Risk mgmt chapter 1.txt
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Risk mgmt chapter 1.txt
Risk Mgmt exam
Risk mgmt exam 1
The uncertainty about outcomes, with the possibility that some outcomes can be negative.
What is NFIP?
The national flood insurance program.
A cause of loss, such as fire, lightning, or explosion.
What are the two elements within the definition of risk?
Uncertainty of outcome
Possibility of a negative outcome.
Measurable and has a value between zero and 1.
What is the difference between probability and possibility?
Possibility does not quantify risk; it only verifies that risk is present.
Probability does both.
Determining the likelihood and potential magnitude of a risk.
What are 3 techniques that can be used to quantify risk?
What are the 6 most commonly used classifications of risk?
Pure and speculative risk
Subjective and objective risk
Diversifiable and nondiversifiable
Static and dynamic risk
A chance of a loss or no loss, but no chance of gain.
What is an example of a pure risk?
A possible fire (only a loss or no loss occurs)
What are generally classified as pure, objective, and diversifable?
A risk with a chance of a gain.
What does every business venture involve?
Uncertainty over size of cash flows resulting from possible changes in the cost of raw materials, as well as cost-related changes in the market for completed products and other outputs.
What is an example of price risk?
The risk that customers or other creditors will fail to make promised payments as they come due.
Is credit risk relevant to any organization with accounts receivable?
Speculative risks in investments include?(4)
Interest rate risk
The risk associated with fluctuations in prices of financial securities, such as stocks and bonds.
The risk associated with the loss of purchasing power because of an overall increase in the economy's price level.
Interest rate risk
The risk associated with a security's future value because of changes in interest rates.
Is interest rate risk pure or speculative?
The risk associated with being able to liquidate an investment easily and at a reasonable price.
Does insurance primarily deal with pure or speculative risks?
Can a risk be both pure and speculative?
Yes,many risks have both pure and speculative aspects.
What is an example of a risk that is both pure and speculative?
A building owner faces pure risk of fire, and speculative risk of the market value of the building.
What are the two common misconceptions of low likelihood, high consequence events.
Giving a probability of zero to low likelihood events such as murder or fires. (It can't happen to me)
Or overstating the probability of an event (common for people who have been exposed to the event previously)
Organizations differ in terms of their risk awareness and therefore perceive risks differently.
Why is subjectivity necessary in risk?
Facts are often not available to objectively assess risk.
A risk that affects only some individuals, businesses or small groups.(can be managed through diversification)
What are some examples of diversifiable risk?
A fire is diversifiable to an insurer because it is only likely to affect one or a small number of businesses. They can insure many buildings in several different locations.
A risk that affects a large segment of the population at the same time.
What are some examples of nondiversifiable risk?
Inflation, unemployment, and natural disasters such as hurricanes.
Nondiversifiable risks are correlated which means that:
Gains and losses tend to occur simultaneously.
The potential for a major disruption in the function of an entire market or financial system.
Generally affects entire economy
Risk that is always present for an organization.
Will different types of organizations have their own static risks.
Yes, in addition to those that are common to all organizations
Results from economic change and emerging risks.
What are some examples of emerging risks?
Climate change, internet privacy, terrorism, new technology such as nanotechnology, and innovations in energy.
A condition that increase the frequency or severity of a loss.
What is an example of a hazard?
Ice on a highway can lead to accidents.
What are the four types of hazards?
What is true about having multiple hazards.
Multiple hazards can have a compounding effect.
A condition that increases the likelihood that a person will intentionally cause, fabricate, or exaggerate a loss.
Examples of moral hazard?
Any type of insurance fraud.
A condition of carelessness or indifference that increases the frequency or severity of a loss.
What's an example of morale hazard?
What is the main difference between morale and moral hazard?
Moral hazard results from a deliberate act.
Morale hazard results from indifference.
A tangible characteristic of property,persons, or operations that tends to increase the frequency or severity of a loss.
What are some examples of physical hazard?
A slip and fall accident is more likely to happen on an icy sidewalk, and a fire is more likely to happen in a building with defective wiring.
A condition of the legal environment that increases loss frequency or severity.
Example of legal hazard?
Courts in some areas are much more likely to find in favor of the plaintiff.
Multiple hazards have a compounding effect
What is an example of multiple hazards.
An unsafe driver in an unsafe car.
The number of losses that occur in a particular period.
The dollar amount of damage that results or might result from each loss exposure.
What losses are easier to calculate? Potential severity of property losses or potential severity of liability losses?
Property. This is because they usually have a finite value that is usually calculable.
What are the three components of the financial consequences of risk?
Expected cost of losses or gains
Expenditures of risk mgmt
Cost of residual uncertainty
Do expected losses or gains include other hidden costs?
Yeah, an example of this is time lost by an injured employee.
What are some examples of Expenditures on risk mgmt
Buying insurance or financing for expected losses.
The level of risk that is present after organizations or individuals implement their risk mgmt plans.
Ex of residual uncertainty?
Investors requiring a larger rate of return on their investment in riskier organizations.
Is the probability of a loss the same as risk?
Does static risk significantly change over time?
What are the 3 major types of pure risk?
Personal pure risk
Property pure risk
Liability pure risk
Sources of pure risk
Ownership of financial or physical assets
Frequency of the loss
# of losses in a given period.
Is driving carelessly because you have insurance morale hazard?
The losses that actually occur
Measure of objective risk(formula)
What is more commonly dealt with in firms? pure or speculative risk?
Some examples of dyamic risk?
personal pure risk
pure risk relating to losses in human capital
property pure risk
pure risk relating to property losses
liability pure risk
pure risk relating to liability losses
Is consuming prescription drugs with a co-pay moral hazard?
yes, because the insurance is making you act differently.(behavior change)
Why did many hospitals eliminate trauma centers?
They were getting sued a lot
Subjective measurement of pure risk
An individuals attitude toward a situation involving uncertainty
People who hate risk
people who love risk
people who do not love or hate risk
How to objectively measure risk
compare actual losses to expected losses
Uncertainty about future losses
condition that increases the chance & /or
size of the loss
location / construction / use, examples