. Affects individuals

Core vs. Secondary

Affects main business functions vs. Doesn’t affect core business operations

Personal risk

risks that happen throughout your lifetime

Property risks

Risks that are directly related to the potential damage to physical property

Liability risks

Being held financially responsible for things you do

Financial Risks

Risks that are directly related to the financial standing of an individual or organization

Attitudes towards risk are

risk neutral, risk averse, risk seeker

Risk Neutral

Indifferent towards risk (value of risky situation is expected loss)

Risk Averse

Prefer to avoid risk (willing to pay more than expected loss to avoid risk)

Risk Seeker

Prefer risk (would pay more than expected return to engage in risky situation)

Burden of Risk on Society

Need for larger emergency funds, loss of needed goods and services, fear and worry

Risk management

Scientific approach to dealing with risk

Rules of Risk Management

Dont risk more than you can afford, dont risk a lot for a little, consider the odds

Step one of the risk management process

determination of objectives

Step two of the risk management process

Identification of risks

Step three of the risk management process

Evaluation of risks

Step four of the risk management process

Considering the alternatives

Step five of the risk management process

Implementing the decisions

Step six of the risk management process

Evaluation and review

Post loss objectives

survival, continuity of operations, earnings stability, continued growth, social responsibility

Pre-loss objectives

Economy, reduction in anxiety, meeting externally, imposed obligations, social responsibility

Identification of risks uses tools such as __,__,__ to identify risks

questionnaires, checklists, and procedure guides

Combination approach examples

Inspections, analysis of documents, interviews, variety of checklists

The preferred approach to risk identification is a ___, which uses all tools available

combination approach

Maximum possible loss (frequency)

What is the worst case scenario

Maximum probable loss (frequency)

What is most likely to happen

Loss severity helps

classify risk (critical, important, or unimportant) and useful in determining amount of insurance needed if decide to transfer risk

The two methods of risk control

loss prevention and loss reduction

Loss prevention

Try to prevent the occurrence of loss (reduce frequency)

Loss Reduction

Try to reduce the severity of losses that do occur (reduce severity)

Risk financing methods

Retention or Transfer

Types of retention

planned vs. unplanned retention, funded vs. unfunded retention

planned vs. unplanned retention

I will pay for any losses out of my bank account if any loss occurs vs. if a loss occurs I’ll figure it out

Types of funded retention

reserves, self-insurance, captive insurance companies, credit

Transfer

Non-insurance transfers, contracts, hedging, incorporation, insurance

Evaluation and Review generally

reevaluate program objectives, repeat identification process to assure it was performed correctly, evaluate the risks that have been identified, verify that the decision on how to address each risk was proper, verify that the decision was properly executed

Definition of risk in chapter 2

Probability of a person suffering an adverse effect from some activity or exposure over a given period of time/ involvement

information ignored with average probabilities

Length of time a person is exposed to risk, individual lifestyles, where you are in life

Risk reduction has costs both which are

monetary and non-monetary

Risk reduction and Public policy likely requires putting a value on ___

human life

Much of risk management is analyzing data to determine the __ and __ associated with making decisions

risk, reward

If innovations make us feel safer they might cause us to

change our habits because we feel safer

Step 1 to Managing innovation risk

Create and use a model

Step 2 to Managing innovation risk

Recognize that the model has limitations

Step 3 to Managing innovation risk

Be prepared- complications will arise that are not projected by the model

Step 1 to Managing innovation risk

Step 4 to Managing innovation risk

Pay attention to your environment

Mathematical modeling

Mimics future outcomes, allows for more precision than human cognition, humans can set mathematical models to execute on their behalf based on some specific guidelines, the more you incorporate the better your assessment will be

Incorrect model

A model whose internal logic or underlying assumptions are themselves manifestly wrong

Incomplete model

characteristic shared by all models, basic model doesn’t need to be unlearned but added to

To improve incomplete models…

stop using incorrect models

Black swan

Things that happen that are so rare, they aren’t foreseen

Be prepared is a step in managing innovation risk because

No model is perfect, Black Swan, Human error can occur, humans may act in ways that are unexpected

Consequences of Innovation

changes in infrastructure usually lag changes in products and services

Changes in infrastructure usually lag behind

changes in products and services

Humans are likely the most resistant to

change

Risks of self drive cars

Hacking vehicles to use as weapons, computer malfunction, weather, moral choices, legal issues, technological cost, maintanence, and repairs

Self-Drive Rewards

lower costs for drivers, improved quality of life, fewer accidents and fatalities, positive economic impacts, environmental

Virtual money risks

Not accessible to everyone, no reversing transaction, no asset protection by third party, loss of access, traded currencies, highly volatile

Virtual Money rewards

No physical bills/ coins, no intermediary needed, lower transaction costs, no need for government backing, anyone can create an account, transactions not limited to business hours, transactions secure

Decision Theory

Theory that provides a formal analytic framework for decision making under conditions of uncertainty.

__ is used to determine optimal strategies where a decision-maker is faced with several alternatives and an uncertain or risk, pattern of future events.

decision theory

Step 1 of the decision making process

Determine all the possible future outcomes

Step 2 of the decision making process

Determine all of the future choices the organization can make

Step 3 of the decision making process

Combine the outcomes and choices into a matrix (pay off table)

Step 4 in the decision making process

Select the choice from the menu determined in step 2 that fulfills some decision criteria

a pay off table represents the matrix of the__ associated with all the possible combinations of the acts and the events

conditional values

Maximax criterion also known as

optimistic criterion

Optimistic criterion

Look at the maximum payoff for each choice and pick the highest one

Maximin criterion also known as

pessimistic criterion

Pessimistic Criterion

Look at the minimum payoff for each choice and pick the highest one

Laplace criterion

Since you don’t know probabilities, take the average of outcomes and pick the highest one