Chapter 6 Study Guide and Checkpoints

Question 1

RIsk Management is both a _______ and _______ process

Answer 1

Risk Management is both a DECISION and ADMINISTRATIVE process.

Question 2

What is the process that arrives at the most cost effective means avail in dealing with loss exposures?

Answer 2

The FIVE STEP PROCESS

Question 3

The ability of the organization to do the FIVE STEP PROCESS will help determine the success of the _______

Answer 3

…Success of the risk management program

Question 4

The Five Steps

Answer 4

1. Identify and analyze loss exposure
2. Examine alternative risk management techniques
3. Select Risk Management Techniques
4. Implement technique(s)
5. Monitor Results

Question 5

Once risk management decisions have been made, they must be ___________ and __________

Answer 5

Implemented and Managed.

Question 6

The success of the risk management process in this stage depends on the organization’s ability to:

C.L.O.P.

Answer 6

• PLAN
• ORGANIZE
• LEAD and
• CONTROL

Question 7

In order to properly manage risks, it is important that they be _______and _______

Answer 7

Identified and Analyzed

Question 8

what is the purpose of IDENTIFICATION

Answer 8

Involves recognizing losses which might possibly occur

Question 9

what is the purpose of ANALYSIS

Answer 9

Involves estimating the significance of those possible losses

Question 10

An organization faces many exposures to loss. What is a LOSS EXPOSURE?

Answer 10

Loss exposure is the CHANCE of FINANCIAL LOSS.

Question 11

What three factors are used to classify Loss Exposures?

Answer 11

1. The type of value exposed to loss.
2. The peril causing the loss.
3. The financial consequences of the loss.

Question 12

The Four types of VALUES exposed to loss in most organizations

Answer 12

1) Property Values
2) Net Income Values
3) Liability Loss
4) Personnel Loss

Question 13

1) Property Values

examples

Answer 13

Tangible Property - can be touched and has form and substance.

• real property
• debris removal
• undamaged property
• pair or set value
• going concern value
• demolition expense
• increased costs of construction
• personal property

Question 14

2) Net Income Values

examples

Answer 14

Net income can be affected by decrease in revenue or increase in expenses. Decreases in revenues may result from:

• business interruption
• Contingent business interruption
• loss of profit on finished goods
• reduced rental income
• decreased collection of accounts receivable

Increase in expenses may result from:

• increased operating expenses
• increased rental expenses
• expediting costs

Question 15

3) Liability Loss

examples

Answer 15

There is a Liability Loss exposure whenever there is a possibility of legal action taken against business. A legal action imposes the following costs to the organization:

• Costs to investigate and defend
• payment of an award for damages, or costs of corrective action
• the amount of any out-of-court settlement the business may decide to pay rather than go to trial
• the amount of any voluntary payments made by the business to gain the claimants goodwill or reduce the final amount of the settlement or verdict

Question 16

4) Personnel Loss

examples

Answer 16

May be due to disability, resignation, retirement or death of personnel. the costs to the organization can be measured by:

• value of the employee services
• the costs of providing employee benefits

Question 17

The two KEY FACTORS used to measure the financial consequences of a loss

Answer 17

1) Severity - the seriousness of loss

2) Frequency - likelihood of loss reoccurring

Question 18

Identify the primary objective of RISK CONTROL

Answer 18

The primary objective of risk control is to reduce to frequency and severity of losses as much as possible with the resources available

Question 19

establishing both ______ and ______ measures can help to reduce the severity of losses

Answer 19

PRE-LOSS and POST-LOSS

Question 20

Describe what is meant by the above terms and provide examples of each (preloss and postloss)

Answer 20

Pre-loss measures are things which can be done before loss occurs. they involve steps taken to reduce the amount of the property, the number of persons, or other things of value that may suffer loss from a single event.

Question 21

Pre-Loss Examples:

Answer 21

Property Values - safe storage of flammable materials to reduce fire intensity.

Net Income Values - reduce value of single shipment in a specific Conveyance

Liability Loss - establish maximum speeds company vehicles can be driven

Personnel Loss - limit number of executives travelling together in any one vehicle or aircraft.

Question 22

POST-LOSS Examples

Answer 22

Focus on action taken AFTER A LOSS to reduce it’s severity.

• Property Values - installing affected fire detection and suppression equipment
• Net Income Values - expediting repairs quickly so business can continue

Liability Loss - developing a procedure plan to be followed by management and employees.

Personnel Loss - returning key personnel to work by allowing them to work part-time or work at home or on a part-time basis

Question 23

Forecasting is an important step in determining what risk management techniques will provide the most cost-effective means to deal with risk. Discuss the types of forecasts that need to be made done before decision can be made…

Answer 23

Three FORECASTS which are necessary including:
1) Forecast of frequency and severity of losses that can be expected.

2) Forecast of the effects that various risk control and risk financing techniques may have in frequency, severity and predictability of these projected losses.

3) Forecast of the costs of these techniques.
Forecasting involves gathering and organizing data on past losses. using probability analysis and trend analysis, future losses can be predicted with some certainty.

Question 24

the ability to survive an accidental loss is a _______ of all organizations

Answer 24

Fundamental goal

Question 25

Risk Management involves the application of a ____________ to risks

Answer 25

Rational Process

Question 26

risk management is primarily concerned with the use of insurance as a means of managing and organizations exposure to loss. true or false

Answer 26

FALSE

Question 27

risk management is concerned with making decisions which arrived at the most cost-effective ways to deal with....

Answer 27

An organization's loss exposures

Question 28

a risk management program will succeed even if it does not receive the full support of both owners and management. true or false

Answer 28

FALSE

Question 29

intangible property values are not considered in the identification of possible loss exposures to an organization. true or false

Answer 29

FALSE

Question 30

in identifying loss exposures, no attention is required to be given to the effects of human or economic perils on the organization. true or false

Answer 30

FALSE

Question 31

the overall financial consequences of a loss exposure during a specific period of time depends upon the frequency and severity of losses occurring during that period.

Answer 31

TRUE

Question 32

Special Risk Management decisions generally do not have to be made for lost exposures having a frequency rating of ______ and a _____ severity rating

Answer 32

ALMOST NIL and a SLIGHT severity rating

Question 33

The organization's financial records help the risk manager to identify important information about the organization's assets and liabilities and its sources of income and expenses. true or false

Answer 33

TRUE

Question 34

Generally, although survey forms, financial statements, and flowcharts serve a valuable purpose in identifying loss exposures, there is no substitute for ____________

Answer 34

PERSONAL INSPECTIONS

Question 35

Avoidance is a practical loss control technique for the majority of businesses. TRUE or FALSE

Answer 35

FALSE

Question 36

Retention is by far the most common means used to finance losses. True or False

Answer 36

False

Question 37

A contractual transfer through insurance should always be recommended by the broker as the primary means of risk financing even though other techniques or combination of techniques would be sufficient. true or false

Answer 37

FALSE

Question 38

Once implemented, the risk management program needs to be continuously monitored and adjusted. true or false

Answer 38

TRUE

Question 39

risk management

Answer 39

is the process of making and carrying out decisions that will minimize the adverse effects of accidental losses upon an organization

Question 40

LOSS EXPOSURE

Answer 40

is the chance of financial loss to an organization as a result of a particular peril striking a thing of value

Question 41

tangible property

Answer 41

property that is real, can be touched, and has form and substance

Question 42

going concern value

Answer 42

the difference in the value of property which must be sold after a loss and its value had the business continued

Question 43

intangible property

Answer 43

property that has no physical substance and consists of legal rights rather than things

Question 44

expediting costs

Answer 44

the extra costs incurred in hastening the recovery of a business after a loss

Question 45

risk control

Answer 45

refers to the steps taken to reduce the frequency and severity of losses as much as possible with the resources that are available

Question 46

risk financing

Answer 46

is concerned with paying those losses that inevitably occur

Question 47

segregation

Answer 47

involves arranging an organization's activities and resources so that no single event can cause simultaneous losses to all of them

Question 48

separation

Answer 48

involves dividing an organization's single asset or operation into two or more separate units

Question 49

duplication

Answer 49

involves complete reproduction of an organization's own standby asset or facility to be kept in reserve

Question 50

retention

Answer 50

includes all means of generating funds from within the business to pay for losses

Question 51

contractual transfer

Answer 51

includes all means of generating funds from outside the business to pay for losses

Question 52

exposure avoidance

Answer 52

the purpose of exposure avoidance is to eliminate any possibility of loss. this is achieved when exposures are a completely avoided or be eliminated. the advantage to this technique is that there are no losses.

Question 53

what is a disadvantage of exposure avoidance

Answer 53

the disadvantage to exposure avoidance as a risk control technique is that in avoiding one exposure, businesses generally create another

Question 54

loss prevention techniques focus on reducing the...

Answer 54

frequency of losses

Question 55

once because of a losses identified, measures are taken to stop it from happening, or at least make it more unlikely.. i.e. installing burglar alarms, fire extinguishing systems. What can be said about these techniques?

Answer 55

although loss prevention techniques help to reduce the frequency of losses, they are not totally effective in eliminating them

Question 56

what is the aim of loss reduction techniques

Answer 56

to reduce the severity of losses that do occur

Question 57

do loss reduction techniques guarantee that severe losses will not happen?

Answer 57

no they do not

Question 58

two ways to achieve SEGRAGATION

Answer 58

1) SEPARATION | 2) DUPLICATION

Question 59

Regarding CONTRACTUAL TRANSFER while the courts generally agree that an organization may transfer its financial responsibility for a loss, they are more reluctant to recognize any agreement which transfers certain responsibilities established upon it...

Answer 59

BY LAW. in other words, although desirable in certain respects, CONTRACTUAL TRANSFER as a risk control technique may not always be depended upon to achieve the intended results.

Question 60

Unfunded Reserves

Answer 60

An unfunded reserve recognizes in advance that a business will suffer a loss. - An accounting entry is made to establish the reserve against which future losses are to be charged. because no monies are specifically allocated to the account to pay losses, it is said to be unfunded

Question 61

Funded Reserves

Answer 61

A funded reserve is supported by cash, securities, or other liquid assets which have been set aside to pay expected losses.

Question 62

what is the key disadvantage to funded reserves as a risk financing technique

Answer 62

it ties up capital which could be better used in the business. Also, the uncertainty about the size of a single loss means that the amount of ANY ONE LOSS could exceed the amount of the fund.

Question 63

Borrowed Funds

Answer 63

borrowing as a risk financing technique is not widely the used. when funds need to be borrowed to pay losses, the business losses some part of its ability to borrow funds for other purposes. if the loss is severe enough, the borough or may not meet the financial institutions criteria to qualify for a loan to fully repair or replace the damaged.

Question 64

Affiliated Capital Insurer

Answer 64

The advantage to the organization is that a separate internal financial unit has assumed responsibility for payment of losses. However, very few organizations have the capacity to finance their losses this way.

Question 65

identify two circumstances under which retention would be viewed as an appropriate risk financing technique

Answer 65

1. when forced onto the organization (forced retention) | 2. When selected as viable option in which to finance losses (optional retention)