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Final Study Set: RMIN 4000 - Daniel Jeremy Brown Exam/195 Q’s and A’s
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Final Study Set: RMIN 4000 - DanielJeremy Brown Exam/195 Q’s and A’s
Exposures - -Things of value (assets) that could be lost (Any
situation/circumstance in which a loss is possible, regardless of whether a
loss actually occurs)
- Perils - -Things that could happen to your assets - cause of loss
- Risk Management - -What you do to protect these assets and/or
prevent/reduce losses (Identifies loss exposures faced by an organization
and selects the most appropriate techniques for treating such exposures)
- Risk - -The calculated possibility of a negative outcome
- Loss - -Negative outcome - must be quantifiable
- Frequency - -How often a loss occurs (number of losses that occur within a
specified time period)
- Severity - -How much a loss costs when it does occur (the dollar amount of
loss for a specific peril
- Hazard - -Condition that creates or increases frequency/severity of loss
- Physical Hazard - -A physical condition that increases the
frequency/severity of a loss
- Moral Hazard - -Presence of insurance changes the behavior of the insured
- Morale (Attitudinal) Hazard - -Carelessness/indifference to a loss
(increases frequency/severity of a loss)
- Legal Hazard - -Characteristics of legal system/regulatory environment
that increase the frequency and/or severity of a loss
- Pure Risk - -Two outcomes possible: loss or no loss (can purchase
insurance for this)
- Speculative Risk - -Three outcomes possible: loss, no loss/no gain, or gain
(cannot purchase insurance for this)
, - Diversifiable Risk - -Affects only individuals/small groups, not entire
economy: can be reduced/eliminated thru diversification (ex: fire, theft,
collision)
- Nondiversifiable Risk - -Affects entire economy/large numbers of
groups/persons within the economy - can't be reduced thru diversification,
government assistance may be needed to insure (correlated risks, ex:
hurricane)
- Enterprise Risk - -All major risks faced by a business firm (pure,
speculative, strategic, operational, financial)
- Systemic Risk - -Risk of collapse of an entire system/market due to the
failure of a single entity/group of entities
Instability in the financial system due to the interdependency between the
players in the market
- Personal Risk - -Directly affects an individual/family - involve the possibility
of loss of income, extra expenses, depletion of financial assets (ex. of perils:
death, unemployment, disability, etc.)
- Property Risk - -Possibility of losses associated with the destruction or
theft of property (Direct loss: cost to repair, Indirect loss: cost to live
elsewhere during repairs)
- Liability Risk - -Legal liability (financial consequences) resulting from
injuries/damages you caused - no upper limit
- Loss of Business Income - -Business having to shut down for a period of
time due to physical damage loss: unable to generate an income
- Risk Control - -Techniques to reduce the frequency/severity of losses
- Risk Financing - -Techniques for funding losses
- Loss Prevention - -Reduces frequency (airport security, safety training
programs)
- Loss Reduction - -Reduces severity (fire sprinklers) - can occur pre or post
loss
- Avoidance - -Type of risk control in which a certain loss exposure is never
acquired (frequency = 0) - many downsides
- Retention - -Retaining part or all of losses that can occur from a given risk
(active: deliberate, passive: unknowing)
, Good when a risk is difficult to insure, low severity, predictable loss
- Noninsurance Transfer - -Methods other than insurance by which a pure
risk and its potential financial consequences are transferred to another party
(by contract, hedging, incorporation)
- Step 1: Identify Loss Exposures - -What assets need to be protected?
What perils are those assets exposed to?
** Most important step!
- Step 2: Measure and Analyze the Loss Exposures - -Estimate the
frequency/severity of loss exposures
Rank loss exposures according to relative importance (severity >>>)
- Maximum Possible Loss - -Worst loss that could happen to the firm during
its lifetime
- Probable Maximum Loss (PML) - -The worst loss that is likely to happen
- Step 3: Consider and Select the Appropriate Risk Management Techniques
- -Options: Risk control or risk financing
- Duplication - -Back-ups or copies of important document/property
- Separation - -Dividing the assets exposed to loss to minimize the harm
from a single event
- Diversification - -Reducing the chance of loss by spreading the loss
exposure across different parties (customers, supplies), securities (stocks,
bonds), or transactions
- Captive Insurer - -Insurer owned by a patent firm for the purpose of
insuring the patent firm's loss exposures (single-parent: owned by only one
parent, group captive: several parents)
- Risk Retention Group - -Group captive that can write any type of liability
coverage except employers' liability, workers comp, and personal lines
- Deductible - -Specified amount subtracted from the loss payment
otherwise payable to the insured
- Excess Insurance - -Plan in which the insurer pays only if the actual loss
exceeds the amount a firm has decided to retain
- Manuscript Policy - -Policy specifically tailored for the firm
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