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Is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures?
Risk Management
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Is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs?
E.g., a plant that may be damaged by an earthquake, or an automobile that may be damaged in a collision.
A loss exposure.
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New forms of risk management consider both?
Pure and speculative loss exposures.
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Prepare for potential losses in the most economical way
Reduce anxiety
Meet any legal obligations
Pre-Loss objectives of risk management.
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Ensure survival of the firm
Continue operations
Stabilize earnings
Maintain growth
Minimize the effects that a loss will have on other persons and on society
Post lost objectives of risk management.
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Risk Management Process?
- Identify potential losses
- Evaluate potential losses
- Select the appropriate risk management technique
- Implement and monitor the risk management program
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Risk Managers have several sources of information to identify loss exposures?
- Questionnaires
- Physical inspection
- Flowcharts
- Financial statements
- Historical loss data
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Refers to the probable number of losses that may occur during some given time period?
Loss frequency.
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Refers to the probable size of the losses that may occur?
Loss severity.
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Loss severity is ____ important than loss frequency?
More
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Is the worst loss that could happen to the firm during its lifetime?
The maximum possible loss.
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Is the worst loss that is likely to happen?
Maximum probable loss.
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Refers to techniques that reduce the frequency and severity of losses.
Risk control.
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Methods of risk control include?
- Avoidance
- Loss prevention
- Loss reduction
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A certain loss exposure is never acquired, or an existing loss exposure is abandoned?
Avoidance
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Refers to measures that reduce the frequency of a particular loss
e.g., installing safety features on hazardous products?
Loss prevention
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Refers to measures that reduce the severity of a loss after is occurs.
e.g., installing an automatic sprinkler system
Loss reduction
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Refers to techniques that provide for the funding of losses.
Risk financing.
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Methods of risk financing include?
- Retention
- Non-insurance Transfers
- Commercial Insurance
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Means that the firm retains part or all of the losses that can result from a given loss?
Retention
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Retention is effectively used when?
- No other method of treatment is available
- The worst possible loss is not serious
- Losses are highly predictable
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Is the dollar amount of losses that the firm will retain?
The retention level.
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A risk manager has several methods for paying retained losses?
- Current net income
- Unfunded reserve
- Funded reserve
- Credit line
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Losses are treated as current expenses?
Current net income.
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Losses are deducted from a bookkeeping account?
Unfunded reserve.
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Losses are deducted from a liquid fund?
Funded reserve.
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Funds are borrowed to pay losses as they occur?
Credit line
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Is an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures
A captive insurer
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Is owned by only one parent?
A single-parent captive.
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Is an insurer owned by several parents?
An association or group captive.
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Is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party?
A non-insurance transfer.
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Is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high
Insurance
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Selects the coverages needed, and policy provisions?
The risk manager.
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Is provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured?
A deductible
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Is one in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain?
An excess insurance policy.
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Is a policy specially tailored for the firm?
Manuscript policy.
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Implementation of a risk management program begins with?
A risk management policy statement.
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Risk management policy statement?
- Outlines the firm’s risk management objectives
- Outlines the firm’s policy on loss control
- Educates top-level executives in regard to the risk management process
- Gives the risk manager greater authority
- Provides standards for judging the risk manager’s performance
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A risk management manual may be used to?
- Describe the risk management program
- Train new employees
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A successful risk management program requires?
Active cooperation from other departments in the firm.
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The risk management program should be periodically?
Reviewed and evaluated to determine whether the objectives are being attained.
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The risk manager should compare?
The costs and benefits of all risk management activities.
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The cost of risk includes?
Premiums paid, retained losses, outside risk management services, financial guarantees, internal administrative costs, taxes, fees, and other expenses.
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Reduction in pure loss exposures allows a firm to?
Enact an enterprise risk management program to treat both pure and speculative loss exposures.
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Refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks?
Personal risk management.
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The same principles applied to corporate risk management apply to?
Personal risk management.
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