Risk Management Exam With Questions And Answers
#10
What is moral hazard? - correct answer Moral hazard is a behavior change due to
insurance-like benefits. An example of a moral hazard would be if a building owner
burned a building. The peril would be fire, frequency would be increased, and the crime
would be Arson. Finally, the moral hazard would be to collect property insurance.
What is pure risk? - correct answer Pure risk is the focus of traditional risk management,
where all losses are recorded in financial terms. There is either a loss or no loss. When
a loss is incurred, it is due to random events.
What are some examples of pure risk? - correct answer Flood, fire, theft, sickness and
death are all examples of pure risk. These risks generally are insurable.
What happens if a loss is known with certainty? - correct answer If a loss was known
with certainty, there is no risk present because there is no uncertainty. However, there
is still a loss.
What are the three ways to help prevent and brace for a loss? - correct answer The
three ways to help prevent and brace for a loss are loss mitigation (reducing severity;
e.g. Safety programs) activities, budgeting for the loss, and avoiding the loss situation.
What is speculative risk? - correct answer Speculative risk is a risk that provides either
a gain, loss, or no loss/gain. These risks are generally not insurable.
What are some examples of speculative risk? - correct answer Gambling, investments,
stocks, owning a business and developing a new product are all examples of
speculative risk.
What is the difference between static and dynamic risk? - correct answer Static risk
does not change significantly over time and it is always present. Dynamic risk is a result
of changing circumstances, laws and conditions and is not always present.
What are some examples of static risks? - correct answer Natural disasters, fire, theft
and death are all examples of static risks.
What are some examples of dynamic risks? - correct answer Internet, privacy,
exchange rates, fuel prices, tax laws and terrorism are all examples of dynamic risks.
What is the cost/burden of risk? What are its components? - correct answer The
cost/burden of risk is the cost of actual losses sustained. The components are 1.)
Financial losses, 2.) Loss of goodwill, 3.) Loss mitigation tools, 4.) Loss of goods and
services that are too risky, and 5.) Loss of residual uncertainty. A primary example of
this would be medical malpractice.
, What are the three major types of pure risk? - correct answer The three major types of
pure risk are personal, property and liability pure risk.
What are sources of personal pure risk? - correct answer Injury, illness, sickness and
death are all sources of personal pure risk because they all damage human capital.
Everyone faces personal pure risk because everyone has human capital.
What do loss of income and medical expenses equal? - correct answer Loss of income
and medical expenses equal the an economic loss, which is a financial consequence of
a loss exposure to human capital.
What are the two components to the sources of property pure risk? - correct answer
The two components are direct losses and indirect losses. Ultimately, these two create
a net income loss exposure. For example, if there is a fire in a building, the direct losses
would be the cost of replacing and repairing the building. On the other hand, in result of
the loss occurring, the indirect losses would be extra expenses and loss of income.
Everybody faces property pure risk because everybody owns something.
What is a source of liability pure risk? - correct answer A source of liability pure risk is
negligence. This results in financial consequences (legal fees, judgement, reputation
loss). This can be seen in product liability cases, where a product manufactured by a
company injures/hurts someone that is using the product.
What is a peril? - correct answer A peril is the immediate cause of a loss.
What are examples of a peril? - correct answer Flood, unemployment, accidents, theft
and death are all examples of perils.
What is frequency of a loss? - correct answer Frequency of a loss is the number of
losses in a given time period.
What is severity? - correct answer Severity is determining how much the loss will cost.
What is a hazard? - correct answer A hazard is a condition that lies behind the
occurrence of a loss and serves to increase the frequency of loss, increase the severity
of a loss, or both.
What is a physical hazard? - correct answer A physical hazard can cater to the location,
construction or the use of a property. An example of a physical hazard for a location
would be if the peril is flood and the property is located in a flood zone. Frequency
would be increased in a flood zone in comparison to a non-flood zone.
What is a morale hazard? - correct answer A morale hazard is carelessness concerning
losses because of the presence of insurance. An example of a morale hazard would
texting while driving.
#10
What is moral hazard? - correct answer Moral hazard is a behavior change due to
insurance-like benefits. An example of a moral hazard would be if a building owner
burned a building. The peril would be fire, frequency would be increased, and the crime
would be Arson. Finally, the moral hazard would be to collect property insurance.
What is pure risk? - correct answer Pure risk is the focus of traditional risk management,
where all losses are recorded in financial terms. There is either a loss or no loss. When
a loss is incurred, it is due to random events.
What are some examples of pure risk? - correct answer Flood, fire, theft, sickness and
death are all examples of pure risk. These risks generally are insurable.
What happens if a loss is known with certainty? - correct answer If a loss was known
with certainty, there is no risk present because there is no uncertainty. However, there
is still a loss.
What are the three ways to help prevent and brace for a loss? - correct answer The
three ways to help prevent and brace for a loss are loss mitigation (reducing severity;
e.g. Safety programs) activities, budgeting for the loss, and avoiding the loss situation.
What is speculative risk? - correct answer Speculative risk is a risk that provides either
a gain, loss, or no loss/gain. These risks are generally not insurable.
What are some examples of speculative risk? - correct answer Gambling, investments,
stocks, owning a business and developing a new product are all examples of
speculative risk.
What is the difference between static and dynamic risk? - correct answer Static risk
does not change significantly over time and it is always present. Dynamic risk is a result
of changing circumstances, laws and conditions and is not always present.
What are some examples of static risks? - correct answer Natural disasters, fire, theft
and death are all examples of static risks.
What are some examples of dynamic risks? - correct answer Internet, privacy,
exchange rates, fuel prices, tax laws and terrorism are all examples of dynamic risks.
What is the cost/burden of risk? What are its components? - correct answer The
cost/burden of risk is the cost of actual losses sustained. The components are 1.)
Financial losses, 2.) Loss of goodwill, 3.) Loss mitigation tools, 4.) Loss of goods and
services that are too risky, and 5.) Loss of residual uncertainty. A primary example of
this would be medical malpractice.
, What are the three major types of pure risk? - correct answer The three major types of
pure risk are personal, property and liability pure risk.
What are sources of personal pure risk? - correct answer Injury, illness, sickness and
death are all sources of personal pure risk because they all damage human capital.
Everyone faces personal pure risk because everyone has human capital.
What do loss of income and medical expenses equal? - correct answer Loss of income
and medical expenses equal the an economic loss, which is a financial consequence of
a loss exposure to human capital.
What are the two components to the sources of property pure risk? - correct answer
The two components are direct losses and indirect losses. Ultimately, these two create
a net income loss exposure. For example, if there is a fire in a building, the direct losses
would be the cost of replacing and repairing the building. On the other hand, in result of
the loss occurring, the indirect losses would be extra expenses and loss of income.
Everybody faces property pure risk because everybody owns something.
What is a source of liability pure risk? - correct answer A source of liability pure risk is
negligence. This results in financial consequences (legal fees, judgement, reputation
loss). This can be seen in product liability cases, where a product manufactured by a
company injures/hurts someone that is using the product.
What is a peril? - correct answer A peril is the immediate cause of a loss.
What are examples of a peril? - correct answer Flood, unemployment, accidents, theft
and death are all examples of perils.
What is frequency of a loss? - correct answer Frequency of a loss is the number of
losses in a given time period.
What is severity? - correct answer Severity is determining how much the loss will cost.
What is a hazard? - correct answer A hazard is a condition that lies behind the
occurrence of a loss and serves to increase the frequency of loss, increase the severity
of a loss, or both.
What is a physical hazard? - correct answer A physical hazard can cater to the location,
construction or the use of a property. An example of a physical hazard for a location
would be if the peril is flood and the property is located in a flood zone. Frequency
would be increased in a flood zone in comparison to a non-flood zone.
What is a morale hazard? - correct answer A morale hazard is carelessness concerning
losses because of the presence of insurance. An example of a morale hazard would
texting while driving.
