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CPCU510
Chapter 02
| Question | Answer |
|---|---|
| Describe the difference in scope between traditional risk management and enterprise risk management | The scope of TRM is on losses generated by hazard risk. The scope of ERM encompasses both hazard and business risk with the intent of maximizing the organization's value. |
| Explain how the focus of risk management efforts differs from traditional risk management and enterprise risk management. | Risk manage prof. have traditionally dealt with act. such as monitoring safety prog. or processing WC claims rather than helping achieve org. gains from exposure to business risk. ERM focuses on managing all of org's key risks. |
| List three functions of a risk map in an enterprise risk management program. | 1. Depicts risks from all sources to enable comparison 2. Helps senior mgmt understand the risks inherent in the org and to aid them in determining which risks req the most attn 3. Ranks risks based on their relative effect on an org's key business goals |
| What are the four quadrants of risk an organization uses when implementing an ERM approach. | 1. Hazard risk 2. Operational risk 3. Financial risk 4. Strategic risk |
| Describe the tradeoff between the cost of risk management and the expected cost of loss, and the cost of residual uncertainty. | An organization that spends a relatively large amount on risk management should see smaller expected losses and experience less residual uncertainty. |
| Identify the costs used to compute the overall financial consequence of risk for a given asset or activity. | 1. Loss not reimbursed by insurance or other source 2. Insurance premium 3. External sources of funds, such as interest payments to lenders 4. Measures to prevent or reduce the size of loss 5. Implementing and administering risk management |
| What are the benefits of risk management? | Preserves financial resources by reducing expected loss, reduces anxiety, provides sense of confidence that capital is protected, reduces the deterrence effect of risk. Benefits society by improving allocation of productive resources. |
| Describe four pre-loss goals supported by an effective and efficient risk management program. | 1. Economy of operations 2. Tolerable uncertainty 3. Legality 4. Social responsibility |
| List six possible post-loss goals for an organization after a significant foreseeable loss has occurred. | 1. Survival 2. Continuity of operations 3. Profitability 4. Earnings stability 5. Social responsibility 6. Growth |
| Identify steps an organization might take to forestall an intolerable shutdown and ensure continuous operations after a loss occurs. | 1. Identify activities whose interruptions cannot be tolerated 2. Identify the types of events that could interrupt such activities 3. Determine the standby resources that must be immediately available 4. Ensure the availability of the standby resources |
| Identify four events that could trigger the initiation of the risk management process. | 1. Pending insurance renewal 2. Serious claim 3. Merger or an acquisition 4. New law or regulation |
| List the six steps in the risk management process. | 1. Identify the loss exposures 2. Analyzing loss exposures 3. Examining feasibility of risk mgmt tech 4. Selecting the app risk manage. tech 5. Implementing selected risk mgmt tech 6. Monitoring results and revising the risk mgmt program |
| Describe four dimensions used to analyze a loss exposure. | 1. Loss frequency 2. Loss severity 3. Total dollar loss 4. Timing |
| Describe how an organization uses risk control and risk financing techniques to manage loss exposures. | Risk control technique used to reduce the frequency and severity of a loss or make losses more predictable. Risk financing techniques generate funds to finance losses that risk control techniques cannot prevent or reduce. |
| Identify the forecasts an organization might use to analyze the costs of a risk management technique. | 1. Forecast of the dimensions of expected losses 2. Forecast of each feasible combination of risk mgmt techniques, of effect on the freq, severity, and timing of expected loss 3. Forecast of after tax costs involved in applying risk mgmt techniques |
| List the four steps required to monitor and revise a risk management program. | 1. Establish standards of acceptable performance 2. Comparing actual results with these standards 3. Correct substandard performance 4. Evaluating standards that have been substantially exceeded. |
| What is the risk management process? | It is the method of making, implementing, and monitoring decisions that minimize the adverse effects of risk on an organization. |
| What is hazard risk? | Traditionally managed by risk management professionals. Many of these risks are transferred by property-liability insurance policies. |
| What is operational risk? | Pure risks that fall outside of the traditional hazard risk category and could jeopardize service-related or manufacturing-related business functions. |
| What is financial risk? | Risks that directly affect an organization's financial position via changes in revenue, expenses, business valuation, or the cost or availability of capital. |
| What is strategic risk? | Fundamental to an organization's existence because they have a current or future effect on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to changes in the industry. |
Created by:
ttran