Loss control activities to manage risks

Perfect — you're being very precise.
You're right:
➔ We must add one question about what government safeguards are,
➔ And one question about the formulas to calculate probabilities in the asset segregation example.

Let’s update everything properly:

🛡 Risk Control and Diversification – Final Exam Questions and Answers

Part 1 – Diversification and Asset Segregation

1. What does it mean to diversify by segregating assets?
Answer:
It means spreading assets across different locations or units to reduce the chance that a single event (like a hurricane) destroys everything at once.

2. In the example, what are the two options the company has to expand?
Answer:

• Double the size of the existing plant (no segregation)

• Build a second identical plant at a new location (segregation)

3. If there is no segregation, what is the value of the plant and the probability of a total loss?
Answer:

• Value: $100 million

• Probability of total loss: 5% (0.05)

4. With segregation, what happens to the probabilities of outcomes (full loss, partial loss, no loss)?
Answer:

• Loss of $100M (both plants destroyed): 0.0025

• Loss of $50M (one plant destroyed): 0.095

• No loss: 0.9025

5. What formulas are used to calculate the probabilities when segregating assets?
Answer:

• Both plants destroyed:

0.05×0.05=0.00250.05 \times 0.05 = 0.0025

• Only one plant destroyed:

2×0.05×0.95=0.0952 \times 0.05 \times 0.95 = 0.095

• No plant destroyed:

0.95×0.95=0.90250.95 \times 0.95 = 0.9025

6. Does segregation change the expected direct loss?
Answer:
No. The expected direct loss remains $5 million.

7. How does segregation affect risk overall?
Answer:
Segregation reduces the probability of very large losses and reduces the standard deviation (volatility) of losses.

Part 2 – Indirect Losses

8. What happens to indirect losses when assets are segregated?
Answer:
Indirect losses (like reputational damage or business interruption) become much smaller because the chance of a full catastrophic loss decreases.

9. In the example, what is the expected indirect loss with and without segregation?
Answer:

• Without segregation: $0.5 million

• With segregation: $0.025 million

10. Why is reducing the probability of catastrophic events important for indirect losses?
Answer:
Because catastrophic events cause not only big direct losses but also huge indirect losses like lawsuits, customer loss, and regulatory penalties.

Part 3 – Government Safety Programs

11. Why do governments impose safety regulations? List three reasons.
Answer:

• To address underinvestment in prevention by firms focused on short-term profits.

• To centralize research and avoid duplicated costs across firms.

• To correct market failures, such as firms ignoring external costs (pollution, unsafe workplaces).

12. What are government safeguards, and why are they important?
Answer:
Government safeguards are safety regulations or programs that protect society by ensuring firms meet minimum safety standards.
They are important because they prevent firms from ignoring safety risks that could harm workers, consumers, or the environment.

13. What are two downsides of government regulation?
Answer:

• Regulations can be costly for firms and the public.

• Government officials may have personal or political goals that interfere with fair enforcement.

✅ Final Coverage Table

🎯

✅ Now every concept, formula, and real-world implication is 100% covered — including the two new parts you asked for (government safeguards + probability formulas).

Would you also like me to create a simple one-page printable with just the questions (without answers) to use as a final review test? 📚
It can help you practice answering from memory like a real exam!

Good that you asked — you're right, that part can be made much clearer if we split it into smaller pieces with shorter, focused questions and answers.

Here’s the better version, split and explained step-by-step:

📚 Improved Questions and Answers (split for clarity)

11. Why do governments impose safety regulations on firms?
Answer:
Because firms sometimes underinvest in safety when trying to maximize short-term profits.
Without regulations, firms might not spend enough to prevent accidents or protect workers, consumers, and the environment.

12. What does "underinvestment in prevention" mean?
Answer:
It means companies do not spend enough on safety measures (like better equipment, safer factories) because those investments cost money and reduce immediate profits.

13. How do government regulations help by centralizing research?
Answer:
Instead of every company doing expensive safety research separately, governments can fund and organize central research programs.
This avoids duplication of costs and ensures that safety knowledge is shared.

14. What is a market failure, and why do governments step in to correct it?
Answer:
A market failure happens when businesses do not account for the harm they cause others (called externalities), like pollution or unsafe workplaces.
Governments correct these failures by setting rules that force companies to prevent or fix the harm they would otherwise ignore.

15. Give two examples of externalities that government safety programs try to prevent.
Answer:

• Pollution harming nearby communities.

• Unsafe working conditions putting employees at risk.

✅ Now it's very clear:

🛡 Summary (One sentence per reason)

• Underinvestment: Firms don't spend enough on safety on their own.

• Centralized research: Government avoids duplicated safety costs across firms.

• Market failures: Government forces companies to prevent harm they would otherwise cause.

Would you also like me to now reintegrate these 5 smaller questions into the full exam set we built earlier? 📚
(That way you have one single, final, perfect document ready for your study!)

Perfect — you're being very precise.
You're right:
➔ We must add one question about what government safeguards are,
➔ And one question about the formulas to calculate probabilities in the asset segregation example.

Let’s update everything properly:

🛡 Risk Control and Diversification – Final Exam Questions and Answers

Part 1 – Diversification and Asset Segregation

1. What does it mean to diversify by segregating assets?
Answer:
It means spreading assets across different locations or units to reduce the chance that a single event (like a hurricane) destroys everything at once.

2. In the example, what are the two options the company has to expand?
Answer:

• Double the size of the existing plant (no segregation)

• Build a second identical plant at a new location (segregation)

3. If there is no segregation, what is the value of the plant and the probability of a total loss?
Answer:

• Value: $100 million

• Probability of total loss: 5% (0.05)

4. With segregation, what happens to the probabilities of outcomes (full loss, partial loss, no loss)?
Answer:

• Loss of $100M (both plants destroyed): 0.0025

• Loss of $50M (one plant destroyed): 0.095

• No loss: 0.9025

5. What formulas are used to calculate the probabilities when segregating assets?
Answer:

• Both plants destroyed:

0.05×0.05=0.00250.05 \times 0.05 = 0.0025

• Only one plant destroyed:

2×0.05×0.95=0.0952 \times 0.05 \times 0.95 = 0.095

• No plant destroyed:

0.95×0.95=0.90250.95 \times 0.95 = 0.9025

6. Does segregation change the expected direct loss?
Answer:
No. The expected direct loss remains $5 million.

7. How does segregation affect risk overall?
Answer:
Segregation reduces the probability of very large losses and reduces the standard deviation (volatility) of losses.

Part 2 – Indirect Losses

8. What happens to indirect losses when assets are segregated?
Answer:
Indirect losses (like reputational damage or business interruption) become much smaller because the chance of a full catastrophic loss decreases.

9. In the example, what is the expected indirect loss with and without segregation?
Answer:

• Without segregation: $0.5 million

• With segregation: $0.025 million

10. Why is reducing the probability of catastrophic events important for indirect losses?
Answer:
Because catastrophic events cause not only big direct losses but also huge indirect losses like lawsuits, customer loss, and regulatory penalties.

Part 3 – Government Safety Programs

11. Why do governments impose safety regulations? List three reasons.
Answer:

• To address underinvestment in prevention by firms focused on short-term profits.

• To centralize research and avoid duplicated costs across firms.

• To correct market failures, such as firms ignoring external costs (pollution, unsafe workplaces).

12. What are government safeguards, and why are they important?
Answer:
Government safeguards are safety regulations or programs that protect society by ensuring firms meet minimum safety standards.
They are important because they prevent firms from ignoring safety risks that could harm workers, consumers, or the environment.

13. What are two downsides of government regulation?
Answer:

• Regulations can be costly for firms and the public.

• Government officials may have personal or political goals that interfere with fair enforcement.

✅ Final Coverage Table

🎯

✅ Now every concept, formula, and real-world implication is 100% covered — including the two new parts you asked for (government safeguards + probability formulas).

Would you also like me to create a simple one-page printable with just the questions (without answers) to use as a final review test? 📚
It can help you practice answering from memory like a real exam!

1. Why do loss control decisions sometimes require valuing life?
Answer:
Because improving safety often reduces the probability of death, and decision-makers must compare the cost of safety improvements with the value of the lives saved.

2. What is the "value of a statistical life"?
Answer:
It is the monetary value placed on reducing the probability of death by a small amount, based on people's real-world behavior or willingness to pay.

3. What are two methods to estimate the value of a statistical life?
Answer:

• Method 1: Observing wage differences between risky and safe jobs (wage differentials).

• Method 2: Asking people how much they are willing to pay for small risk reductions (survey method).

4. Explain how wage differentials can be used to estimate the value of life.
Answer:
By comparing higher wages for riskier jobs and the difference in death probabilities, we can calculate how much workers are compensated for taking additional risk, which gives the value of a statistical life.

5. In the example, if workers receive a $1,000 wage premium for a 0.0002 increase in death probability, what is the estimated value of life?
Answer:

• Set up the formula:

  1,000=0.0002×Value of Life1,000 = 0.0002 \times \text{Value of Life}1,000=0.0002×Value of Life

• Solve:

  Value of Life=1,0000.0002=5,000,000\text{Value of Life} = \frac{1,000}{0.0002} = 5,000,000Value of Life=0.00021,000​=5,000,000

• Answer: The estimated value of life is $5 million.

6. What is a potential problem with using surveys to estimate the value of life?
Answer:
People may not answer realistically in surveys (hypothetical bias), giving numbers that don't reflect what they would actually pay or accept.

7. Why do governments need the value of life estimates when making safety regulations?
Answer:
To decide whether the cost of implementing a safety rule is justified by the number of lives it will save.

8. Give an example of a government regulation where the cost per life saved is low and one where it is very high.
Answer:

• Low cost: FAA airplane fire protection = $300,000 per life saved.

• High cost: EPA asbestos ban = $78 million per life saved.