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RMIN MIDTERM Flashcards

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1
Q

What are the two meanings of risk?

A
  1. Higher expected loss
  2. Variability of Loss
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2
Q

Expected loss = ?

A

Frequency * Severity

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3
Q

What are the three Categories of Risk

A

Societal
Business
Personal

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4
Q

What are the 4 Major types of Risks

A

Hazard
Financial
Operational
Strategic

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5
Q

What are the two types of Risk treatment

A

Loss control (Reduce likelihood or size of loss

Loss financing: How to pay for a loss (Insurance)

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6
Q

What is Pure Risk

A

2 possible outcomes
ex: Fire, Theft, Flood

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7
Q

What is Speculative Risk

A

3 possible outcomes: Loss, no loss, gain
ex: Investing, Gambling

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8
Q

What 2 Major types of risks falls under Pure risk

A

Hazard Risks
Operational Risks

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9
Q

Fundamental Risk

A

Impacts a large number of people or companies
(Losses are correlated)
ex: Hurricanes, Inflation

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10
Q

What 2 Majour types of risks fall under speculative risks

A

Financial Risks
Strategic Risks

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11
Q

Particular risk

A

Impacts only one or a few people or companies
(Losses are uncorrelated)
ex: Auto accidents, Burglaries

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12
Q

Static risk

A

Risk in an unchanging environment
ex: Lightning, death, windstorm

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13
Q

Dynamic risk

A

Risk created by changes in society
ex: Cyber attacks, oil prices

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14
Q

Subjective Risk

A

Risk based on the mental state of an individual

Stems from doubt or worry about outcomes

Psychological uncertainty

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15
Q

Objective Risk

A

The probable variation of actual from expected experience

Precisely observable and thus measurable

Outcome of die roll

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16
Q

What are the two types of Risk Attitudes

A

Risk averse - Avoid risk and will pay to offload
Risk seeking - Likes Risk and will pay to take on additional risk

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17
Q

Exposure means

A

An opportunity for loss. Something or someone facing the risk of loss.
* Need to identify loss exposures or risk exposures

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18
Q

What is a Peril

A

The event or action which causes a loss

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19
Q

What is a hazard

A

A condition which increases the frequency or severity of loss
* Physical hazard
* Moral hazard

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20
Q

What is risk management

A
  • The process used to systematically manage risk
    exposures
  • Traditionally referred to management of pure risks only
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21
Q

What is enterprise risk management? (ERM)

A

A modern and expanded risk management approach which
targets all forms of risk
* Management of both pure and speculative risks

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22
Q

What are the 4 things in the Risk management cycle

A

Identify risks -> Evaluate risks -> Select risk management techniques -> Implement and review decisions

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23
Q

Risk management requires? (3)

A

Risk identification and analysis
Risk treatment (Control vs Financing)
Evaluation of costs & benefits (Of diff risk man strategies)

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24
Q

What are examples of direct losses

A

Damage to Assets
Injury & illness to employees
Liability claims & Defence costs

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25
What are examples of Indirect loss
- Loss of Normal Profit (Net Cash Flow) - Continuing & Extra Operating Expense - Higher Cost of Funds & Foregone Investment - Bankruptcy Costs (legal fees)
26
What are the 5 components of Cost of risk
Expected losses Cost of loss control Cost of loss financing Cost of internal risk reduction cost of residual uncertainty
27
Of the 5 components of risk what two components are COST OF LOSSES
Expected losses Cost of residual uncertainty
28
Of the 5 components of risk what three components are COST OF RISK MANAGEMENT
Cost of loss control Cost of loss Financing Cost of internal risk reduction
29
When Costs of RM increase the cost of_ decrease?
The cost of losses decrease
30
What is the goal of risk management?
To maximize value by minimizing the cost of risk
31
Value with risk =?
Value of risk - cost of risk
32
What are the key benefits of ERM
Defense Avoid surprises, anticipate & prevent potential negative events/impacts * Pro-active risk management (identify risks and prevent losses) Offense Increase firm value * Increases the range of opportunities available to the firm and increase positive outcomes (identify which risks they are good at managing)
33
What are the step in linking ERM and the business strategy
1. What drives drives/could drive value for the firm 2. What risks can Hinder or HELP the firm 3. Is the firms strategy aligned with the firms mission or vision 4. What risks are generated from going with a chosen strategy
34
What are the 5 steps in the Risk management Process
1. Communicate & Consult 2.Establish the Context 3. Risk Assessment - Risk Identification - Risk Analysis - Risk evaluation 4. Risk treatment 5. Monitor & Review
35
How do you "Establish the context"
Find out what the companies objectives are
36
What is internal context
* Includes all internal environment factors that impact risk and Internal steak holders
37
What is External context
* Includes all external environmental parameters and factors. * Includes external stakeholders and their values, perceptions and relationships.
38
What are some methods to identify risk
You could do/examine: financial statements: balance sheet, income & expenses Contracts On-site inspections, interviews Statistical loss analysis
39
What do you want to know after risk identification
what could we lose? why could we lose it? what conditions can make losses more likely and/or more severe?
40
Contingent Business Interruption exposure is...
When a loss to a major customer or supplier is incurred
41
What are the 5 Quantifiable risks
Financial insurable hazard risk Operational risk Compliance risk Projects risk
42
What are the 5 Unquantifiable Risks
Strategic Environmental Politcal Technology innovation Cybersecurity
43
What are the 2 metric used in quantifying either type of risk
Quantitative: Standard deviation Qualitative: Risk rating scales
44
Expected loss calc =?
$Damage * Probability
45
Variance equation =?
Probability * ( $Damage - Expected loss)^2
46
What does zero, positive and negative correlation mean?
Cero: no linear relationship between the two variables Positive: variables tend to move in the same direction Negative:variables tend to move in opposite directions
47
Frequency is calculated by...
of losses / # of employees
48
Expected severity per injury formula =?
Total cost / # of injuries
49
Risk evaluation is...
Know which risks are/aren't acceptable and which ones should be a priority
50
What are the 3 ways in risk treatment
Risk control Risk financing Avoidance
51
What are the two subsets in Risk Control
Loss prevention Loss reduction (Before-After)
52
What are the two subsets in Risk Financing
Retention Transfer
53
What is Loss Prevention
Reduce the frequency of loss
54
What is Loss reduction (Before/After)
Reduce the severity of loss pre ex: Sprinklers Post ex: Put on tarp after damage
55
What is Risk retention?
pay for losses directly out of the organization’s funds; hence, retain risk
56
What are internal Funds:
cash flow (current expensing) reserve captive insurance company
57
What are external funds:
Debt Equity
58
What is "Real property"
Land and all structures permanently attached to land ex: Fixture, crops, building
59
What is "personal property"
all other property (not permanently attached to real property) * Vehicles * Contents
60
What is personal liability
If you cause an accident while driving, you are liable to the other driver for damages (injuries and property damage).
61
What is Product liability:
If an automobile is defective and results in the driver being in an accident the manufacturer is liable for damages.
62
Types of liability damages are
Bodily injury Personal injury Property damage Legal expenses
63
Bodily injury is...
damage to a person’s body or mind * Medical bills * Loss of income * Rehabilitation costs * Pain and suffering * Punitive damages
64
Personal injuries are...
* Libel * Slander * Invasion of privacy * False arrest * ...many others
65
What are the two types of awards for losses
Compensatory damages Punitive damages
66
Compensatory damages are (2 types)
Special damages General damages
67
Special damages are...
Monetary compensationfor economic losses -Medical expenses, lost wages, property damage
68
General damages are...
Monetary compensation for non-monetary losses -Pain and suffering, emotional distress, loss of consortium
69
Punitive damages are...
Meant to punish and deter - typically not covered under insurance
70
What is a tort
A legal injury or wrong to another that arises out of actions other than breach of contract
71
The plaintiff must prove what 4 elements for proof of negligence
1. Legal duty of care owed to the plaintiff (reasonable care) 2. Breach of legal duty 3. Damages (usually bodily injury or property damage) 4. Proximate cause of loss (foreseeability test)
72
What are the defence against liability
Assumption of risk Contributory or comparative negligence
73
Assumption of risk is?
plaintiff assumed that there was risk of harm from *conduct of the defendant *condition of the premises *the defendant’s product
74
Contributory negligence is?
If plaintiff contributed to their own injury, they may not recover any damages (in some US states)
75
What is comparative negligence?
If plaintiff contributed to their own injury, damages are allocated based on percentage of fault. Award reduced in proportion to plaintiff’s fault.
76
What is strict liability
Defendant is liable even if not negligent Ex: your venomous pet snake escapes and bites someone
77
What is the Res Ipasa loquitur rule?
Burden of proof reverses: - Plaintiff DOES NOT need to prove negligence. - Up to the defendant to prove they were NOT negligent -Ex: a surgeon leaves a scalpel in a patient
78
What is joint and several liability?
Actions of multiple parties combined to cause the loss:
79
What is the threshold to keep on investing for optimal safety
Invest in safety until MB
80
What are some examples of Hazard risks
Fire and Property damage Windstorm and other nature perils Theft and other crimes Personal injury disease and disability Liability claim
81
What are some examples of Financial Risks
Price Liquidity Credit Inflation Hedging/basisi risk
82
What are some examples of Operational risks
Business operations Empowerment Information technology Information/business reporting
83
What are some examples of Strategic risks?
Reputational damage Competition Customer wants Demographic and social/cultural trends Technological innovation Capital availability Regulatory and political trends
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