NAFA Chapter 2: Fundamentals of Risk Management Questions With Correct Solutions

NAFA Chapter 2: Fundamentals of Risk Management Two Factors of Risk - ANS There is more than one possible outcome, and at least one of the outcomes has a negative element. Risk Management - ANS the process of identifying, evaluating and measuring risk, then developing strategies to control it The basic purpose of management is to- - ANS maximize production efficiency by achieving an optimum balance between bene ts and costs. The basic purpose of risk management is to- - ANS make the most efficient pre-loss arrangement for a post-loss balance between resources needed and resources available to preserve the effective operation of the organization Risk Capacity - ANS establishes the amount of risk an organization is able to withstand Risk Appetite - ANS the amount of risk an organization is willing to take six techniques most commonly employed to manage risk - ANS • Risk avoidance • Risk retention • Hazard reduction • Loss reduction • Risk transfer • Risk reduction Exposure= - ANS Risk-Control Fleet managers will most often interact with risk managers on issues related to - ANS outcomes from automobile crashes and issues related to repair facilities. The goal of risk management is to - ANS minimize the frequency and severity and maximize the opportunities associated with these and numerous other types of risk. Frequency of loss refers to - ANS the actual number of times the same (or similar) loss occurs. Severity of loss refers to - ANS the size (or cost) of the loss to the organization. It determines how bad a given situation or event may get by measuring the amount of damage likely to be suffered. A ________________ is followed to maximize the benefit derived from an ideal risk management approach - ANS prioritization process (see ch.2.2 p.10) Risk Management Process - ANS systematic, methodical system ensuring the level of risk within an organization remains within an acceptable range; generally starts with assigning the responsibility for the study to an individual or a team Risk Management Process Step One - ANS Determine the goal: examine what it is you are trying to achieve Risk Management Process Step Two - ANS Risk Identification: consider what causes risk Four factors that lead to risk - ANS uncertainty, constraints, assumptions and dependencies Tools to Identify Risk: Orientation - ANS Before any other tools are employed, the researcher or team have to be fully immersed in the operations they are investigating Tools to Identify Risk: Insurance Policy Checklist - ANS catalogue of policies or types of insurance can assist as an immediate gap analysis to highlight areas where coverage may be lacking. Tools to Identify Risk: Risk Analysis Questionnaire - ANS an act as a fact finder designed to lead the risk manager to discover risks through a series of questions about the organization Tools to Identify Risk: Flow Process Charts - ANS Preparing new or reviewing existing flowcharts can help determine the magnitude of certain losses. Tools to Identify Risk: Data Review - ANS An organization's historical data is fundamental to understanding the type and magnitude of past losses. Frequently summarized, the data will include the loss date, the loss location, the total incurred amount of the loss, the total paid on the loss as well as a description of the loss. Tools to Identify Risk: Physical Inspections - ANS A personal inspection of the organization's plant and equipment can reveal potential loss exposures.Interaction with plant management and employees can be very beneficial as it respects safety issues and supplier or customer concerns. Tools to Identify Risk: Financial Statements - ANS A review of financial statements can help identify the size and scope of various assets relative to the organization. It can also help determine the ability of an organization to withstand a large loss or series of losses. Tools to Identify Risk: Peer reviews and Discussions - ANS NAFA - Fleet Management Association is an excellent example of a professional organization that provides many opportunities for a fleet manager to interact with other fleet professionals to help identify the types, relative frequency and severity of losses in a specific industry sector. Property Exposures - ANS Property loss exposures result from the destruction, theft or loss of use of property in which the organization has a financial interest. It can also include intangible property such as copyrights, patents and goodwill. Liability Exposures - ANS Liability loss exposures are those resulting from a claim alleging an organization's legal responsibility for damage to property or bodily injury suffered by another person or organization. Areas of Loss Exposures - ANS • Liability resulting from company vehicles • Bodily injury to employees, customers or guests • Defective products • Sexual harassment, wrongful termination or hiring discrimination • Environmental damages • Vicarious liability from the wrongful acts of others hired or authorized by the organization Human Resources and Key Personnel Exposures - ANS these types of liability exposures are most often related to the unplanned loss of key personnel, which can have a devastating effect on an organization Business Income Exposure - ANS Most organizations prepare forward looking operating and financial plans based upon certain fundamental assumptions. Threats to business income can result from other types of losses (like a property loss) or from outside threats, such as changes in interest rates or the loss of a key supplier. Risk Management Process Step Three - ANS Risk Quantification and Measurement: risk manager analyzes the identified and documented risks to determine the significance of each type of loss Losses are analyzed for the following perameters - ANS 1. Frequency 2. Severity 3. Maximum possible loss 4. Maximum probable loss 5. Cash flow 6. Risk evaluation Risk Management Process Step Four - ANS Examine Alternative Strategies to Manage Risk: evaluate various strategies to minimize these risks and their impact on the organization's bottom line Risk Management Strategy: Risk Retention - ANS Risk retention involves accepting the loss when it occurs. This may be done out of ignorance that a risk even exists, but may be a viable risk technique when done knowingly in consideration of all factors. Risk Management Strategy: Risk Reduction - ANS Reducing risks may be achieved through loss reduction or minimizing the severity of a loss, and loss prevention, or addressing the frequency that adverse events occur. Risk Management Strategy: Risk Avoidance - ANS Risk avoidance is precisely what the term implies - staying away from the risk completely to remove the exposure and the probability that an adverse event will happen. Risk Management Strategy: Risk Transfer or Sharing - ANS Transfer or sharing of risk can be accomplished through Insurance. Insurance is a device for reducing risk by having a pool of sufficient size so that losses can be shared in a way that minimizes the impact on any one contributor. Risk Management Process Step Five - ANS Choose the Strategy (refer to risk management matrix) Risk Management Process Step Six - ANS Plan and Implement: While the matrix will indicate the best strategy to deal with specific risks, this has to be translated into a plan for that organization. Risk Management Process Step Seven - ANS Communicate Results: It is critical that every attempt is made to measure and demonstrate the utility of risk management. Risk Management Process Step Eight - ANS Monitor and Modify: continual process where improvements should be implemented regularly. Risk Management Grid: High Severity/High Frequency - ANS These risks should receive the highest priority for treatment and mitigation as they represent the biggest exposure to an organization, with severe consequences when they occur; ideal strategy is to avoid these risks, but if avoidance is impossible they should be reduced as much as possible. Risk Management Grid: High Severity/Low Frequency - ANS these risks have severe impact but happen rarely; suitable for insurance Risk Management Grid: Low Severity/High Frequency - ANS These risks have a relatively low impact on the organization but happen regularly so are retained even while loss reduction strategies are applied; financial risks are retained through insurance deductible, but most organizations still pursue safety programs. Risk Management Grid: Low Severity/Low Frequency - ANS These risks do not happen often, and even when they happen, their impact is slight. It would cost more to implement control measures to monitor and stop the losses, so the risks are retained. The Role of Fleet Managers: Insurance - ANS Insurance language can be difficult to comprehend, yet every fleet risk manager should make an e ort to have a fundamental understanding of the details of their fleet insurance coverage (further info in ch.3). The Role of Fleet Managers: Safety Programs - ANS Fleet safety programs reduce fleet costs by preventing crashes rather than managing them (further info in ch.4). The Role of Fleet Managers: Crash Management and Motor Vehicle Records - ANS Managing crash risk begins by determining which employees will receive company vehicles (further info in ch.5) The Role of Fleet Managers: Procurement, Maintenance and Remarketing - ANS Risk managers can reduce crash costs by encouraging acquisition of vehicles with better safety features and the ability to better protect drivers and passengers in crash situations. (more in ch. 2.3 p. 20-21) The Role of Fleet Managers: Fuel Price Management - ANS Financial institutions have, for some time, offered financial hedging to support fleet pricing programs by providing a tool to help manage the price of fuel and o set the risk of adverse price movements. The Role of Fleet Managers: Employee Provided Vehicles - ANS An organization that provides vehicles accepts liability. Liability is also assumed when employees use their own vehicles for official business. (more info in ch. 2.3 p. 21)