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Identify the two dimensions of the risk management process

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1. A decision process 2. A management or administrative process

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Identify the five steps in the decision making process

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Step 1 - Identify & analyze loss exposure Step 2 - Examine alternative risk management techniques Step 3 - Select risk management techniques Step 4 - Implement techniques Step 5 - Monitor results

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Identify the four administrative areas in the risk management process

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1. Plan 2. Organize 3. Lead 4. Control

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Identify five advantages or achievable results of brokers who use a risk management approach with their clients

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1. A more informed clientele 2. Increased retention 3. Increased customer referrals 4. Increased claims satisfaction 5. Reduction in errors & omissions potential

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Identify the purpose of Identification and Analysis

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Identification - Involved recognizing losses which might possibly occur Analysis - Involves estimating the likely significance of those possible losses

question

Why must risks be properly identified and analyzed

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Unless risks are properly identified and analyzed they cannot be properly managed

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Identify the three classifications that all loss exposures can be divided into

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1. The type of value exposed to loss 2. The peril causing the loss 3. The financial consequences of the loss

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Identify the four broad categories that the type if Value Exposed to Loss fall into

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1. Property values 2. Net income values 3. Liability loss 4. Personnel loss

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Identify the two types of Property Values

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1. Tangible 2. Intangible

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Explain Real Property

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Consists of land and generally whatever is erected or growing upon or affixed to land

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Explain Personal Property

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All tangible property other than real estate, item's subject to loss include money, stock, furniture, equipment and supplies

question

Explain Increased costs of construction

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Building codes are continuously being revised to improve building standards. Costs to meet these newer, stricter standards will be more than those that would have satisfied older codes

question

Identify four other types of tangible property

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1. Pair or set value 2. Undamaged property 3. Demolition expense 4. Debris removal

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Identify six types of intangible property

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1. Securities such as stocks and bonds 2. Trade marks and trade names 3. Right to collect accounts 4. Copyrights and patents 5. Licenses 6. Leasehold interests

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Identify two factors that might affect the Net Income Values of an organization

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1. Decreases in Revenues 2. Increases in Expenses

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Decreases in Revenues - Explain Business Interruption

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Losses which occur on the owners premises. The amount of the reduction in net income to the organization serves as the measure of the loss

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Decreases in Revenues - Explain Contingent Business Interruption

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Occurs away from the premises of the organization. The measure of a contingent business operation loss is the amount by which the net income to the organization is reduced

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Decreases in Revenues - Explain Decreased Collections of Accounts Receivable

answer

The difference in amounts collected as compared to those actually owed when accounts receivable records are lost or damaged

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Increases in Expenses - Explain Increased Operating Expenses

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Many organizations are able to continue operating after a loss. In some cases operations can continue on the same premises although at an additional cost to the organization

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Increases in Expenses - Explain Expediting Costs

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The extra cost incurred in hastening the recovery of a business after a loss

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Identify the two categories that may give rise to a Liability Loss exposure

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1. Entity to whom duty is owed 2. Source of legal duty

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Identify two parties to whom an organization may owe a legal duty

answer

1. Society 2. Particular individuals and organizations

question

Identify four costs that may be imposed on an organization following a legal action

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1. Costs to investigate and defend 2. Payment of an award for damages or costs of corrective action 3. The amount of any out of court settlement the business may decide to pay rather than go to court 4. The amount of any voluntary payments made by the business to gain the claimants goodwill or reduce the final amount of the settlement or verdict

question

Identify the two items to be considered when considering the economic loss to an organization from a personnel loss

answer

1. The value of an employee's service 2. The cost of providing employee benefits

question

Identify the three origins of perils that fall into the Peril Causing loss

answer

1. Natural 2. Human 3. Economic

question

Identify the four factors to be analyzed to quantify the financial consequences of a loss

answer

1. The likelihood of a loss occurring (loss frequency) 2. The seriousness of losses that could occur (loss severity) 3. The potential dollar losses in any given period of time (frequency times severity) 4. The reliability of the predictions of frequency and severity

question

Identify two examples to show that the financial consequence to a loss are not always related to the extent the physical damage caused

answer

1. Damage to a specialized motor or pump can, if not readily replaced, cause a business to shut down. The resulting damage could result in hundreds of thousands of dollars 2. A total fire loss to an abandoned building covering the entire city block will cause little financial loss to their owners

question

Identify and explain the four categories of Loss Frequency of the Prouty approach to analyzing the significance of loss exposures

answer

1. Almost nil - extremely unlikely to happen, virtually no possibility. 2. Slight - it could happen but has not. 3. Moderate - happens once in a while. 4. Definite - it happens regularly.

question

Identify and explain the three categories of Loss Severity

answer

1. Slight - the business can readily retain each loss. The organization may decided to absorb those costs in the same way it does other business expenses 2. Significant - the organization cannot retain each loss, some of which must be transferred. 3. Severe - the business must transfer virtually all of the loss or endanger its survival

question

Explain the 'inverse relationship, between loss frequency and loss severity

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Generally, the more frequent the loss from a given exposure, the less severe it tends to be. The more severe a loss tends to be, the less frequent its occurrence

question

Identify six methods to provide a proper basis of exposure identification and analysis

answer

1. Standardized surveys/questionnaires 2. Financial statements and underlying records 3. Other records and documents 4. Flowcharts 5. Personal inspection 6. Consultation with experts within and outside the business

question

Identify five documents included in financial statements and underlying record

answer

1. The balance sheet 2. The operating (profit and loss) statement 3. The statement of changes in financial position 4. The opinion letter 5. Notes

question

Identifying four documents included under other records and documents

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1. Minutes of meetings of the board of directors, executives or other senior management groups 2. Memoranda exchanged between senior executives or officials 3. All sales or purchase contracts over a predetermined amount 4. Plans or drawings for architectural or engineering changes in the organizations buildings, machinery, workflow and office layout

question

Identify two sources under consultation with experts within and outside of the business

answer

1. Internal sources 2. External sources

question

Identify an advantage and disadvantage for standardized surveys/questionnaires

answer

Advantage - it can normally be answered by people who have little risk management experience, such as business owners Disadvantage - there is a concern that they do not stimulate the user to do anything after the document has been completed

question

Identify a weakness for balance sheet or operating statement

answer

They represent past performance of the business and can not be depended upon to predict what will happen in the future

question

Identify the weakness in other records and document

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The examination of all documents produced or flowing into the business would be both impossible and impractical

question

Identify a weakness in flowcharts

answer

Do not provide a complete method for identifying all of its loss exposures. Although each step in the production process is identified its vulnerability to loss is not

question

Identify two internal and two external sources of information available to assist in categorizing and analyzing loss exposures

answer

Internal 1. Businesses personnel 2. Documents it generates External 1. Professional organizations 2. Government agencies

question

Explain three reasons for brokers to conduct personal inspection of the clients organization

answer

1. A first-hand look at the actual exposures will normally lead to better loss forecasts 2. Discussion with the organization staff will also provide a better understanding of the potential effect of certain types of losses 3. Brokers can gain valuable experience in exposure identification by taking every opportunity to company risk management specialists and underwriters on inspections

question

Identify the two techniques to be considered for dealing with each loss exposure identified and analyzed in step one

answer

1. Risk control 2. Risk financing

question

The objective of risk control is to reduce the frequency and/or severity of losses as much as possible with the resources available. Identify and explain five risk control techniques

answer

1. Exposure avoidance - eliminates any possibility of loss. Has the most complete form of risk control 2. Loss prevention - focus on reducing the frequency of losses. Measures are taken to stop a loss from happening 3. Loss reduction - aim at reducing the severity of losses that do occur. 4. Segregation of exposure units 5. Contractual transfer

question

Identify the two areas to be reviewed in Loss Reduction

answer

1. Pre-loss measures 2. Post-loss measures

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Identify the purpose of pre-loss measures

answer

The severity of loss to property value, net income values, liability loss, personnel loss values may be significantly reduced by adopting certain pre-loss measures

question

Identify a pre-loss measure that can be adopted to reduce the severity to Property values

answer

Safe storage of flammable materials to reduce fire intensity

question

Identify a pre-loss measure that can be adopted to reduce the severity to net income values

answer

Reducing the value of any single shipment of stock being transported on any one truck or transporting conveyance

question

Identify a pre-loss measure that can be adopted to reduce the severity to liability losses

answer

Establishing maxims speeds at which company automobiles may be driven

question

Identify a pre-loss measure that can be adopted to reduce the severity of personnel losses

answer

Limiting the number of key executives that may travel together in any one vehicle or aircraft

question

Identify the purpose of post-loss measures

answer

Typically focus on emergency procedures, salvage operations, rehabilitation activities, or legal defences to halt the speed of the loss or counter it effects

question

Identify the post-loss measure that can be adopted to reduce the severity to property values

answer

Installing an effective fire detection/suppression system

question

Identify the post-loss measure that can be adopted to reduce the severity to net income values

answer

Expediting repairs quickly or finding temporary facilities so as to continue the business after a loss

question

Identify the post-loss measure that can be adopted to reduce the severity to liability loss

answer

Developing a procedural plan to be followed by management and employees

question

Identify the post-loss measure that can be adopted to reduce the severity to Personnel loss

answer

The prompt replacement of personnel with competent successors

question

Identify the two ways to achieve segregation

answer

1. Separation 2. Duplication

question

Identify an example of segregation and duplication for property values

answer

Segregation - Dividing existing inventory between two or more warehouses Duplication - keeping spare machinery parts in the event of an accident to the original

question

Identify an example of segregation and duplication for net income values

answer

Segregation - Developing alternative facilities which would absorb the temporary extra workload until the damaged facility is repaired Duplication - maintaining duplicate accounts receivable records

question

Identify an example of segregation for liability loss

answer

Storing customers property into two or more buildings or in different parts of the same building

question

Identify an example of segregation and duplication for personal losses

answer

Segregation - Dividing one person's duties among several people to minimize the effect of the loss of service of that one person Duplication - training "on call" persons who could be summoned in an emergency

question

The second technique to be considered for dealing with each loss exposure identified in step one is Risk Financing. Identifying the two risk financing grouping

answer

1. Retention 2. Contractual transfer

question

Explain the retention method current expensing and losses

answer

This loss financing technique involves paying for losses as they occur. This technique carries with it many uncertainties like unexpected large losses or insufficient cash flow

question

Explain the retention method unfunded reserves

answer

This technique recognizes in advance that a business will suffer a loss. An accounting entry is made in the businesses books which establishes the reserve against which all losses are charged

question

Explain the retention method funded reserves

answer

This technique is supported by cash, securities or other liquid asset which have been set aside to pay expected losses. This is relatively rare most businesses don't like to tie up capital

question

Explain the retention method borrowed funds

answer

When a businessman borrows funds to the restore accidental losses, it uses some part of its ability to borrow funds for other purposes

question

Explain the retention method affiliated captive insurers

answer

When the payment of losses is made by an insurer which is a member of the businesses 'economic family', the risk is said to be retained. Captive insurers can operate for one or more 'parents'. There are a number of association or group captives which offer insurance to specialized types of risks

question

Identify two reasons for Forced Retention

answer

1. Losses resulting from certain uninsurable perils 2. Amounts required as deductibles

question

Identify two reasons for Optional Retention

answer

1. Losses which are sufficiently frequent or so as to be routinely budgeted 2. Loss exposures which are unlikely to cause a large number of losses within a short period of time

question

Identify two ways contractual transfer can be achieved

answer

1. Non-insurable transfer 2. Commercial insurance

question

Although the most widely used of all risk financing techniques, when does the effective risk management. Program use commercial insurance

answer

Only as a last resort when no other technique or combination of techniques is sufficient

question

Identify three uncertainties that may exist with commercial insurance

answer

1. Insurer may become insolvent or refuse to meet its policy obligations for some other reason 2. Disagreement between insurer and the insured as to whether a loss is insured or for the amount of the loss 3. Inadequate limits at the time of loss

question

Identify the two steps to be followed before reaching a decision as to which combination of risk control and risk financing meet the best objectives to be applied to an organization's loss exposure

answer

1. Forecasting 2. Selection criteria

question

Identify three forecasts that are required for an organization to establish meaningful priorities in treating loss exposures

answer

1. Forecast of frequency and severity of losses that can be expected 2. Forecast of the effects of various risk control and risk financing techniques are likely to have on the frequency, severity and predictability of those projected losses 3. Forecast the cost of these techniques

question

Identify the two selection criteria once loss exposures have been forecasted

answer

1. Effectiveness 2. Economy

question

Identify the two decisions to ensure the successful implementation of the risk management techniques selected by an organization

answer

1. Technical decisions 2. Managerial decisions

question

Once implemented, identify and explain the purpose of the two ongoing areas in the final step of the risk management process

answer

1. Monitored - ensures that the risk management program is achieving the results expect of it 2. Adjusted - the risk management process must be flexible enough to deal with changing loss exposures on an ongoing basis. This helps to ensure that the program will always incorporate techniques that represent the best available risk management options

question

Why must standards be set to measure the performance of the overall risk management program

answer

If effective monitoring and assessment are to occur, there must be some standard against which actual performance can be evaluated. When results fall below standards, the risk management program should identify means for improving performance

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