Risk Management Exam 1 (2025) ||
Complete Questions & Solutions (100%
Correct)
The number of losses occurring in a given time period. Alternatively, the probability of a
loss in a given time period - ANSWER - Frequency
The dollar amount of a given loss or the aggregate dollar amount of all losses for a
given period - ANSWER - Severity
A situation or activity that may lead to an adverse financial consequence - ANSWER -
Exposure
The specific cause of a loss, e.g., fire, wind, hail, slip and fall - ANSWER - Peril
All costs associated with the risks taken by an organization including all losses and all
expenses associated with managing loss exposures - ANSWER - Total Cost of Risk
(TCOR)
the deliberate process of finding and cataloguing the loss exposures of an organization.
- ANSWER - Risk Identification
The systematic process of controlling managing the uncertainty of loss exposures that
affect an organization's assets and impede goals - ANSWER - Risk Management
One of two major categories of risk management techniques available, it attempts to
engage in activities that reduce uncertainty or the amount of loss experienced by an
organization, either by reducing the frequency of loss or the severity of loss - ANSWER
- Risk Control
One of two major categories of risk management techniques available, it is the method
used to finance losses experienced by an organization; two extremes of it are retention
(fully funded by the organization) and risk transfer (paid by another party such as an
insurer) - ANSWER - Risk Financing
Implementing a risk management program, including establishing and communicating
policy, assigning responsibility, hiring staff, developing risk management information
systems, etc. - ANSWER - Risk Administration
Sometimes called systematic risk, it is uncertainty that is tied to the state of the
economy or business cycle. - ANSWER - Economic Risk
, Uncertainty in the applicability or interpretation of contracts, laws, liability, or regulations.
For example, a jury may decide that an insurer's policy is unclear and require payment
for unintended losses - ANSWER - Legal Risk
Uncertainty associated with changes, interpretations, or reinterpretations of
governmental rules and regulations. It is often used to refer to businesses that are
operating in foreign countries with political instability. - ANSWER - Political risk
One of the ERM risk quadrants, these risks are the subject of "traditional" risk
management, which often involved significant use of insurance as a risk management
technique. These risks are pure risks that stem internally and include property, liability,
and personnel (especially employee injury) - ANSWER - Hazard risks
One of the ERM risk quadrants, these risks are pure risks that stem from people or
failures in business processes /systems. Examples include breakdown of computer
systems or inadequate process training - ANSWER - Operational Risks
One of the ERM risk quadrants, these risks are speculative risks caused by the effect of
forces in the financial markets which affect asset or liability values. Includes commodity
price risk, interest rate risk, foreign exchange risk, and equity price risk - ANSWER -
Financial Risks
One of the ERM risk quadrants, these risks are speculative risks related to major
decisions of the company. Because strategic decisions by the company are impacted by
social changes, regulatory and political environment, and demographics, there are
unpredictable consequences of those decisions - ANSWER - Strategic Risks
Differentiate pure risk and speculative risk. Give an example of each type. - ANSWER -
Pure risk involves only uncertainty of either experiencing a loss or not, there is no
potential for gain. An example would be the uncertainty of getting hit by a tornado.
Speculative risk involves not only the potential for loss, but the possibility of gain too. An
example would be a business venture - it could be successful or the business could lose
money. In general, only pure risks are insurable.
Which of the following loss probabilities (P) is riskier? Explain your answer.
P(A) = 1% P(B) = 50% P(C) = 99% - ANSWER - Options A and C are relatively certain;
A is not likely to happen (only 1% chance) and C is very likely to happen. Option B is
more uncertain (and therefore riskier) because we don't know what the outcome will be.
What are the components of the total cost of risk? - ANSWER - TCOR includes all the
costs associated with risk including any losses and any costs of establishing a risk
management program
Complete Questions & Solutions (100%
Correct)
The number of losses occurring in a given time period. Alternatively, the probability of a
loss in a given time period - ANSWER - Frequency
The dollar amount of a given loss or the aggregate dollar amount of all losses for a
given period - ANSWER - Severity
A situation or activity that may lead to an adverse financial consequence - ANSWER -
Exposure
The specific cause of a loss, e.g., fire, wind, hail, slip and fall - ANSWER - Peril
All costs associated with the risks taken by an organization including all losses and all
expenses associated with managing loss exposures - ANSWER - Total Cost of Risk
(TCOR)
the deliberate process of finding and cataloguing the loss exposures of an organization.
- ANSWER - Risk Identification
The systematic process of controlling managing the uncertainty of loss exposures that
affect an organization's assets and impede goals - ANSWER - Risk Management
One of two major categories of risk management techniques available, it attempts to
engage in activities that reduce uncertainty or the amount of loss experienced by an
organization, either by reducing the frequency of loss or the severity of loss - ANSWER
- Risk Control
One of two major categories of risk management techniques available, it is the method
used to finance losses experienced by an organization; two extremes of it are retention
(fully funded by the organization) and risk transfer (paid by another party such as an
insurer) - ANSWER - Risk Financing
Implementing a risk management program, including establishing and communicating
policy, assigning responsibility, hiring staff, developing risk management information
systems, etc. - ANSWER - Risk Administration
Sometimes called systematic risk, it is uncertainty that is tied to the state of the
economy or business cycle. - ANSWER - Economic Risk
, Uncertainty in the applicability or interpretation of contracts, laws, liability, or regulations.
For example, a jury may decide that an insurer's policy is unclear and require payment
for unintended losses - ANSWER - Legal Risk
Uncertainty associated with changes, interpretations, or reinterpretations of
governmental rules and regulations. It is often used to refer to businesses that are
operating in foreign countries with political instability. - ANSWER - Political risk
One of the ERM risk quadrants, these risks are the subject of "traditional" risk
management, which often involved significant use of insurance as a risk management
technique. These risks are pure risks that stem internally and include property, liability,
and personnel (especially employee injury) - ANSWER - Hazard risks
One of the ERM risk quadrants, these risks are pure risks that stem from people or
failures in business processes /systems. Examples include breakdown of computer
systems or inadequate process training - ANSWER - Operational Risks
One of the ERM risk quadrants, these risks are speculative risks caused by the effect of
forces in the financial markets which affect asset or liability values. Includes commodity
price risk, interest rate risk, foreign exchange risk, and equity price risk - ANSWER -
Financial Risks
One of the ERM risk quadrants, these risks are speculative risks related to major
decisions of the company. Because strategic decisions by the company are impacted by
social changes, regulatory and political environment, and demographics, there are
unpredictable consequences of those decisions - ANSWER - Strategic Risks
Differentiate pure risk and speculative risk. Give an example of each type. - ANSWER -
Pure risk involves only uncertainty of either experiencing a loss or not, there is no
potential for gain. An example would be the uncertainty of getting hit by a tornado.
Speculative risk involves not only the potential for loss, but the possibility of gain too. An
example would be a business venture - it could be successful or the business could lose
money. In general, only pure risks are insurable.
Which of the following loss probabilities (P) is riskier? Explain your answer.
P(A) = 1% P(B) = 50% P(C) = 99% - ANSWER - Options A and C are relatively certain;
A is not likely to happen (only 1% chance) and C is very likely to happen. Option B is
more uncertain (and therefore riskier) because we don't know what the outcome will be.
What are the components of the total cost of risk? - ANSWER - TCOR includes all the
costs associated with risk including any losses and any costs of establishing a risk
management program
