Term
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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. |
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Term
| What are the two elements within the definition of Risk? |
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Definition
| The uncertainty of outcome; and the possibility of a negative outcome. |
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Term
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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. |
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Term
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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. |
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Term
| What are the most commonly used Classification of Risks? |
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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. |
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Term
| What are the four Quadrants of Risk? |
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Definition
| Hazard (Pure Risk), Operational (Pure Risk), Financial (Speculative) and Strategic (Speculative). This is an Enterprise Risk Management approach. |
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Term
| What is Pure Risk and what is Speculative Risk? |
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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. |
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Term
| What is Subjective Risk and what is Objective Risk? |
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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. |
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Term
| What is Diversifiable Risk? What is Nondiversifiable Risk? |
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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) |
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Term
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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) |
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Term
| Define Operational Risks. |
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Definition
Many Operational Risks are pure and diversifiable. They include:
Product Recall (pure, diversifiable)
Turnover (pure, diversifiable)
Supplier Business Interruption (pure, diversifiable)
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Term
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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. |
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Term
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Definition
Many Strategic Risks are directly linked to management decisions.
Ethics - Speculative/Diversifiable
Union Relations - Speculative/Diversifiable
Industry Consolidation - Speculative/Diversifiable
Technology - Speculative/Diversifiable |
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Term
| What are the three Financial Consequences of Risk faced by an individual or organization. |
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Definition
| Expected Cost of Losses or Gains; Expenditures on Risk Management; Cost of Residual Uncertainty. |
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Term
| What is Expected Cost of Losses or Gains? |
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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.
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Term
| What is Expenditures on Risk Management? |
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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. |
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Term
| What is Cost of Residual Uncertainty. |
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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.) |
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Term
| What is the basic purpose and scope of Risk Management? |
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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). |
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Term
| What is a Risk Management Program? |
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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. |
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Term
| What is a Risk Management Process? |
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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. |
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Term
| What is Traditional Risk Management? |
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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. |
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Term
| 'What is Enterprise-Wide Risk Management? |
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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. |
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Term
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Definition
| Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs. |
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Term
| What are the three elements of loss exposure? |
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Definition
| An asset exposed to loss, cause of loss (peril), and financial consequence of that loss. |
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Term
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Definition
| A condition that increases the frequency or severity of a loss. |
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Term
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Definition
| A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss. |
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Term
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Definition
| A condition of carelessness or indifference that increases the frequency or severity of a loss. |
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Term
| What is a Physical Hazard? |
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Definition
| A tangible characeristic of property, persons, or operations that tends to increase the frequency or severity of loss. |
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Term
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Definition
| A condition of the legal environment that increases loss frequency or severity. |
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Term
| Name the typical types of Loss Exposures? |
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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). |
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Term
| What is Property Loss Exposure? |
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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. |
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Term
| What is Tangible Property? |
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Definition
| Property that has a physical form. |
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Term
| What is Real Property (realty)? |
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Definition
| Tangible Property (having physical form) consisting of land, all structures permanently attached to the land, and whatever is growing on the land. |
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Term
| What is Personal Property? |
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Definition
| All tangible (property that has physical form) or intangible property (property that has no physical form) that is not real property. |
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Term
| What is Intangible Property? |
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Definition
| Property that has no physical form. |
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Term
| What is Liability Loss Exposure? |
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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. |
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Term
| What is Personnel Loss Exposure? |
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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. |
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Term
| What is Personal Loss Exposure? |
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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. |
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Term
| What is Net Income Loss Exposure? |
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Definition
| A condition that presents the possibility of loss caused by reduction in net income. |
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Term
| What are the benefits of Risk Management? |
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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. |
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Term
| Name the Sum of Three Costs of overall financial consequences of risk for a given asset or activity. |
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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. |
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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? |
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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. |
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Term
| What are Pre-Loss Goals (Risk Management Program Goals)? |
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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. |
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Term
| What are Post Loss Goals (Risk Management Program Goals)? |
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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. |
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Term
| What are the typical types of operational goals that pre-loss risk management activities are designed to support? |
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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). |
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Term
| Name six possible post-loss goals. |
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Definition
| Survival, Continuity of Operations, Profitability, Earnings Stability, Social Responsibility, Growth. |
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Term
| What are the six Risk Management Process steps that can be applied to any set of loss exposures. |
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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. |
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Term
| What are the four dimensions used to Analyze a Loss Exposure. |
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Definition
| Loss Frequency - Loss Severity - Total Dollar Losses - Timing. |
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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 |
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Definition
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Analyzing loss exposures.
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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 |
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Definition
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Term
| Risk involves the possibility of a negative outcome. Possibility means |
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Definition
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That an outcome may or may not occur.
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Term
| Buildings, investments, patents, and human resources are all examples of |
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Definition
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Term
| Which one of the following statements regarding monitoring the results of a risk management program is true? |
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Definition
Activities standards are necessary
to obtain a complete picture of the
success or failure of a
risk management program.
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Term
| Which one of the following describes how an effective risk management program should support an organization’s pre-loss operational goals? |
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Definition
It should help ensure that the organization’s
legal obligations
are satisfied.
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Term
| Which one of the following represents a risk that enterprise-wide risk management (ERM) would treat but that traditional risk management would not? |
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Definition
C.Risk of changes in economic conditions,
such as growth or recession
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Term
| Which one of the following statements is true regarding the effects of risk management on individuals, organizations, and society in general? |
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Definition
Risk management makes those who own or
run an organization more willing to
undertake risky activities.
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