Risk Management - Exam 1 (Temple University - McCloskey)

Risk

the uncertainty concerning the occurrence of a loss

Loss Exposure

any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs

Law of Large Numbers

as the number of exposure units increase, the more closely the actual loss experience will approach the expected loss experience

Peril

the cause of the loss

Hazard

a condition that creates or increases the frequency or severity of a loss, or both

Pure Risk

a situation in which there are only the possibilities of loss or no loss

Speculative Risk

a situation in which either profit, break even, or loss is possible

Diversifiable

a risk that affects only individuals or small groups and not the entire economy

Nondiversifiable

a risk that affects the entire economy or large numbers of persons or groups within the economy

Static

Risk that does not change significantly over time

Dynamic

Risk that arises out of constantly changing circumstances

Subjective Risk

An individual view of uncertainty regarding risk; not easily measurable

Objective Risk

Based on data, experience, and other means; measures the actual loss; more easily measurable

Direct Loss

The cost to replace or repair financial or physical assets

Indirect Loss

Extra expenses that are the result of a loss (i.e. Loss of Income)

Frequency

How often losses occure

Severity

How bad the loss is in terms of dollars

Physical Hazard

Examples of this include location, construction, and use

Moral Hazard

When behavior is different because of the existence of insurance

Morale Hazard

Carelessness concerning losses; has nothing to do with the existence of insurance

Burden of Risk

Asks the question of what risks truly cost an organization or society

Expected Cost of Loss

The direct and indirect losses (financial losses, goodwill losses, etc.)

Risk Management Expenditure

The safety programs, police, security, training, and insurance that protects from loss exposures; also known as 'cost to manage'

Residual Uncertainty

The loss of goods or services because they are deemed "too risky" by society

Traditional Risk Management

TRM stands for this

Enterprise Risk Management

ERM stands for this

Finance Department

This entity/person will handle risk in a small company

Risk Manager

This entity/person will handle risk in a medium sized company

Chief Risk Officer

This entity/person will be in charge of managing risk in a large company

Identify Loss Exposures

The first step in the RM Process

Evaluate Loss Exposures

The second step in the RM Process

Identify Alternatives

The third step in the RM Process

Select Alternatives

The fourth step in the RM Process

Implementation

The fifth step in the RM Process

Re-Evaluation

The final step in the RM Process

Contract Analysis

Identifying specific information found in leases and hold harmless agreements

Walkarounds

Term for inspecting plants and other facilities

Financial Statement Approach

Evaluating balance sheets and the income statement to identify risk exposures

Types of Loss Exposure

Property, Net Income, Personnel, and Liability

Property

This type of loss exposure involves the loss of real and personal property, or legal interest in an asset.

Personal Property

The tangible and intangible assets of a property (i.e. goodwill, patent, accounts receivable)

Ownership Interest

A present or future claim of property (i.e. bank loans, mortgages, buyers/sellers, FOB points)

Bailee Interest

When an entity who receives property form another under a contract faces a possible property loss

Tenant Interest

When someone has continued use of a property and is responsible for keeping property in reasonable condition

Net Income

This type of Loss Exposure is when a firm suffers a primary loss that interrupts the normal productive process of the business and produces a secondary loss.

Primary

A Net Income Loss must be the result of a _____________ Loss.

Secondary

For Net Income Loss, a primary loss will result in a __________ loss.

Personnel

This type of loss exposure is when a key employee suffers a personal loss.

Business Issue

For Personnel loss exposures, a personal issue becomes a ___________ ____________.

Intentional

______________ Behavior results in lawsuits towards assault, libel, slander, etc.

Unintentional

______________ Behavior results in lawsuits towards negligence or carelessness

Legal Liability

This is only established when there is proven negligence and an actual damage or loss.

Injured Party

In a liability case, the burden of proof is on the ___________ ___________.

Strict liability

This type of liability is imposed whether anyone was at fault (i.e. situations with children or workers compensation); also known as Absolute

Bodily Injury

In cases of Property loss or ___________ ____________, compensation is fairly easy to calculate.

General Damages

These are difficult to estimate and measure; examples include pain and suffering, and mental anguish

Punitive Damages

Amounts assessed as a form of punishment when gross negligence is present

Assumption of Risk

This defense to liability is when one recognizes the dangers involved in an activity and voluntarily choose to encounter it

Contributory Negligence

This defense to liability is when the plaintiff was partially to blame for what happened; aka Comparative Negligence

Res Ipsa Loquitur

"The thing speaks for itself"

Vicarious Liability

When one person becomes liable for the negligent behavior of another, often occurs due to employees

Joint Liability

When the negligence of 2 or more parties contributes to the injury or damage; aka Several Liability

Search for Deep Pockets

This saying refers to joint liability and is when the injured party sues whoever can pay the most money (i.e poor people don't get sued)

Product Liability

When the manufacturers of a faulty product can be liable for damages or injury

4

How many of the following losses CAN be a result of product liability:

-Cost of Defending

-Cost of Recall

-Cost of Paying Injury Claims

-Damage to Name

Premises Liability

When an owner or tenant may be held liable for damages or injury on their property.

Trespassers

In Premises Liability, you are only obligated to abstain from doing intentional harm to these people

Licensees

In Premises Liability, you are obligated to warn these people of any hidden dangers

Social Guests

In Premises Liability, you are obligated to keep the premises sage so NO harm occurs to these people

Strict

Exotic animals are always enforced with ___________ liability.

Dogs

Some states require strict liability with these animals, while some have a one bite rule

Pitbulls

These dogs can sometimes not be covered under insurance policies.

TRM

Property, Net Income, Personnel, and Liability fall under this type of Risk Management (abbreviation)

Silo Approach

This approach delegates certain areas of risk management to different professionals (The RM, HR, COO, CFO, CEO, etc,)

ERM

This type of Risk Management breaks risks down into quadrants (abbreviation)

Hazard Risks

This is the first quadrant of ERM

Financial Risks

This is the second quadrant of ERM

Operational Risks

This is the third quadrant of ERM

Strategic Risks

This is the fourth quadrant of ERM

1

Which quadrant of ERM include fire, flood and lawsuits?

2

Which quadrant of ERM deals with exchange rates, the stock market, volatility, and liquidity?

3

Which quadrant of ERM deals with supply chains, service providers, system failures, and product recall?

4

Which quadrant of ERM deals with customer service, PR, competition, ethics, and bad business decisions?

SWOT

Strategic risks (the fourth quadrant of ERM) generally deal with this acronym

Integrated

When explaining the difference between ERM and TRM, ERM is generally __________________ while TRM is departmentalized

Departmentalized

When explaining the difference between ERM and TRM, TRM is generally __________________ while ERM is integrated.

CRO

This person is critical in the RM Process under ERM.