Risk mgmt chapter 1.txt

Card Set Information

Risk mgmt chapter 1.txt
2014-03-18 23:45:01
Risk Mgmt exam

Risk mgmt exam 1
Show Answers:

  1. Risk management
    The uncertainty about outcomes, with the possibility that some outcomes can be negative.
  2. What is NFIP?
    The national flood insurance program.
  3. Peril
    A cause of loss, such as fire, lightning, or explosion.
  4. What are the two elements within the definition of risk?
    • Uncertainty of outcome
    • Possibility of a negative outcome.
  5. Probability
    Measurable and has a value between zero and 1.
  6. What is the difference between probability and possibility?
    • Possibility does not quantify risk; it only verifies that risk is present.
    • Probability does both.
  7. Quantifying risks
    Determining the likelihood and potential magnitude of a risk.
  8. What are 3 techniques that can be used to quantify risk?
    • Benchmarking
    • Probability analysis
    • Modeling
  9. 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
  10. Pure risk
    A chance of a loss or no loss, but no chance of gain.
  11. What is an example of a pure risk?
    A possible fire (only a loss or no loss occurs)
  12. What are generally classified as pure, objective, and diversifable?
    Insurable risks
  13. Speculative risk
    A risk with a chance of a gain.
  14. What does every business venture involve?
    Speculative risk
  15. Price risk
    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.
  16. What is an example of price risk?
  17. Credit risk
    The risk that customers or other creditors will fail to make promised payments as they come due.
  18. Is credit risk relevant to any organization with accounts receivable?
  19. Speculative risks in investments include?(4)
    • Market risk
    • Inflation risk
    • Interest rate risk
    • Liquidity risk
  20. Market risk
    The risk associated with fluctuations in prices of financial securities, such as stocks and bonds.
  21. Inflation risk
    The risk associated with the loss of purchasing power because of an overall increase in the economy's price level.
  22. Interest rate risk
    The risk associated with a security's future value because of changes in interest rates.
  23. Is interest rate risk pure or speculative?
  24. Liquidity risk
    The risk associated with being able to liquidate an investment easily and at a reasonable price.
  25. Does insurance primarily deal with pure or speculative risks?
  26. Can a risk be both pure and speculative?
    Yes,many risks have both pure and speculative aspects.
  27. 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.
  28. 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)
  29. Risk awareness
    Organizations differ in terms of their risk awareness and therefore perceive risks differently.
  30. Why is subjectivity necessary in risk?
    Facts are often not available to objectively assess risk.
  31. Diversifiable risk
    A risk that affects only some individuals, businesses or small groups.(can be managed through diversification)
  32. 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.
  33. Nondiversifiable risk
    A risk that affects a large segment of the population at the same time.
  34. What are some examples of nondiversifiable risk?
    Inflation, unemployment, and natural disasters such as hurricanes.
  35. Nondiversifiable risks are correlated which means that:
    Gains and losses tend to occur simultaneously.
  36. Systemic risk
    • The potential for a major disruption in the function of an entire market or financial system.
    • Generally nondiversifiable.
    • Generally affects entire economy
  37. Static risk
    Risk that is always present for an organization.
  38. Will different types of organizations have their own static risks.
    Yes, in addition to those that are common to all organizations
  39. Dynamic risk
    Results from economic change and emerging risks.
  40. What are some examples of emerging risks?
    Climate change, internet privacy, terrorism, new technology such as nanotechnology, and innovations in energy.
  41. Hazard
    A condition that increase the frequency or severity of a loss.
  42. What is an example of a hazard?
    Ice on a highway can lead to accidents.
  43. What are the four types of hazards?
    • Moral
    • Morale
    • Physical
    • Legal
  44. What is true about having multiple hazards.
    Multiple hazards can have a compounding effect.
  45. Moral hazard
    A condition that increases the likelihood that a person will intentionally cause, fabricate, or exaggerate a loss.
  46. Examples of moral hazard?
    Any type of insurance fraud.
  47. Morale hazard
    A condition of carelessness or indifference that increases the frequency or severity of a loss.
  48. What's an example of morale hazard?
    Driving carelessly
  49. What is the main difference between morale and moral hazard?
    • Moral hazard results from a deliberate act.
    • Morale hazard results from indifference.
  50. Physical hazard
    A tangible characteristic of property,persons, or operations that tends to increase the frequency or severity of a loss.
  51. 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.
  52. Legal hazard
    A condition of the legal environment that increases loss frequency or severity.
  53. Example of legal hazard?
    Courts in some areas are much more likely to find in favor of the plaintiff.
  54. Multiple hazards
    Multiple hazards have a compounding effect
  55. What is an example of multiple hazards.
    An unsafe driver in an unsafe car.
  56. Loss frequency
    The number of losses that occur in a particular period.
  57. Loss severity
    The dollar amount of damage that results or might result from each loss exposure.
  58. 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.
  59. 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
  60. Do expected losses or gains include other hidden costs?
    Yeah, an example of this is time lost by an injured employee.
  61. What are some examples of Expenditures on risk mgmt
    Buying insurance or financing for expected losses.
  62. Residual uncertainty
    The level of risk that is present after organizations or individuals implement their risk mgmt plans.
  63. Ex of residual uncertainty?
    Investors requiring a larger rate of return on their investment in riskier organizations.
  64. Is the probability of a loss the same as risk?
  65. Does static risk significantly change over time?
  66. What are the 3 major types of pure risk?
    • Personal pure risk
    • Property pure risk
    • Liability pure risk
  67. Sources of pure risk
    • Human capital
    • Ownership of financial or physical assets
  68. Frequency of the loss
    # of losses in a given period.
  69. Is driving carelessly because you have insurance morale hazard?
  70. Average losses(al)
    The losses that actually occur
  71. El
    Expected losses
  72. Measure of objective risk(formula)
    • Al-el
    • -------
    • Al
  73. What is more commonly dealt with in firms? pure or speculative risk?
  74. Some examples of dyamic risk?
    • Internet risk
    • privacy risk
    • tax laws
  75. personal pure risk
    • pure risk relating to losses in human capital
    • ex. unemployment,injury,retirement
  76. property pure risk
    pure risk relating to property losses
  77. liability pure risk
    pure risk relating to liability losses
  78. Is consuming prescription drugs with a co-pay moral hazard?
    yes, because the insurance is making you act differently.(behavior change)
  79. Why did many hospitals eliminate trauma centers?
    They were getting sued a lot
  80. Subjective measurement of pure risk
    An individuals attitude toward a situation involving uncertainty
  81. risk averse
    People who hate risk
  82. risk lovers
    people who love risk
  83. risk neutral
    people who do not love or hate risk
  84. How to objectively measure risk
    compare actual losses to expected losses
  85. risk definition
    Uncertainty about future losses
  86. Hazard
    • condition that increases the chance & /or
    • size of the loss
  87. Physical Hazards
    location / construction / use, examples