# Shared Flashcard Set

## Details

CPCU 500
CPCU 500 - INTRODUCTION TO RISK MANAGEMENT - CHAPTER 1
56
Insurance
Professional
07/12/2014

Term
 Define Risk.
Definition
 A term regularly used by individuals, in both their personal and professional lives.   It is defined as an uncertainty of outcomes, with the possibility that some outcomes can be negative.
Term
 What are the two elements within the definition of Risk?
Definition
 The uncertainty of outcome; and the possibility of a negative outcome.
Term
 Define Probability.
Definition
 The likelihood that an outcome or event will occur.   To quantify risk, one needs to know the probability of an outcome or event occurring.  Probability is measurable and has a value of between zero and one.  If an event is not possible, then the value is zero.   If the event is certain, it has a value of one.  If an event is possible, but not certain, its probability is some value between zero and one.  It can be used to help decide which activities to undertake and which risk management technicque to use.
Term
 Define Possibility.
Definition
 An outcome or event may or may not occur.   The fact that something may occur does not mean that it will occur.  It does not quantify risk.  It only verifies that risk is present.
Term
 What are the most commonly used Classification of Risks?
Definition
 Pure and Speculative; Subjective and Objective; Diversifiable and NonDiversifiable.   These are not mutually exclusive, and all classification of pairs can be applied to all given risk.
Term
 What are the four Quadrants of Risk?
Definition
 Hazard (Pure Risk), Operational (Pure Risk),  Financial (Speculative) and Strategic (Speculative).  This is an Enterprise Risk Management approach.
Term
 What is Pure Risk and what is Speculative Risk?
Definition
 A Pure Risk involves a chance of a loss or no loss, but no chance of  a gain.  Because there is no opportunity of a gain, pure risks are always undesirable. A Speculative Risk involves a chance of gain.   Because there is an expected chance of gain, it is desirable.
Term
 What is Subjective Risk and what is Objective Risk?
Definition
 Subjective = Involves an attempt to determine what will happen in the future.  It is based on opinions. Objective = Relies on information regarding the past.  It is based on fact.
Term
 What is Diversifiable Risk?   What is Nondiversifiable Risk?
Definition
 Diversifiable Risks tend not to be correlated (occur randomly) and can be managed through a spread of the risk. (auto accident) A Non-Diversifiable Risks are correlated.   The gains or losses tend to occur simultaneously rather than randomly. (hurricane)
Term
 Define Hazard Risks.
Definition
 Many of these risks are transferred by property-liabilty insurance policies.   Insurance for some of these risks may be mandated by law. Examples: Property Damage (Pure/Diversiable) Third Party Liability (Pure/Diversiable) Natural Hazards/Hurricanes (Pure/Non-Diversiable)
Term
 Define Operational Risks.
Definition
 Many Operational Risks are pure and diversifiable.   They include: Product Recall (pure, diversifiable) Turnover (pure, diversifiable) Supplier Business Interruption (pure, diversifiable)
Term
 Define Financial Risks.
Definition
 They are traditionally handled by the treasury or CFO.  These risks are normally speculative and can be sometimes managed with financial tools such as options or futures. Asset Valuation - Speculative, diversifiable Liquidity/Cash - Speculative, diversifiable Legislative Changes - Speculative, nondiversifiable Economic Growth/Recession - Speculative, nondiversifiable.
Term
 Defeine Strategic Risks.
Definition
 Many Strategic Risks are directly linked to management decisions. Ethics - Speculative/Diversifiable Union Relations - Speculative/Diversifiable Industry Consolidation - Speculative/Diversifiable Technology - Speculative/Diversifiable
Term
 What are the three Financial Consequences of Risk faced by an individual or organization.
Definition
 Expected Cost of Losses or Gains; Expenditures on Risk Management; Cost of Residual Uncertainty.
Term
 What is Expected Cost of Losses or Gains?
Definition
 It is a financial consequence of risk that is expected, hidden costs associated with pure or speculative risks.  It is more difficult to compute expected costs than pure costs. Examples of hidden costs: Time lost by the injured employee. Interference with Production. Loss of profit on the injured employee's productivity and on an idle machine.
Term
 What is Expenditures on Risk Management?
Definition
 It is a consequence of risk whereby expenditures are incurred to finance risk management techniques.   Example:   Homeowners insurance, auto insurance, health insurance are all risk financing measures used by individuals to manage some of the risks they face.   The expenditures (premiums) on these activities are finanancial consquence of risk.
Term
 What is Cost of Residual Uncertainty.
Definition
 It is a financial consequence of risk.   It is the level of risk that remains after an individual or organization implements their risk management plan.  (Known as COST OF WORRY.)
Term
 What is the basic purpose and scope of Risk Management?
Definition
 Risk Management involves the efforts of individuals and organizations to efficiently and effectively assess, control, and finance risk in order to minimize the adverse effects of losses or missed opportunities.  It includes any effort to economically deal with the uncertainty of outcomes (risk).
Term
 What is a Risk Management Program?
Definition
 A system for planning, organizing, leading and controlling resources and activities that an organization needs to protect itself from the adverse effects of accidental losses.
Term
 What is a Risk Management Process?
Definition
 Is the method of making, implementing and monitoring decisions that minimize the adverse effects of risk on an organization.   They are designed to assess, control and finance risk.
Term
Definition
 Has been associated with mainly pure risk and focused on managing safety, purchasing insurance, and controlling financial recovery from losses generated by hazard risk.
Term
 'What is Enterprise-Wide Risk Management?
Definition
 A term commonly used to describe the broader view of risk management that encompasses all types of risk.  It is an approach to managing all of an organization's key risks and opportunities with the intent of maximizing the organization's value.   It allows an organization to integrate all of its risk management activities so that the risk management process occurs at the enterprise level, rather than the departmental or business unit level.
Term
 What is Loss Exposure?
Definition
 Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
Term
 What are the three elements of loss exposure?
Definition
 An asset exposed to loss, cause of loss (peril), and financial consequence of that loss.
Term
 What is Hazard?
Definition
 A condition that increases the frequency or severity of a loss.
Term
 What is a Moral Hazard?
Definition
 A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.
Term
 What is a Morale Hazard?
Definition
 A condition of carelessness or indifference that increases the frequency or severity of a loss.
Term
 What is a Physical Hazard?
Definition
 A tangible characeristic of property, persons, or operations that tends to increase the frequency or severity of loss.
Term
 What is a Legal Hazard?
Definition
 A condition of the legal environment that increases loss frequency or severity.
Term
 Name the typical types of Loss Exposures?
Definition
 Property, Liability, Personnel, and Net Income. The three elements of loss exposures - Asset exposed to loss, Cause of Loss (Peril) and Financial Consequences of that loss, all apply to these four types.   However, each type is distinguished in relation to how it afects the first element of loss exposure (Asset exposed to the loss).
Term
 What is Property Loss Exposure?
Definition
 A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest.
Term
 What is Tangible Property?
Definition
 Property that has a physical form.
Term
 What is Real Property (realty)?
Definition
 Tangible Property (having physical form) consisting of land, all structures permanently attached to the land, and whatever is growing on the land.
Term
 What is Personal Property?
Definition
 All tangible (property that has physical form) or intangible property (property that has no physical form) that is not real property.
Term
 What is Intangible Property?
Definition
 Property that has no physical form.
Term
 What is Liability Loss Exposure?
Definition
 Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.
Term
 What is Personnel Loss Exposure?
Definition
 A condition that presents the possibility of loss caused by a person's death, disability, retirement, or resignation that deprives an organization of the person's special skill or knowledge that the organization cannot readily replace.
Term
 What is Personal Loss Exposure?
Definition
 Any condition or situation that presents the possibility of a financial loss to an individual or family by such causes as death, sickness, injury or unemployment.
Term
 What is Net Income Loss Exposure?
Definition
 A condition that presents the possibility of loss caused by reduction in net income.
Term
 What are the benefits of Risk Management?
Definition
 Properly managed risk reduces the negative financial consequences and thereby benefits individuals, organizations, and society.   It involves the efforts of individuals and organizations to efficiently and effectively assess, control, and finance risk in order to minimize the adverse effects of losses or missed opportunities.
Term
 Name the Sum of Three Costs of overall financial consequences of risk for a given asset or activity.
Definition
 The cost of the value lost because of actual events that cause a loss; The cost of resources devoted to risk management for that asset or activity; The cost of residual uncertainty.
Term
 When reducing the Financial  Conseuqences of Risk, for a particular asset or activity, the cost of risk can be broken down in what ways?
Definition
 Cost of losses not reimbursed by insurance or other external sources; cost of insurance premiums; cost of external sources of funds; cost of measures to prevent or reduce the size of potential losses; cost of implementing and administering risk management.
Term
 What are Pre-Loss Goals (Risk Management Program Goals)?
Definition
 Goals to be accomplished before a loss, involving social responsibility, externally imposed goals, reduction of anxiety, and economy. They describe an organization's need to meet responsibilities as an ongoing operation.
Term
 What are Post Loss Goals (Risk Management Program Goals)?
Definition
 Risk Management Program Goals that should be in place in the event of a significant loss. They broadly describe the degree of recovery that an organization will strive to reach following a loss.  They are based on operating and financial conditions that the organization's senior management would consider acceptable after a significant foreseeable loss.
Term
 What are the typical types of operational goals that pre-loss risk management activities are designed to support?
Definition
 Economy of Operations (program should operate economically and efficiently); Tolerable Uncertainty (keeping manager's uncertainty about losses at a tolerable level); Legality (help ensure that the organization's legal obligations are satisfied); Social Responsibility (acting ethically and fullfilling obligations to the community and society as a whole).
Term
 Name six possible post-loss goals.
Definition
 Survival, Continuity of Operations, Profitability, Earnings Stability, Social Responsibility, Growth.
Term
 What are the six Risk Management Process steps that can be applied to any set of loss exposures.
Definition
 Step 1 - Identifying Loss Exposures; Step 2 - Analyzying Loss Exposure; Step 3 - Examining the Feasibility of Risk Management Techniques; Step 4 - Selecting the Appropriate Risk Management Techniques; Step 5 - Implementing the Selected Risk Management Techniques; Step 6 - Monitoring Results and Revising the Risk Management Program.
Term
 What are the four dimensions used to Analyze a Loss Exposure.
Definition
 Loss Frequency - Loss Severity - Total Dollar Losses - Timing.
Term
 Two steps of the risk management process, when combined, constitute the process of assessing loss exposures. For this reason, they are probably the two most important steps in the process. These two steps are identifying loss exposures and
Definition
 Analyzing loss exposures.
Term
 One of the elements of a loss exposure is an asset exposed to loss. These assets may be tangible or intangible. An example of an intangible asset that an individual may possess is
Definition
 A unique skill set.
Term
 Risk involves the possibility of a negative outcome. Possibility means
Definition
 That an outcome may or may not occur.
Term
 Buildings, investments, patents, and human resources are all examples of
Definition
 Assets exposed to loss
Term
 Which one of the following statements regarding monitoring the results of a risk management program is true?
Definition
 Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.
Term
 Which one of the following describes how an effective risk management program should support an organization’s pre-loss operational goals?
Definition
 It should help ensure that the organization’s legal obligations  are satisfied.
Term
 Which one of the following represents a risk that enterprise-wide risk management (ERM) would treat but that traditional risk management would not?
Definition
 C.Risk of changes in economic conditions, such as growth or recession
Term
 Which one of the following statements is true regarding the effects of risk management on individuals, organizations, and society in general?
Definition
 Risk management makes those who own or run an organization more willing to undertake risky activities.
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