Risk Management Exam
Risk - ANSUncertainty about outcomes that can be either positive or negative.
Risk Management - ANSThe process of making and implementing decisions
that enable an organization to optimize its level of risk.
-identify
-select techniques
Risk Management Process - ANS. Identify potential losses
• Measure and analyze the loss exposures
• Select the appropriate combination of techniques for treating the loss
exposures
• Implement and monitor the risk management program
Steps in the Risk Management Process - ANS1. Identify loss exposure
2. Measure and analyze the loss exposure
3. Select the appropriate combination of technique for treating the loss
exposure
include risk control ( use for the Hazard risk)
- Avoidance
- Loss prevention
- Loss reduction
And risk financing
- retention
- Non insurance transfers
- Insurance
4. Implement and monitor the risk management program
Measure and Analyze Loss Exposures - ANSEstimate for each type of loss
exposure:
- Loss frequency refers to the probable #number# of losses that may occur
during some time period
- Loss severity refers to the probable# size# of the losses that may occur
• Rank exposures by importance
• Loss# severity# is more important than loss frequency:
- The maximum possible loss is the worst loss that could happen to the firm
during its lifetime
- The probable maximum loss is the worst loss that is likely to happen
1. Risk control refers to techniques that reduce the frequency and severity of
losses
• Methods of risk control include:
- Avoidance
, - Loss prevention
- Loss reduction - ANSLoss prevention refers to measures that reduce the
frequency of a particular loss
- e.g., installing safety features on hazardous products
• Loss reduction refers to measures that reduce the severity of a loss after it
occurs
- e.g., installing an automatic sprinkler system
2. Risk financing refers to techniques that provide for the payment of losses
after they occur
Methods of risk financing include:
- Retention
- Non-insurance Transfers
- Commercial Insurance - ANSRetention means that the firm retains part or
all of the losses that can result from a given loss
- Retention is effectively used when:
• No other method of treatment is available • The worst possible loss is not
serious
• Losses are highly predictable
A risk manager has several methods for paying retained losses: - ANS-
Current net income: losses are treated as current expenses
- Unfunded reserve: losses are deducted from a bookkeeping account
- Funded reserve: losses are deducted from a liquid fund
- Credit line: funds are borrowed to pay losses as they occur
Self-insurance, or self-funding is a special form of planned retention by
which part or all of a given loss exposure is retained by the firm - ANSA risk
retention group (RRG) is a group captive that can write any type of liability
coverage except employers' liability, workers compensation, and personal lines
- They are exempt from many state insurance laws
A non-insurance transfer - ANSis a method other than insurance by which a
pure risk and its potential financial consequences are transferred to another party
- Examples include: contracts, leases, hold- harmless agreements
Advantages of Non-insurance transfer
- Can transfer some losses that are not insurable
- Less expensive
- Can transfer loss to someone who is in a better position to control losses -
ANSDisadvantages
- Contract language may be ambiguous, so transfer may fail
- If the other party fails to pay, firm is still responsible for the loss
- Insurers may not give credit for transfers
Risk - ANSUncertainty about outcomes that can be either positive or negative.
Risk Management - ANSThe process of making and implementing decisions
that enable an organization to optimize its level of risk.
-identify
-select techniques
Risk Management Process - ANS. Identify potential losses
• Measure and analyze the loss exposures
• Select the appropriate combination of techniques for treating the loss
exposures
• Implement and monitor the risk management program
Steps in the Risk Management Process - ANS1. Identify loss exposure
2. Measure and analyze the loss exposure
3. Select the appropriate combination of technique for treating the loss
exposure
include risk control ( use for the Hazard risk)
- Avoidance
- Loss prevention
- Loss reduction
And risk financing
- retention
- Non insurance transfers
- Insurance
4. Implement and monitor the risk management program
Measure and Analyze Loss Exposures - ANSEstimate for each type of loss
exposure:
- Loss frequency refers to the probable #number# of losses that may occur
during some time period
- Loss severity refers to the probable# size# of the losses that may occur
• Rank exposures by importance
• Loss# severity# is more important than loss frequency:
- The maximum possible loss is the worst loss that could happen to the firm
during its lifetime
- The probable maximum loss is the worst loss that is likely to happen
1. Risk control refers to techniques that reduce the frequency and severity of
losses
• Methods of risk control include:
- Avoidance
, - Loss prevention
- Loss reduction - ANSLoss prevention refers to measures that reduce the
frequency of a particular loss
- e.g., installing safety features on hazardous products
• Loss reduction refers to measures that reduce the severity of a loss after it
occurs
- e.g., installing an automatic sprinkler system
2. Risk financing refers to techniques that provide for the payment of losses
after they occur
Methods of risk financing include:
- Retention
- Non-insurance Transfers
- Commercial Insurance - ANSRetention means that the firm retains part or
all of the losses that can result from a given loss
- Retention is effectively used when:
• No other method of treatment is available • The worst possible loss is not
serious
• Losses are highly predictable
A risk manager has several methods for paying retained losses: - ANS-
Current net income: losses are treated as current expenses
- Unfunded reserve: losses are deducted from a bookkeeping account
- Funded reserve: losses are deducted from a liquid fund
- Credit line: funds are borrowed to pay losses as they occur
Self-insurance, or self-funding is a special form of planned retention by
which part or all of a given loss exposure is retained by the firm - ANSA risk
retention group (RRG) is a group captive that can write any type of liability
coverage except employers' liability, workers compensation, and personal lines
- They are exempt from many state insurance laws
A non-insurance transfer - ANSis a method other than insurance by which a
pure risk and its potential financial consequences are transferred to another party
- Examples include: contracts, leases, hold- harmless agreements
Advantages of Non-insurance transfer
- Can transfer some losses that are not insurable
- Less expensive
- Can transfer loss to someone who is in a better position to control losses -
ANSDisadvantages
- Contract language may be ambiguous, so transfer may fail
- If the other party fails to pay, firm is still responsible for the loss
- Insurers may not give credit for transfers
