C131 Chapter 1 Introduction to Risk Management Questions And Answers

Define Risk - ANS What are the step in the risk management process? - ANS The risk management process: 1. Identifying and analyzing risk exposures 2. Formulating options for dealing with each exposure 3. Selecting the best technique (or combination of techniques) to deal with the exposure 4. Implementing the chosen technique (or combination of techniques) 5. Monitoring the results and modifying techniques used What is risk management? - ANS Define and contrast speculative risk and pure risk - ANS Speculative - uninsurable, can have gain or loss, managed by owners Pure - insurable, chance of loss but no chance of profit What methods are used to manage risk? - ANS 1. Reduction of elimination of risk by preventative effort 2. Assumption or retention of risk by self-insuring 3. Transfer of risk -By means of insurance -By means of contracts with other parties How does a broker use risk management as a prospecting tool? - ANS What job positions within a client's business can include the tasks of a risk manager? - ANS What is role of the risk manager? - ANS Big company - develop and co-ordinate risk management functions, act as advisors to the business Small company - same role might be shared among line managers Identify outside experts who can assist in the risk management process. - ANS In the risk management process, why is it important to develop a positive relationship with the client? - ANS A lot of information needed for an application is sensitive business info. Potential clients may be hesitant to disclose this information to a 3rd party. Having a positive relationship with the client helps to establish trust. Why is it important to identify all exposures during the risk management process? - ANS Define and contrast frequency of loss and severity of loss. - ANS What resources are available to assist a broker in risk analysis? - ANS Surveys, clients records and personal observations and inspections Identify permanent business losses that cannot be covered by insurance - ANS Cost of replacing customers that have turned to other suppliers Delay in taking product to marketplace Loss of employees Interruption of business during a time of growth What does the following statement mean: "When a company avoids one exposure, another is created." - ANS Provide examples of physical safety measures and of administrative safety measures that can be employed to reduce the frequency and severity of losses. - ANS Contrast risk retention and risk transfer - ANS Retention - when company absorbs a all or part of the financial loss itself (can be voluntary or involuntary) Transfer - the responsibility of paying for a loss transferred to other entities by a contract or thru an insurance policy What are two ways to transfer risk? - ANS Thru contract Insurance What is a hold harmless agreement? - ANS Agreement btwn two or more parties transferring liability from where it would normally lie to someone else and directing who shall pay for expenses related to defending an action What is a disclaimer? - ANS A refusal to accept liability for damages that might occur - denies a plaintiff's right to recovery What requirements must be met to create an effective contractual risk transfer? - ANS There must be an appropriate balance of knowledge and skills to protect the interests of each party to the contract What problems can occur with contractual risk transfer? - ANS 1. Courts can void the transfer 2. Cost control - can't control the insurance costs of the party who the risk is transferred to 3. Incompleteness of the Risk Transfer - transferor will always hold certain residual risks (ex. The transferee's insurance could be depleted by other claims or exclude the particular loss)