Study 1 – Introduction to Risk Management
1. What is a loss exposure? (p. 2)
Loss exposure: is a situation or physical circumstance that makes an individual or an organization vulnerable to loss, damage or injury and will lead to financial loss.
2. What types of risks is the focus of study for risk management? (p. 2)
Managing pure risk exposures is the study for risk management.
3. Given an everyday example of how risk management is practiced? (p. 3)
When you decide to cross the street at a crosswalk instead of jay-walking in the middle of a block, you are practicing risk management.
4. What kind of business would benefit from risk management techniques? (p. 3)
Risk management techniques have been adopted by most large corporations but the concepts of risk management are also appropriate for small firms, governments, or other public entities.
5. What is the traditional method used by brokers to acquire a new account? (p. 3)
Brokers often sell insurance by quoting on policies using the existing coverage’s as a guide or quoting on coverage’s that an insurer is willing to provide for the client. Traditionally, a competing broker armed with renewal dates of the policies in force will offer similar policies for a lower premium. In both of these cases, the risks the organization faces are never analyzed and the needs of the client are never uncovered. Errors and oversights of the first producer are merely repeated by the second producer. The price may be reasonable for the coverage but it may not provide adequate or relevant protection for the client.
6. What are the consequences of merely offering a prospective client replacement policies rather than identifying and analyzing the client’s risk exposures? (p. 3)
The consequences of not identifying and analyzing the risks the organization faces may be critical. The broker may be blamed for not advising the client to purchase appropriate insurance; the insurer is likely to bear the client’s anger and frustration; the adjuster will have to explain that there is no coverage and prepare for a legal battle.
7. What do producers accomplish for clients using the risk management process? (p. 4)
The producer can work with the client instead of selling to the client. Risk management concepts are not used and the producer who thinks in risk management terms will stand out from the crowd.
The risk management process is used to:
1. Determine the exposures clients need to manage;
2. Provide a plan of action to manage those risks.
3. Recommend insurance coverage for those risks best served by insurance coverage.
8. What goals must risk management objectives achieve? (p. 4)
Risk management objectives must be aligned with the fundamental goals of an organization. The objectives help focus decisions made in the risk management program to support the overall goals an organization has set for itself.
9. What are the two components of risk management objectives? (p. 5)
The objectives of risk management can be broken into two components:
· Pre-Loss objectives: those to be accomplished before a loss occurs.
· Post-Loss objectives: those to be met after a loss occurs.
10. Name and described four pre-loss objectives. (p. 5)
1. Social responsibilities: serves to improve the organization’s overall public image. An organization should be recognized as a “good corporate citizen” by its conduct.
2. Externally imposed obligations: are set out in statute, in contract, or simply as a commitment to a customer. Failure to abide by the law can result in serious penalties and can ruin a business relationship.
3. Peace of mind (tolerance level of uncertainty): each organization has a different tolerance level for uncertainty, a threshold beyond which the organization will not survive financially. By removing or minimizing uncertainty about loss exposures, management can concentrate on business operations.
4. Operate economically: all costs associated with managing pure risk are known as cost of risk. This will also include insurance premiums and the costs to recover from any uninsured losses.
11. Name and described five post-loss objectives. (p. 6-7)
1. Social responsibility
2. Survival
3. Operational continuity
4. Maintain stable earnings
5. Sustain growth
12. Described a situation that demonstrates a conflict between objectives. (p. 8)
Objectives can conflict with one another. An organization’s priorities must be examined to develop a plan consistent with the organization’s goals overall. The plan to accomplish each objective must be analyzed comparing costs to benefits.
13. What are the three elements of a loss exposure? (p. 8)
1. Item subject to loss;
2. Potential cause of the loss (peril);
3. Financial consequences of the occurrence.
14. What four categories are used to classify items subject to loss? (p. 13-14)
1. Physical assets;
2. Loss of use of those assets;
3. Legal liabilities;
4. Personal health and earning capacity (human assets).
15. Given an example of a physical asset. (p. 9)
Physical assets include any tangible property.
Premises: building, equipment, stock, valuable papers, accounts receivable, etc.
Off Premises: postal or courier service, automobile, private truck carrier, boat, aircraft, etc.
Perils: fire, smoke, windstorm, water damage, hail, vehicle impact, etc.
16. Given an example of a loss of use of a physical asset. (p. 9)
When a physical asset is damaged or destroyed, its use is impaired. The organization will incur a loss of use of the physical asset. Income may be reduced or operating expenses may be increased as a result.
Property: business interruption, rental income, extra expense.
Transportation: costs of freight and passage.
17. Given an example of legal liability. (p. 10)
The most common legal obligation arises from the legal duty to take care in one’s relationships with others so as to not cause injury. One is exposed to legal liabilities arising from negligent acts or omissions.
Examples: bodily injury, property damage, personal injury, employers’, tenants’ legal, contractual, etc.
18. Given an example of a human asset loss exposure. (p. 10)
Members of an organization are subject to the possibility of illness, disability, or premature death – the human asset exposure.
Examples: loss of life, retirement, disability and loss of earnings, rehabilitation, medical expenses, etc.
19. What are the three classifications of perils? (p. 10-11)
1. Human -> caused by human behaviour such as vandalism, arson and theft.
2. Natural -> caused by natural forces in the weather and earth.
3. Economic -> such events as changes in consumer tastes, currency fluctuations, depreciation, etc.
20. What are the financial effects of losses? (p. 11)
When an item is damaged, the organization will be affected by:
1. The reduced value of an asset;
2. The decreased income derived from the asset;
3. The increased expenses to keep the asset operating.
21. Why do producers find it satisfying to work with an organization’s professional risk manager? (p. 12)
Experienced producers usually find it gratifying to deal with professional risk managers because risk managers usually have a keen understanding of the exposures facing the company and the importance of insurance.
Knowing the risk management process gives the producer insight into clients’ needs and provides the skills to “talk the same language” as a professional risk manager.
Other commercial lines of insurance include marine insurance for shipping, errors and omissions coverage, medical malpractice, umbrella liability coverage and crop insurance for farmers. In addition, a large reinsurance market covers commercial insurers against extremely large risks.
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