CISR ELEMENTS OF RISK MANAGEMENT

Elements of Risk Management

CISR

ELEMENTS

OF RISK

MANAGEMENT

STUDY GUIDE

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Elements of Risk Management

iii

CISR

ELEMENTS

OF RISK

MANAGEMENT

STUDY GUIDE

This Study Guide has been prepared to enhance your learning

experience. It contains all of the Check-in questions, Knowledge Checks,

and Self-Quizzes contained within the course, along with an Answer Key

and Glossary. Use it as a tool to help practice and assess your knowledge

of the course material, but do not mistake it for a comprehensive "short-

cut" to preparing for the nal exam.

Be sure to take a look at the section, "Resources," that follows the

Answer Key in this Study Guide. It contains valuable suggestions for

test preparation and study techniques, as well as some sample exam

questions and a glossary of terms.

Your path to success in passing the nal exam will come from your

attentiveness during the course and the effort you put into preparation.

Contents

Tools to Assess Your Knowledge

Check-Ins, Knowledge Checks, and Self-Quizzes by Topic

Section 1: Introduction to Risk Management ...................................... 3

Dening Risk .......................................................................................................................................................................... 3

Key Risk Management Terms ..................................................................................................................................5

Risk Management .............................................................................................................................................................9

Section 1 Self-Quiz ........................................................................................................................................................... 13

Section 2: Risk Identication......................................................................17

The Importance of Risk Identication ............................................................................................................. 17

General Classes of Risk .................................................................................................................................................18

Four Logical Classications of Exposures ......................................................................................................19

Risk Identication Methods ....................................................................................................................................20

Section 2 Self-Quiz .........................................................................................................................................................25

Section 3: Risk Analysis ................................................................................29

The Uses of Risk Analysis ........................................................................................................................................... 29

Loss Trending ...................................................................................................................................................................... 34

Section 3 Self-Quiz .........................................................................................................................................................35

Section 4: Risk Control ..................................................................................37

Risk Control Techniques ............................................................................................................................................ 37

Accident Prevention Basics .....................................................................................................................................43

Section 4 Self-Quiz .........................................................................................................................................................45

Elements of Risk Management

Section 5: Risk Financing ............................................................................47

Risk Financing .................................................................................................................................................................... 47

Insurable Risks ...................................................................................................................................................................49

Risk Retention and Transfer .................................................................................................................................... 51

Section 5 Self-Quiz .........................................................................................................................................................55

Section 6: Risk Administration .................................................................57

Implementation and Monitoring of a Risk Management Program .....................................57

The Role of a Risk Manager .....................................................................................................................................58

The Risk Management Network ........................................................................................................................ 60

Section 6 Self-Quiz ..........................................................................................................................................................61

Answer Key

Section 1: Introduction to Risk Management ...................................65

Dening Risk .......................................................................................................................................................................65

Key Risk Management Terms ...............................................................................................................................66

Risk Management ..........................................................................................................................................................70

Section 1 Self-Quiz .......................................................................................................................................................... 74

Section 2: Risk Identication..................................................................... 77

The Importance of Risk Identication ............................................................................................................ 77

General Classes of Risk ................................................................................................................................................78

Four Logical Classications of Exposures .....................................................................................................79

Risk Identication Methods ................................................................................................................................... 80

Section 2 Self-Quiz .........................................................................................................................................................85

Section 3: Risk Analysis ................................................................................89

The Uses of Risk Analysis ...........................................................................................................................................89

Loss Trending ......................................................................................................................................................................94

Section 3 Self-Quiz .........................................................................................................................................................96

Section 4: Risk Control ..................................................................................99

Risk Control Techniques ............................................................................................................................................99

Accident Prevention Basics .................................................................................................................................. 105

Section 4 Self-Quiz .......................................................................................................................................................107

Section 5: Risk Financing ..........................................................................109

Risk Financing ................................................................................................................................................................. 109

Insurable Risks ..................................................................................................................................................................110

Risk Retention and Transfer ...................................................................................................................................112

Section 5 Self-Quiz ........................................................................................................................................................116

Section 6: Risk Administration ................................................................119

Implementation and Monitoring of a Risk Management Program .................................... 119

The Role of a Risk Manager ...................................................................................................................................120

The Risk Management Network ....................................................................................................................... 122

Section 6 Self-Quiz ....................................................................................................................................................... 123

Resources

Preparing for the Final Exam .................................................................. 127

Study Techniques .......................................................................................................................................................... 127

Sample Exam Questions .........................................................................................................................................128

Glossary of Terms ........................................................................................... 129

Elements of Risk Management

Tools to Assess Your

Knowledge

Check-Ins, Knowledge Checks,

and Self-Quizzes by Topic

Section 1: Introduction to Risk Management

Elements of Risk Management

Section 1: Introduction to Risk Management

Dening Risk

Check-in

Directions: Use the following terms to ll in the blanks. Some terms may

be used more than once.

area of expertise negative uncertainty

job function positive

Risk is a condition of either ______________________________ or

______________________________ ______________________________ arising

from a given set of circumstances. The term does not solely describe possible

______________________________ outcomes, the chance of loss, or no loss. Risk

outcomes can also be ______________________________. Perceptions of risk vary,

depending on an individual’s job function or ______________________________.

Section 1: Introduction to Risk Management



Knowledge Check

Directions: Imagine that one of your clients owns a company that

manufactures and sells a variety of granola breakfast and snack

products. Identify three examples of pure and speculative risk associated with

your client’s business.

Type of Risk Examples

Pure

Speculative

Section 1: Introduction to Risk Management

Elements of Risk Management

Key Risk Management Terms

Check-in

Directions: Directions: Read each statement. Then select True or False.

1. A hazard is a cause of loss.

True False

2. A situation, behavior, or condition that may lead to adverse nancial consequences

is an exposure.

True False

3. A cyberattack is an example of an exposure.

True False

4. A spill on a supermarket aisle is an example of a hazard because it increases the

likelihood that someone will fall.

True False

5. An insured who shows no regard for his insured property demonstrates a

morale hazard.

True False

Section 1: Introduction to Risk Management

Check-in

Directions: Read each example. Write the risk term that applies.

1. A passenger enters an elevator. His clothing is caught in the elevator door as the

door closes. The passenger snatches the clothing from the door before the elevator

begins to move. He is uninjured and his clothes are not damaged.

_____________________________________________________________________________

2. A mixing paddle on a faulty bakery mixer snaps and strikes an employee’s hand.

The employee’s hand is cut and bleeding.

_____________________________________________________________________________

3. A driver is at fault in a minor auto accident. The other driver is uninjured, but the

bumper on her car requires repairs. The other driver demands that the at-fault

driver’s insurance company pay for the loss.

_____________________________________________________________________________

Check-in

Directions: Match each term to its description.

A. average severity

B. risk appetite

C. high frequency

D. low frequency

E. severity

F. expected losses

_____ The total dollar amount of all losses for a given

period of time

_____ A loss has occurred but is unlikely to occur again in

the future

_____ An organization’s tolerance for risk

_____ The product of loss frequency multiplied by loss

severity

_____ The total amount of losses in a given period divided

by the total number of claims

_____ A loss expected to continue occurring regularly

Section 1: Introduction to Risk Management

Elements of Risk Management

Check-in

Directions: Match each term to its description.

A. loss

B. exposure

C. peril

D. hazard

E. incident

F. accident

G. occurrence

H. claim

_____ A cause of loss

_____ An unplanned event denite as to time and place that

results in injury or damage to a person or property

_____ An event that disrupts normal activities and may become

a loss or business interruption

_____ A demand for payment or an obligation to pay as a result

of a loss or occurrence

_____ A situation, practice, or condition that may lead to an

adverse nancial consequence or loss; an activity or

resource; people or assets

_____ A reduction in asset value

_____ An accident with the limitation of time removed; an

“accident” extended over a period of time rather than a

single, observable event

_____ A condition or characteristic that may create or increase

the likelihood or severity of a loss

Section 1: Introduction to Risk Management



Knowledge Check

Imagine a client is seeking property insurance for a condominium building

that her company manages. The building, located on Florida’s Gulf Coast, is

valued at $10,000,000. It was built in 2002, has 10 oors and 100 condominium units. The

building’s roof has not been updated, and a recent inspection concluded that the main

electrical panel needs repairs. It also appears that the majority of the unit owners do not

own re extinguishers, nor do they own hurricane shutters.

Directions: Give one example of each of the following risk management factors your client

should consider:

Exposure Building

Peril

Hazard

Incident

Accident

Section 1: Introduction to Risk Management

Elements of Risk Management

Risk Management

Check-in

Directions: Use the following terms to ll in the blanks.

behaviors objects quantitative

case studies operations Risk Control

interviews procedures Risk Financing

negative qualitative Risk Identication

______________________________ is the rst and most important step in the

risk management process. Any failure to identify risk exposes an organization to

______________________________ nancial consequences.

Once risks are identied, they are analyzed to assess their potential impact. Analysis

takes two forms. ______________________________ analysis allows the collection

of information that does not lend itself easily to ______________________________

analysis, or mathematical measurement. ______________________________ and

______________________________ are examples of this form of analysis.

______________________________ and ______________________________ share the

same position in the risk management process because they are interchangeable.

______________________________ applies methods or actions aimed at minimizing

or avoiding the impact of a loss. The human approach to risk control focuses on

people’s ______________________________. The engineering approach focuses on

______________________________ and ______________________________. The systems

approach pays attention to ______________________________ and policies, as well as

negligent supervision.

Section 1: Introduction to Risk Management

Check-in

Directions: Match each term to its description.

A. Avoidance

B. Prevention

C. Reduction

D. Segregation

E. Separation

F. Duplication

G. Transfer

_____ A response to a focus on the frequency with which

events occur

_____ The isolation of an exposure from other exposures,

perils, or hazards

_____ Creating asset back-ups

_____ A response to a focus on the severity of incidents in an

effort to recognize risk and take action to lower losses

_____ The shift of function, exposure, or responsibility of

certain liabilities to another party

_____ The elimination of risk

_____ The process of spreading exposures or activities over

several locations



Knowledge Check

Review the diagram of the ve steps of the risk management process.

Summarize in your own words why each part of the process is necessary.

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk

Identiﬁcation

______________________________________________

Section 1: Introduction to Risk Management

Elements of Risk Management

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk

Analysis

_______________________________________________

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk Control

Risk Financing

_______________________________________________

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk Control

Risk Financing

_______________________________________________

Section 1: Introduction to Risk Management

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk

Administration

_______________________________________________

Section 1: Introduction to Risk Management

Elements of Risk Management

Section 1 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

accident hazard segregation

avoidance incident severity

business liability speculative

contractual measure of loss risk ability

exposure occurrence Risk Administration

nancial peril risk management

frequency physical uncertainty

1. Risk is dened as a condition of either positive or negative

______________________________ arising from a given set of circumstances.

2. Perceptions of risk depend upon an individual’s job function or area of expertise.

Select True or False.

True False

3. A risk manager may dene risk as the person or property exposed to a potential loss.

Select True or False.

True False

4. Pure risks include threats to property and people, as well as _____________________.

5. The result of a pure risk is some __________________________.

6. Unlike pure risk, ______________________________ risk presents the opportunity

for gain.

7. Speculative risk is associated with ______________________________ or

______________________________ risk.

Section 1: Introduction to Risk Management

accident hazard segregation

avoidance incident severity

business liability speculative

contractual measure of loss risk ability

exposure occurrence Risk Administration

nancial peril risk management

frequency physical uncertainty

8. Think about the denition of the term loss. Check each example of loss.



a business interruption



physical property damage



injury to an employee or customer

9. A situation, practice, or condition that may lead to an insured’s susceptibility to adverse

nancial consequences or loss is called a(n) ______________________________.

10. A(n) ______________________________ is a cause of loss.

11. A(n) ______________________________ is a factor that increases the likelihood that a

peril will occur.

12. A(n) ______________________________ is an event that may lead to a loss or a claim, or

an event that may cause a business interruption.

13. A(n) ______________________________ is always an unexpected and unintentional event

that tends to result in damage or injury.

14. An “accident” that occurs over an extended period of time is called a(n)

______________________________.

15. The number of claims that occur or that an insurer expects to occur within a given

period of time is labeled ______________________________.

Section 1: Introduction to Risk Management

Elements of Risk Management

16. The dollar amount inicted by a given loss or catastrophe, or the aggregate

dollar amount of all losses for a given period of time, is dened by the word

_____________________________.

17. ______________________________ describes an organization’s ability or inability to

assume nancial responsibility for loss.

18. ______________________________ is the implementation of a process intended to

minimize the uncertainty of exposures that can adversely affect an individual’s or an

organization’s assets and nancial well-being.

19. Sequentially order (number them 1–5) the steps of the risk management process.

______ Risk Control

______ Risk Administration

______ Risk Identication

______ Risk Analysis

______ Risk Financing

20. The best method of risk control is ______________________________, or the elimination

of risk.

21. ______________________________ involves isolating an exposure from other exposures,

perils, or hazards.

22. The two types of risk transfer are ______________________________ and

______________________________.

23. The ongoing implementation and monitoring of the risk management process is called

______________________________.

Section 2: Risk Identication

Elements of Risk Management

Section 2: Risk Identication

The Importance of Risk Identication



Knowledge Check

Think about your organization and the risks you identied as potential

threats to your organization’s well-being. Predict what might happen to your

organization if one of the risks you identied was overlooked.

_________________________________________________________________________________

Section 2: Risk Identication

General Classes of Risk

Check-in

Directions: Read each example and consider the risk class implications.

Circle all of the risk classications that apply.

1. The ABC Plastics Company produces medical supplies for distribution across the

country. Government sanctions against certain oil-producing countries have led

to resource scarcity. Scarcity has led to higher prices, which has triggered protests

from national healthcare watchdog groups. How could the risks associated with

these circumstances be classied?

Economic Class Legal Class Physical Class

Social Class Technological Class

Juridical Class Political Class

2. The XYZ Company manufactures children’s clothing and accessories. The company

licensed rights to a variety of popular movie characters for use on children’s

lunchboxes and backpacks. The movie company’s employment practices have

recently come under scrutiny by state employment authorities, and a number

of civil lawsuits are underway. How could the risks associated with these

circumstances be classied?

Economic Class Legal Class Physical Class

Social Class Technological Class

Juridical Class Political Class

Section 2: Risk Identication

Elements of Risk Management



Knowledge Check

A toy company works in partnership with global food manufacturers to

create toy models of brand name foods for use in preschool, daycare, and

home settings. For years, the toy company has seen revenue increase. Consequently, it

has expanded its product line to include popular snack foods. In recent months, the

company’s marketing team has collected evidence of a growing initiative on social media to

eliminate what some consumers call “unhealthful” food choices associated with children’s

play objects. Explain which classications of risk apply to the toy manufacturer’s current

circumstances. Justify your choices.

_________________________________________________________________________________

Four Logical Classications of Exposures



Knowledge Check

Imagine yourself as the risk manager for XYZ Engineers, a Virginia company

holding several engineering patents that apply to green energies. You have

identied several areas of intellectual property under the property logical classication.

Describe some of the perils and hazards associated with this classication.

_________________________________________________________________________________

Section 2: Risk Identication

Risk Identication Methods

Check-in

Directions: Read each statement. Then select True or False.

1. Risk management surveys are more effective at the company or event level because

they reveal more industry-specic information.

True False

2. Checklists are an efcient means of covering all areas of an operation.

True False

3. One of the values of reports following annual surveys is the identication of

emerging risks.

True False

Section 2: Risk Identication

Elements of Risk Management

Check-in

Directions: Read each statement. Then select True or False.

1. One purpose of a compliance review is to examine an organization’s adherence to

insurance professional standards.

True False

2. In most cases, an organization has little or no control over a compliance review.

True False

3. An organization may conduct an internal review of procedures and policies or give

the task to an external group or legal counsel.

True False

4. Documented processes, procedures, and policies help organizations secure

protection against exposures.

True False

Check-in

Directions: Select the term that completes each statement.

1. Recognizing an organization’s ______________________________ others is an

important outcome of reviewing contracts.

obligations to reliance on

2. During contract reviews, a risk manager must be aware of the possibility of

______________________________.

noncompliance with exposures to

statutes and regulations nancial risk

Section 2: Risk Identication

Check-in

Directions: Select the term that completes each statement.

1. Financial statement analysis may reveal understated or overstated

______________________________ being carried on an organization’s books.

nancial capabilities values

2. Experts include human resource consultants, actuaries, and

______________________________.

people with people with

particular craft skills customer service

experience

Section 2: Risk Identication

Elements of Risk Management

Check-in

Directions: Match each term to its description.

A. Expert review

B. Financial

statement

analysis

C. Physical

inspection

D. Flowchart

construction

E. Contract review

F. Compliance

review

G. Checklists,

surveys, and

questionnaires

H. Insurance policy

review

I. Loss data analysis

J. Procedures and

policies review

_____ Examination of an organization’s nancial information

to identify and value its exposures/assets

_____ A graphical depiction of a process or system

_____ Contributions from experienced individuals in the

identication of exposures

_____ Systematic searches for as many exposures, perils, and

hazards as possible

_____ Visits to physical sites to identify exposures to risk

_____ Historical examination of exposures and their

valuations

_____ Identication of contractual obligations and

examination of contractual compliance

_____ Determination of an organization’s adherence to laws

and regulations

_____ Examination of current policies and procedures for

the purpose of identifying exposures

_____ Identication of exposures and perils arising from

insurance coverage gaps, insufcient limits, coverage

limitations, and exclusions

Section 2: Risk Identication



Knowledge Check

Think about the processes that occur in your organization each day. Select one

of those processes. Draw and label a owchart to show the sequential steps in

the process, and identify risks associated with those steps.

Section 2: Risk Identication

Elements of Risk Management

Section 2 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

compliance hazard loss data tangible

economic

human

resources

peril technological

exposure intangible physical

nancial loss

juridical class

of risk

political

owcharts legal social

1. The potential for several buildings to be damaged by heavy winds within the

geographical area nicknamed "Tornado Alley" is an example of a(n)

______________________________.

2. Tornadoes that frequently occur within Tornado Alley represent a(n)

______________________________.

3. An older building that was engineered only to withstand winds of less than 110 miles

per hour, or a tornado in the EF 1 damage category, is an example of

a(n) ______________________________.

4. The most obvious result of overlooking the Risk Identication step in the risk

management process is an increased likelihood of ______________________________.

5. Monetary exchange rates, ination rates, and import-export tariffs are examples of risks

in which general class of risk? ______________________________

6. Government regulation, new legislation, and compliance are examples of risks in which

general class of risk? ______________________________

7. Fire and water damage, earthquake damage, and bodily injury are examples of risks in

which general class of risk? ______________________________

Section 2: Risk Identication

compliance hazard loss data tangible

economic

human

resources

peril technological

exposure intangible physical

nancial loss juridical political

owcharts legal social

8. The loss of reputation, brand damage, and social trends are examples of risks in which

general class of risk? ______________________________

9. Lost data and disruption to service or online access are examples of risks in which

general class of risk? ______________________________

10. Legal costs and legal decisions are examples of risks in which general class of risk?

______________________________

11. Trade agreements, legislation, and social unrest are examples of risks in which general

class of risk? ______________________________

12. ______________________________ property can be seen or touched, and includes real

property like buildings and personal property, such as equipment.

13. Patents and intellectual property are examples of ______________________________

property.

14. ______________________________ are an organization’s internal people exposure.

Section 2: Risk Identication

Elements of Risk Management

15. Check each example of a peril arising from liability.



Libel, slander, false imprisonment



Products and completed operations



Product malfunctions



Failure to enforce or inadequate policies and procedures

16. Check each example of an exposure arising from net income.



International business interests



Investment activities



Weather (no property damage)



Overextension of credit or excessive borrowing

17. Check each example of a risk identication method.



Checklists, surveys, and questionnaires



Compliance review



Procedures and policies review



Contract review



Flowchart construction



Physical inspection

18. In the risk identication method, ______________________________ analysis, risk

managers examine historical information and data to identify exposures and

their valuations.

19. ______________________________ are useful for understanding product development

processes, decision-making processes, architectural site analyses, and

scheduling processes.

20. An organization conducts a(n) ______________________________ review to determine

how well it complies with regulations and laws, which may be statutory, state, or federal.

Section 3: Risk Analysis

Elements of Risk Management

Section 3: Risk Analysis

The Uses of Risk Analysis

Check-in

Directions: Use the following terms to ll in the blanks.

chance of loss negative outcome severity

minimal renement validation

Risk is more than a(n) ______________________________ or

a(n) ______________________________. Risk Analysis provides

______________________________ of loss data. It also provides

______________________________ of loss data. Such information allows risk factors

to be prioritized, so those with the greatest ______________________________ or

______________________________ receive more attention than those that have

______________________________ impact on an organization.

Section 3: Risk Analysis



Knowledge Check

Consider each of the following exposures. Then indicate in which quadrant

each exposures should be placed.

High

Severity

Frequency

Low

1 2

1. An earthquake in California:

Quadrant _____

2. Knife cuts to chefs in a restaurant

kitchen

Quadrant _____

3. Tornadoes in Kansas and Oklahoma

Quadrant _____

4. Fender-benders due to icy roads in south

Texas

Quadrant _____

5. A bridge collapse during rush-hour trafc

Quadrant _____

Section 3: Risk Analysis

Elements of Risk Management

Check-in

Directions: Use the following terms to ll in the blanks. Terms may be used

more than once.

annual greater risk prioritization

colors impact risk scores

frequency likelihood severity

mitigation

Heat Mapping uses ______________________________ to indicate patterns

or groupings of how risk will impact an organization. Values are assigned

based on measurement scales for both ______________________________ and

______________________________ for each risk. The higher the number assigned to

a risk, the ______________________________ the ______________________________

or ______________________________ of an event. A heat map can help assist an

organization with ______________________________.

A risk register is a highly customizable tool that prioritizes risks based on

a scale of anticipated potential ______________________________. A risk

manager can use a risk register to track issues, likelihood, potential impact, and

______________________________ measures. The key to using a risk register successfully

is conducting this exercise on a(n) ______________________________ basis to see if the

controls are resulting in decreases to the ______________________________ over time.

Section 3: Risk Analysis

Check-in

Directions: Indicate "A" or "B" to identify each analysis method as

qualitative or quantitative.

A. Qualitative

analysis

method

B. Quantitative

analysis

method

_____ Cost-benet analysis

_____ Heat mapping

_____ Loss projections

_____ TCOR calculations and analyses

_____ Root cause analysis

_____ Risk register

_____ Time value of money calculations

_____ Risk mapping

Section 3: Risk Analysis

Elements of Risk Management



Knowledge Check

As the risk manager for a large beverage distributor, you have identied the

following risks:

1. Catastrophic hurricane

2. Fleet maintenance

3. Vehicular accidents

4. Drivers

5. Supply chain exposures

6. Inventory

7. Competition

8. New distribution opportunities

9. Fuel prices

10. Warehouse re

After being asked to present your ndings to the CEO, you determined that a heat map

would be the best way to help the CEO visualize the impact these risks have on the

organization.

Directions: Write the number of each identied risk in the following heat map. (For

example, you might decide that a hurricane would have low probability but

high negative outcome, so you would write the number 1 in the bottom left

red square.)

A Sample Heat Map

Frequency

High

Probability

Low

Probability

Negative Outcome Positive Outcome

Severity

Section 3: Risk Analysis

Loss Trending

Check-in

Directions: Check each true statement.



Loss trending converts historical loss data to current dollar amounts.



Loss data are reported to and stored by an insurance carrier in an RMIS.



Loss development is used to calculate anticipated ultimate losses.



Ultimate losses must be calculated because some claims take extensive periods

of time to develop or close.



Losses related to accidents that have occurred but have not been reported are

excluded from loss calculations.



Operational changes within an organization have little or no impact on

loss calculations.



Knowledge Check

Your supervisor has been examining unadjusted loss data for claims that have

occurred over the last ve years and identies some trends. Explain to your

supervisor what must be done to loss data before trends can be determined and why those

actions are necessary.

_________________________________________________________________________________

Section 3: Risk Analysis

Elements of Risk Management

Section 3 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

cost-benet loss development risk mapping

event loss projections risk register

heat mapping loss trending root cause

Ishikawa diagram prioritization severity

likelihood qualitative analysis TCOR

1. Validation and renement of loss data allow for the ______________________________ of

risk factors.

2. A risk manager uses a(n) ______________________________ analysis to systematically

drill down to the cause of an incident.

3. This word is used interchangeably with the word “incident.”

A(n) ______________________________ is an incident that may or may not become

a claim.

4. ______________________________ is the chance something will happen. It is also known

as frequency.

5. ______________________________ describes the impact of an event, should that

event occur.

6. A risk manager carries out ______________________________ to seek information that is

initially difcult to measure mathematically.

7. ______________________________ is a visual analytical tool that identies all risks to

an organization and indicates their frequency, on a scale from low to high, and their

potential impact, or severity, on a scale from low to high.

Section 3: Risk Analysis

8. ______________________________ is a visual representation of complex sets of data

interpretations that uses colors to indicate patterns or groupings of how risk will impact

an organization.

9. The following diagram is an example of a(n) ______________________________.

Current Risk Score Target Risk Score

Risk Description Prob Impact Rating Controls Prob Impact Rating

Choking hazard

Food poisoning

Theft

10. The head of a “sh” is the identied problem, incident, or accident in a(n)

______________________________.

11. ______________________________ use historical loss data to predict future risk

frequency and severity.

12. A(n) ______________________________ analysis measures total anticipated benets after

costs are subtracted.

13. A risk manager who conducts a(n) ______________________________ analysis calculates

the sum of all costs and expenses associated with risks and risk management within

an organization.

14. ______________________________ takes historical data (losses) and converts that loss

data to current dollar amounts.

15. ______________________________ is the process by which data are adjusted to account

for lag time to settle claims, recognize frequency development, acknowledge incurred

but not reported (IBNR) accidents, and the index for ination, or a calculation of the rate

of ination in an economy.

Section 4: Risk Control

Elements of Risk Management

Section 4: Risk Control

Risk Control Techniques

Check-in

Directions: Read each statement. Then select True or False.

1. Risk avoidance is the mitigation of an exposure to help reduce the severity of a loss.

True False

2. Risk avoidance is a business organization’s preferred risk management method.

True False

3. Exposures related to past activities may remain despite risk avoidance.

True False

Section 4: Risk Control

Check-in

Directions: Use the following terms to ll in the blanks.

budgetary

impact

loss reduction pre-loss

elimination operations prevention

interrupt post-loss

While avoidance is the ______________________________ of exposures,

______________________________ is intended to ______________________________

events that lead to loss, not avoid them entirely. Unlike avoidance,

prevention is a risk control technique that permits organizations to continue

______________________________.

Actions taken to minimize the severity, or ______________________________,

of unprevented losses represent the risk control technique called

______________________________. The approach is applied before and after

losses. A coastal hotel, for example, takes ______________________________

actions when it prepares an emergency evacuation plan and implements

______________________________ actions when it provides medical attention to staff

and guests after a hurricane has occurred.

Check-in

Directions: Match each term to its example.

A. Segregation

B. Separation

C. Duplication

_____ An ice cream start-up builds a second walk-in freezer in

its warehouse.

_____ A car dealership sells its sports utility vehicles from its

suburban lot and its compact and hybrid cars from its

downtown location.

_____ A waste management company establishes a compost

facility at a site separate from its landll facility to

prevent contamination.

Section 4: Risk Control

Elements of Risk Management

Check-in

Directions: Match each term to its example.

avoidance prevention loss reduction

segregation separation duplication

transfer

_______________ 1. A machine shop requires employees to use personal safety

equipment while they are using the shop’s drill presses.

_______________ 2. An appliance store splits unsold inventory between two

warehouses 20 miles apart.

_______________ 3. A company relies on a common carrier to distribute manufactured

goods rather than buying trucks to transport its products.

_______________ 4. A dairy farmer installs generators as an energy alternative in cases

of power failure.

_______________ 5. A large retail company installs a re suppression system.

_______________ 6. After there are several reported cases of babies swallowing

ornaments decorating a crib mobile, the manufacturer ends

production of the mobile.

Section 4: Risk Control



Knowledge Check

A hurricane struck Florida’s Gulf Coast, causing signicant damage to a ve-star

hotel. The hotel has a golf club, golf course, and separate parking structure. The

hotel maintains a eet of minivans and employs drivers to shuttle guests to and from

the airport.

During the storm, it was necessary to evacuate guests and employees, and injuries were

reported. After the storm, the property required extensive repairs related to wind damage

and ooding. Plus, water damage made it necessary to replace the hotel’s eet of golf carts

and two minivans.

Knowing the extent of the damage, what risk control measures should the hotel have taken

prior to the loss? Write your answers in the chart.

Sample Answer:

Guests

Avoidance

Prevention

Loss Reduction

Segregation

Transfer

Section 4: Risk Control

Elements of Risk Management

Golf carts

Avoidance

Prevention

Loss Reduction

Segregation

Transfer

Damage to the building

Avoidance

Prevention

Loss Reduction

Segregation

Transfer

Section 4: Risk Control

Minivans

Avoidance

Prevention

Loss Reduction

Segregation

Transfer

Section 4: Risk Control

Elements of Risk Management

Accident Prevention Basics

Check-in

Directions: Use the following terms to ll in the blanks.

identify permitted uncontrollable

lack of

awareness

preventable unsafe acts

operations sinkholes

unsafe

conditions

overlooked training

1. ______________________________, or behaviors, are one common and

______________________________ reason for accidents. Often, the cause is

a(n) ______________________________. Companies have not taken the time to

______________________________ unsafe behaviors. Neither have they provided

their employees with adequate ______________________________ training.

2. ______________________________ are also a reason for employee

accidents. While some unsafe conditions are inherent to specic business

______________________________, such conditions are sometimes

______________________________ or even ______________________________ by

managers seeking to increase production, promote efciency, or save money.

3. Large natural events like earthquakes are ______________________________

acts and considered catastrophic. Much smaller natural events like

______________________________ can also have signicant damaging effects on

both people and property.

Section 4: Risk Control



Knowledge Check

Here are six steps for accident prevention:

1. Eliminate a potential hazard.

2. Substitute a less hazardous substance or process for another.

3. Make physical modications to a design to reduce the likelihood of injury.

4. Establish rules or processes aimed to reduce the likelihood of injury.

5. Provide personal protective equipment to employees.

6. Offer training.

Directions: Read the following scenario. Explain how these steps could prevent an

accident from occurring.

Your organization specializes in mechanical and structural repair. Your employees often

work on scaffolding, outside in the heat, and with open welding ames. Your equipment is

several years old, and the majority of the tanks have visible dents from years of use.

_________________________________________________________________________________

Section 4: Risk Control

Elements of Risk Management

Section 4 Self-Quiz

Directions: Use the following terms to ll in the blanks. Answers may be used

more than once.

avoidance hold harmless prevention

uncontrollable

events

contractual limit of liability segregation unsafe acts

duplication loss reduction transfer

1. Risk ______________________________ is the complete elimination of an exposure to

avoid the chance of loss.

2. An action intended to interrupt a sequence of events that leads to loss is called

______________________________.

3. ______________________________ reduces frequency of loss, not the severity, or budget

impact, of loss.

4. ______________________________ is an action taken to minimize the severity, or

budgetary impact, of an unprevented loss.

5. An action intended to isolate an exposure from other exposures, perils, or hazards is

called ______________________________.

6. The establishment of backups for critical systems or operations is called

______________________________.

7. Movement of some or all risk to another party is called

______________________________.

8. Responsibility for certain liabilities moves to another party in a(n)

______________________________ transfer.

Section 4: Risk Control

avoidance hold harmless prevention

uncontrollable

events

contractual limit of liability segregation unsafe acts

duplication loss reduction transfer

9. A(n) ______________________________ agreement is an arrangement whereby one

party assumes the liability inherent in a situation, thereby relieving another party of

that liability.

10. A(n) ______________________________ clause is a pre-event limitation of the amount,

type, or method of calculation of damages available by one or both parties to

an agreement.

11. What do the items in the following list have in common? Write your answer on the lines.

•

Unsafe acts or behaviors

•

Lack of awareness

•

Lack of or insufcient training

•

Unsafe conditions

•

Uncontrollable events

_________________________________________________________________________________

12. Check each example of accident prevention.



enter into an exculpatory agreement



eliminate a potential hazard



substitute a less hazardous substance or process for another



establish a waiver of subrogation



make physical modications to a design to reduce the likelihood of injury



offer training

Section 5: Risk Financing

Elements of Risk Management

Section 5: Risk Financing

Risk Financing

Check-in

Directions: Select each true statement.



Risk nancing involves all acquisitions of funds, regardless of cost.



Internal risk nancing includes unplanned retention.



External risk nancing includes contractual transfers.



The term optimal cost is a precisely dened term that means the best product

for a customer at market prices.



Risk control and risk nancing are closely related, as in the case of a company

that purchases insurance to cover potential losses while also taking steps within

the company to mitigate those losses.

Check-in

Directions: Match each term to its description.

A. the insurer

B. the insured

C. exposure

D. insurance

E. premium

_____ A consideration in exchange for a promise

of indemnication

_____ Susceptibility to loss

_____ A transferee that takes contractual responsibility for the

nancial consequence of a risk

_____ A transferor with a relationship with a transferee

_____ A promise of indemnication for specied losses in

exchange for payment of premium

Section 5: Risk Financing



Knowledge Check

You speak to your organization’s management team about creating a risk

nancing program. A manager asks you to explain retention in relation to

creating a risk nancing plan. How do you respond?

_________________________________________________________________________________

Section 5: Risk Financing

Elements of Risk Management

Insurable Risks

Check-in

Directions: Use the following terms to ll in the blanks. Terms may be used

more than once.

calculable many unintended

exceed retention unlikely

few risk manager

An underwriter views risk as something that is _______________________ to occur. An

insurable risk is one that is shared by ______________________, and is unexpected and

______________________________, such as the likelihood that an audience member

will sink a basketball from across a court in a charity event. An insurable risk is also

reasonably ____________________, like auto accidents. Damage to autos is an example

of an insurable risk that generates enough premium paid by ______________________

to pay for the losses of a(n) ______________________________.

A(n) ______________________________ has a different perspective on what

constitutes an insurable risk. From this perspective, insurable risks are not reasonably

______________________________ within an organization and are capable of

causing great harm. Insurable risks are those that ______________________________

an organization’s risk appetite and are less costly than the cost of

______________________________ because of insurance market conditions.

Section 5: Risk Financing

Check-in

Directions: Read each statement. Then select True or False.

1. From an underwriter’s perspective, an

insurable risk is a risk that generates

enough premium paid by the many to

pay for the losses of the few.

True False

2. From an underwriter’s perspective, an

insurable risk is a non-catastrophic risk

or a risk that is unlikely to strike

many simultaneously.

True False

3. From a risk manager’s perspective,

an insurable risk is not reasonably

calculable by an organization.

True False

4. From a risk manager’s perspective,

an insurable risk stays within an

organization’s risk appetite.

True False

5. Standard insurance carriers are

admitted and licensed by the states in

which they operate.

True False

6. The majority of coverage for

catastrophic risks such as oods,

earthquakes, and windstorms is

provided through the excess and

surplus lines market.

True False

7. The NFIP offers affordable ood

insurance to property owners, renters,

and businesses to ll the gaps existing

in ood insurance programs provided

by many insurance carriers.

True False

8. Claims activity levels are a

consideration in assigning the label

high risk to a property.

True False

9. The NFIP is a government-run

program that provides ood insurance

to lower the nancial burden on

property owners who receive limited

coverage from insurance carriers.

True False

10. All insurance professionals face the

challenge of determining the right

mix of internal and external funds.

True False

Section 5: Risk Financing

Elements of Risk Management



Knowledge Check

You meet with your organization’s CFO, who is reviewing the upcoming

policy renewal. She asks two questions. First, why was the property insurance

purchased through surplus lines? And what was the purpose of the additional NFIP policy?

Respond to both of the CFO’s questions.

_________________________________________________________________________________

Risk Retention and Transfer

Check-in

Directions: Match each term to its purpose in a retention/transfer diagram.

A. Vertical

axis

B. Horizontal

axis

C. External

Financing

D. Budgeted

Retention

E. Tolerance

Corridor

_____ The portion of expected losses an organization is willing

and able to retain

_____ The marginal retention beyond budgeted retention that an

organization may also choose to retain all or part of

_____ Represents the total amount paid for all claims during a

policy period

_____ Insurance purchased to pay for losses that fall outside of an

organization’s risk appetite and ability

_____ Represents the total amount per claim or per occurrence

in dollars

Section 5: Risk Financing

Check-in

Directions: Read each statement. Then select True or False.

1. An organization that chooses to insure everything selects a guaranteed cost plan as

a risk nancing option.

True False

2. An organization that chooses a guaranteed cost plan is likely to have few excess

funds available for covering nancial losses.

True False

3. An organization with a guaranteed cost plan is likely to have the ability to manage

claims services internally but unlikely to have excess funds to cover losses.

True False

4. One distinctive advantage of a fully insured program is that an organization has a

high degree of certainty when budgeting for insurable losses.

True False

5. Standardized coverage is a benet of guaranteed cost plans.

True False

6. An advantage of both the guaranteed cost plan and the dividend plan is that

both provide security while also providing a return of premium based on an

organization’s losses.

True False

Section 5: Risk Financing

Elements of Risk Management

Check-in

Directions: Match each term to its description.

A. Guaranteed

cost plan

B. Dividend plan

C. Deductible plan

D. Self-insured risk

nancing plan

_____ The insured reimburses the insurer a portion of each

loss up to a stated amount.

_____ The reimbursement from an insurance carrier when

an organization experiences a good year in terms of

losses

_____ A fully insured program that transfers all risk of loss to

an insurance company

_____ The use of internal funds to cover possible losses

and possibly external funds through reinsurance or

excess coverage

Section 5: Risk Financing



Knowledge Check

Select one of the following scenarios. Then explain which risk nancing plan

would be most appropriate.

1. Your organization is extremely risk adverse and desires a plan with the lowest loss

sensitivity.

_________________________________________________________________________________

2. Your organization has a sophisticated risk management program and prefers to retain

risk as opposed to paying premium.

_________________________________________________________________________________

3. Your organization can control most of its risk and has the nancial resources to retain

much of its risk. The organization is interested in retaining risk but wants coverage for

large losses.

_________________________________________________________________________________

Section 5: Risk Financing

Elements of Risk Management

Section 5 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

budgeted retention transfer

deductible risk nancing

insurer standard

1. The acquisition of funds at the most favorable or optimal cost to pay losses is called

______________________________.

2. The use of internal funds to pay losses is called ______________________________.

3. The use of external funds to pay losses is called a(n) ______________________________ of

nancial responsibility.

4. A(n) ______________________________ takes contractual responsibility for the nancial

consequence of a risk.

5. Insurance carriers that are considered ______________________________ are admitted

and licensed by the states in which they operate.

6. A(n) ______________________________, or transfer diagram, depicts an organization’s

nancial ability and risk appetite.

7. ______________________________ retention is the portion of expected losses an

organization is willing and able to retain.

8. In a(n) ______________________________ risk nancing plan, an insured elects to

reimburse an insurer for losses up to a stated amount.

Section 5: Risk Financing

Directions: Select True or False.

9. Insurance is a transfer of risk.

True False

10. Insurance is a contractual responsibility to assume the nancial consequences of a risk.

True False

11. A guaranteed cost risk nancing plan provides an insured with the most stability.

True False

12. Check all characteristics of an insurable risk as seen from an underwriter’s perspective.



a risk shared by many



a risk that causes crippling severity to an organization



an unexpected and unintended risk



a risk which generates enough premium paid by the many to pay for the losses of

the few



a risk that exceeds an organization’s risk appetite

Section 6: Risk Administration

Elements of Risk Management

Section 6: Risk Administration

Implementation and Monitoring of a Risk

Management Program



Knowledge Check

Explain the differences between the implementation and monitoring of a risk

management program.

_________________________________________________________________________________

Section 6: Risk Administration

The Role of a Risk Manager

Check-in

Directions: There are numerous things a risk manager must do to be

successful. Read the scenario. Then check each example of a

successful behavior the risk manager demonstrates.

Elizabeth is the risk manager for a large widget manufacturing company with several

facilities. She has earned the Certied Risk Manager (CRM) designation and regularly

attends courses offered by The National Alliance to hone her skills and stay current on

best practices and emerging trends in the risk management industry.

Elizabeth is also a member of the Widget Manufacturers Association (WMA.) The

Association offers a Liability Pool to its members. Elizabeth recently moved her

company’s liability coverage to the pool after completing an analysis of rates and

premiums. This move also provides her with loss control services and important

information specic to widget manufacturing companies.

When she received a bulletin from the WMA detailing new federal requirements for

tempered steel—which is used to make widgets—she immediately consulted with

the company leadership team and corporate counsel to alert them of the change

and to assist in compliance with the new regulations. Elizabeth also consulted with

a manufacturing expert to determine if this change would impact the quality and

performance of the company’s products, or the manufacturing process as a whole. She

knows that any changes in the manufacturing process will require the review of current

risk management procedures and implementation of new or revised procedures.



Remains up-to-date with changes within the risk management industry



Seeks the most benecial and cost-effective solutions for protecting their

organizations



Recognize themselves as sources of vast amounts of information that require

communication to numerous stakeholders



Communicates with management as well as employees in non-supervisory

roles



Constantly reviews risk management policies and procedures



Maintains quality control



Uses materials and reports to provide evidence of the strengths and weaknesses

of a risk management program

Section 6: Risk Administration

Elements of Risk Management

Check-in

Directions: Read each statement. Then select True or False.

1. A risk manager may select either an agent or a broker to represent her company.

True False

2. Because every organization is different, it unlikely that an agency will be familiar

with similar organizations.

True False

3. A risk manager might ask an agent whether the agent has recommended

appropriate coverages to accounts similar to the risk manager’s.

True False

4. The competencies of an agency’s personnel are of concern to effective risk

managers.

True False

5. An agency’s stage of growth is less important to a risk manager’s decision than is

the agency’s management prole.

True False

Section 6: Risk Administration



Knowledge Check

You have been asked to speak to your board of directors regarding the role

of a risk manager and why your organization needs a risk management

department. What specic reasons will you present to board members? Write them here.

_________________________________________________________________________________

The Risk Management Network



Knowledge Check

As the risk manager for a large organization, you have identied cybersecurity

as a main threat, but you do not have much experience with this exposure.

What members of your risk network could you reach out to, and how might they be able

to help?

_________________________________________________________________________________

Section 6: Risk Administration

Elements of Risk Management

Section 6 Self-Quiz

1. Check all examples that represent a source of evidence a risk manager might use to

determine the effectiveness of a risk management program.



open and closed claims



risk nancing plans



contracts



signicant incidents/accidents

Directions: Read each statement. Then select True or False.

2. A risk manager provides a nance plan during the nal step of the

risk management process.

True False

3. Implementation of a risk management plan relies heavily on the risk manager’s control

of an organization’s resources.

True False

4. The two parts of the nal step in the risk management process are implementation

and monitoring.

True False

5. A risk manager’s success rests entirely with those who have the ability to execute risk

management strategy.

True False

6. Risk managers conduct monthly assessments to maintain quality control.

True False

Section 6: Risk Administration

7. For long-term success, risk managers must be active participants on their organizations’

leadership teams.

True False

8. For long-term success, risk managers must create adaptable processes and approaches

that evolve to t new needs, best practices, and emerging risks.

True False

9. To achieve their objectives, risk managers require contributions from both internal and

external networks of people.

True False

10. To select network members who will be the best t for their organizations, risk

managers consider a person’s personal attributes, such as interpersonal skills.

True False

Elements of Risk Management

Answer Key

Section 1: Introduction to Risk Management

Elements of Risk Management

Section 1: Introduction to Risk Management

Dening Risk

Check-in

Directions: Use the following terms to ll in the blanks. Some terms may

be used more than once.

area of expertise negative uncertainty

job function positive

Risk is a condition of either positive or negative uncertainty arising from a given set

of circumstances. The term does not solely describe possible negative outcomes, the

chance of loss, or no loss. Risk outcomes can also be positive. Perceptions of risk vary,

depending on an individual’s job function or area of expertise.



Knowledge Check

Directions: Imagine that one of your clients owns a company that

manufactures and sells a variety of granola breakfast and snack

products. Identify three examples of pure and speculative risk associated with

your client’s business.

Type of Risk Examples

Pure

A food product could contain contaminants.

A line worker could suffer a back injury.

A re could occur.

Speculative

The client introduces a reduced carbohydrate line, which could have

a lasting impact or be of limited interest to consumers.

The client pays an athlete for an endorsement, tying the brand

to the image of the athlete. Should the athlete’s reputation be

tarnished, the client’s product could suffer.

The client decides to expand into a new geographic territory.

Expansion could result in nancial gain or loss, or no change at all.

Section 1: Introduction to Risk Management

Key Risk Management Terms

Check-in

Directions: Read each statement. Then select True or False.

1. A hazard is a cause of loss.

True False

A peril is a cause of loss.

2. A situation, behavior, or condition that may lead to adverse nancial consequences

is an exposure.

True False

3. A cyberattack is an example of an exposure.

True False

A cyberattack is an example of a peril, or cause of loss.

4. A spill on a supermarket aisle is an example of a hazard because it increases the

likelihood that someone will fall.

True False

5. An insured who shows no regard for his insured property demonstrates a

morale hazard.

True False

Section 1: Introduction to Risk Management

Elements of Risk Management

Check-in

Directions: Read each example. Write the risk term that applies.

1. A passenger enters an elevator. His clothing is caught in the elevator door as the

door closes. The passenger snatches the clothing from the door before the elevator

begins to move. He is uninjured and his clothes are not damaged.

incident

2. A mixing paddle on a faulty bakery mixer snaps and strikes an employee’s hand.

The employee’s hand is cut and bleeding.

accident

3. A driver is at fault in a minor auto accident. The other driver is uninjured, but the

bumper on her car requires repairs. The other driver demands that the at-fault

driver’s insurance company pay for the loss.

claim

Check-in

Directions: Match each term to its description.

A. average severity

B. risk appetite

C. high frequency

D. low frequency

E. severity

F. expected losses

_____ The total dollar amount of all losses for a given

period of time

_____ A loss has occurred but is unlikely to occur again in

the future

_____ An organization’s tolerance for risk

_____ The product of loss frequency multiplied by loss

severity

_____ The total amount of losses in a given period divided

by the total number of claims

_____ A loss expected to continue occurring regularly

Section 1: Introduction to Risk Management

Check-in

Directions: Match each term to its description.

A. loss

B. exposure

C. peril

D. hazard

E. incident

F. accident

G. occurrence

H. claim

_____ A cause of loss

_____ An unplanned event denite as to time and place that

results in injury or damage to a person or property

_____ An event that disrupts normal activities and may become

a loss or business interruption

_____ A demand for payment or an obligation to pay as a result

of a loss or occurrence

_____ A situation, practice, or condition that may lead to an

adverse nancial consequence or loss; an activity or

resource; people or assets

_____ A reduction in asset value

_____ An accident with the limitation of time removed; an

“accident” extended over a period of time rather than a

single, observable event

_____ A condition or characteristic that may create or increase

the likelihood or severity of a loss

Section 1: Introduction to Risk Management

Elements of Risk Management



Knowledge Check

Imagine a client is seeking property insurance for a condominium building

that her company manages. The building, located on Florida’s Gulf Coast, is

valued at $10,000,000. It was built in 2002, has 10 oors and 100 condominium units. The

building’s roof has not been updated, and a recent inspection concluded that the main

electrical panel needs repairs. It also appears that the majority of the unit owners do not

own re extinguishers, nor do they own hurricane shutters.

Directions: Give one example of each of the following risk management factors your client

should consider:

Exposure Building

Peril Hurricane, re, ood

Hazard Faulty electrical panel, age of roof, lack of re extinguishers, lack of

hurricane shutters

Incident The main circuit breaker keeps tripping, causing the residents to lose

power.

Accident Eventually the faulty electrical system started a re that damaged the

building causing $2,000,000 in losses. Several of the residents also were

injured due to smoke inhalation.

Section 1: Introduction to Risk Management

Risk Management

Check-in

Directions: Use the following terms to ll in the blanks.

behaviors objects quantitative

case studies operations Risk Control

interviews procedures Risk Financing

negative qualitative Risk Identication

Risk Identication is the rst and most important step in the risk management process.

Any failure to identify risk exposes an organization to negative nancial consequences.

Once risks are identied, they are analyzed to assess their potential impact. Analysis

takes two forms. Qualitative analysis allows the collection of information that does not

lend itself easily to quantitative analysis, or mathematical measurement. Interviews and

case studies are examples of this form of analysis.

Risk Control and Risk Financing share the same position in the risk management

process because they are interchangeable. Risk Control applies methods or actions

aimed at minimizing or avoiding the impact of a loss. The human approach to risk

control focuses on people’s behaviors. The engineering approach focuses on objects

and operations. The systems approach pays attention to procedures and policies, as

well as negligent supervision.

Section 1: Introduction to Risk Management

Elements of Risk Management

Check-in

Directions: Match each term to its description.

A. Avoidance

B. Prevention

C. Reduction

D. Segregation

E. Separation

F. Duplication

G. Transfer

_____ A response to a focus on the frequency with which

events occur

_____ The isolation of an exposure from other exposures,

perils, or hazards

_____ Creating asset back-ups

_____ A response to a focus on the severity of incidents in an

effort to recognize risk and take action to lower losses

_____ The shift of function, exposure, or responsibility of

certain liabilities to another party

_____ The elimination of risk

_____ The process of spreading exposures or activities over

several locations



Knowledge Check

Review the diagram of the ve steps of the risk management process.

Summarize in your own words why each part of the process is necessary.

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk

Identiﬁcation

Risk Identication: This is the most important step in

the entire risk management process. Simply put, if you

do not identify a risk, you are unable to analyze, control,

or nance the risk. In most cases, failure to identify risk

puts the burden or loss solely on the organization as an

unplanned or unfunded loss.

Section 1: Introduction to Risk Management

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk

Analysis

Risk Analysis: This step allows you to determine

frequency and severity of identied risk. It is important

to know how often certain losses may occur, and once

they do, how much they may cost. Once you have

analyzed your risk, you are able to decide if you should

control or nance it, but in most cases, you will do a

combination of both.

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk Control

Risk Financing

Risk Control: When you choose to control a risk, you are

taking a conscious action or inaction to minimize, at

the optimal cost, the frequency and severity of claims.

All decisions made during this step are an effort to

prevent, mitigate, avoid, or eliminate risk. Organizations

that have excellent control techniques are able to keep

costs down and employees safe.

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk Control

Risk Financing

Risk Financing: This step allows you to consider using

internal funds to manage claims or external funds

(insurance, non-insurance contractual transfer, and

borrowing) to pay or shift liability to another party. The

objective is to nd the appropriate balance of options

that suit an organization best.

Section 1: Introduction to Risk Management

Elements of Risk Management

Risk Control

Risk Financing

Risk

Administration

Risk

Analysis

Risk

Identiﬁcation

Risk

Administration

Risk Administration: The ongoing implementation and

monitoring of the risk management process is a crucial

and often overlooked step. As a risk manager, you must

be able to make changes to a risk management

program when exposures or operations change, new

risks are identied, or frequency and severity increase.

Section 1: Introduction to Risk Management

Section 1 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

accident hazard segregation

avoidance incident severity

business liability speculative

contractual measure of loss risk ability

exposure occurrence

Risk

Administration

nancial peril risk management

frequency physical uncertainty

1. Risk is dened as a condition of either positive or negative uncertainty arising from a

given set of circumstances.

2. Perceptions of risk depend upon an individual’s job function or area of expertise.

Select True or False.

True False

3. A risk manager may dene risk as the person or property exposed to a potential loss.

Select True or False.

True False

accident hazard segregation

avoidance incident severity

business liability speculative

contractual measure of loss risk ability

exposure occurrence

Risk

Administration

nancial peril risk management

frequency physical uncertainty

Section 1: Introduction to Risk Management

Elements of Risk Management

4. Pure risks include threats to property and people, as well as liability.

5. The result of a pure risk is some measure of loss.

6. Unlike pure risk, speculative risk presents the opportunity for gain.

7. Speculative risk is associated with business or nancial risk.

8. Think about the denition of the term loss. Check each example of loss.

a business interruption

physical property damage

injury to an employee or customer

9. A situation, practice, or condition that may lead to an insured’s susceptibility to adverse

nancial consequences or loss is called a(n) exposure.

10. A(n) peril is a cause of loss.

11. A(n) hazard is a factor that increases the likelihood that a peril will occur.

12. A(n) incident is an event that may lead to a loss or a claim, or an event that may cause a

business interruption.

13. A(n) accident is always an unexpected and unintentional event that tends to result in

damage or injury.

14. An “accident” that occurs over an extended period of time is called a(n) occurrence.

15. The number of claims that occur or that an insurer expects to occur within a given

period of time is labeled frequency.

16. The dollar amount inicted by a given loss or catastrophe, or the aggregate dollar

amount of all losses for a given period of time, is dened by the word severity.

17. Risk ability describes an organization’s ability or inability to assume nancial

responsibility for loss.

Section 1: Introduction to Risk Management

18. Risk management is the implementation of a process intended to minimize the

uncertainty of exposures that can adversely affect an individual’s or an organization’s

assets and nancial well-being.

19. Sequentially order (number them 1–5) the steps of the risk management process.

______ Risk Control

______ Risk Administration

______ Risk Identication

______ Risk Analysis

______ Risk Financing

20. The best method of risk control is avoidance, or the elimination of risk.

21. Segregation involves isolating an exposure from other exposures, perils, or hazards.

22. The two types of risk transfer are physical and contractual.

23. The ongoing implementation and monitoring of the risk management process

management process is called Risk Administration.

Section 2: Risk Identication

Elements of Risk Management

Section 2: Risk Identication

The Importance of Risk Identication



Knowledge Check

Think about your organization and the risks you identied as potential

threats to your organization’s well-being. Predict what might happen to your

organization if one of the risks you identied was overlooked.

Sample Answer:

Answers will vary, but let’s say that someone identied high employee turnover as a risk

to her organization. This is a serious risk to an organization’s nancial well-being, given

the costs of recruiting, hiring, and training new employees. There are also nancial losses

attached to employee and customer dissatisfaction, workow interruptions, and customer

loss.

Section 2: Risk Identication

General Classes of Risk

Check-in

Directions: Read each example and consider the risk class implications.

Select all of the risk classications that apply.

1. The ABC Plastics Company produces medical supplies for distribution across the

country. Government sanctions against certain oil-producing countries have led

to resource scarcity. Scarcity has led to higher prices, which has triggered protests

from national healthcare watchdog groups. How could the risks associated with

these circumstances be classied?

Economic Class Legal Class Physical Class

Social Class Technological Class

Juridical Class Political Class

2. The XYZ Company manufactures children’s clothing and accessories. The company

licensed rights to a variety of popular movie characters for use on children’s

lunchboxes and backpacks. The movie company’s employment practices have

recently come under scrutiny by state employment authorities, and a number

of civil lawsuits are underway. How could the risks associated with these

circumstances be classied?

Economic Class Legal Class Physical Class

Social Class Technological Class

Juridical Class Political Class

Section 2: Risk Identication

Elements of Risk Management



Knowledge Check

A toy company works in partnership with global food manufacturers to

create toy models of brand name foods for use in preschool, daycare, and

home settings. For years, the toy company has seen revenue increase. Consequently, it

has expanded its product line to include popular snack foods. In recent months, the

company’s marketing team has collected evidence of a growing initiative on social media to

eliminate what some consumers call “unhealthful” food choices associated with children’s

play objects. Explain which classications of risk apply to the toy manufacturer’s current

circumstances. Justify your choices.

Sample Answer:

Social: As our culture moves toward healthier lifestyle choices, we do not want to be seen

as an organization that is promoting unhealthful options for children. Failure to adapt

to the changing public perception of acceptable food options will lead to a decrease in

revenue.

Economic: If our products are seen as “unhealthful,” this could have a direct impact on our

revenue and ability to maintain our current workforce.

Political: The government is taking steps to educate people on the consequences of

unhealthful lifestyle choices, including the identication of unhealthful foods. If any foods

that our products are modeled after are identied as unhealthful, we will see an impact on

both social and economic risk classications.

Four Logical Classications of Exposures



Knowledge Check

Imagine yourself as the risk manager for XYZ Engineers, a Virginia company

holding several engineering patents that apply to green energies. You have

identied several areas of intellectual property under the property logical classication.

Describe some of the perils and hazards associated with this classication.

Sample Answer:

Perils associated with this logical classication could include theft, cyber liability, cyber

breaches, and physical damage to the patents, if the technology is kept on site.

Hazards associated with this logical classication include poor network security, a

disgruntled employee, poor building construction, and poor electrical wiring.

Section 2: Risk Identication

Risk Identication Methods

Check-in

Directions: Read each statement. Then select True or False.

1. Risk management surveys are more effective at the company or event level because

they reveal more industry-specic information.

True False

2. Checklists are efcient means of covering all areas of an operation.

True False

Checklists may not identify new exposures or cover all areas of an operation.

3. One of the values of reports following annual surveys is the identication of

emerging risks.

True False

Section 2: Risk Identication

Elements of Risk Management

Check-in

Directions: Read each statement. Then select True or False.

1. One purpose of a compliance review is to examine an organization’s adherence to

insurance professional standards.

True False

2. In most cases, an organization has little or no control over a compliance review.

True False

3. An organization may conduct an internal review of procedures and policies or give

the task to an external group or legal counsel.

True False

4. Documented processes, procedures, and policies help organizations secure

protection against exposures.

True False

Check-in

Directions: Select the term that completes each statement.

1. Recognizing an organization’s obligations to others is an important outcome of

reviewing contracts.

obligations to reliance on

2. During contract reviews, a risk manager must be aware of the possibility of

exposures to nancial risk.

noncompliance with exposures to

statutes and regulations nancial risk

Section 2: Risk Identication

Check-in

Directions: Select the term that completes each statement.

1. Financial statement analysis may reveal understated or overstated values being

carried on an organization’s books.

nancial capabilities values

2. Experts include human resource consultants, actuaries, and people with particular

craft skills.

people with people with

particular craft skills customer service

experience

Section 2: Risk Identication

Elements of Risk Management

Check-in

Directions: Match each term to its description.

A. Expert review

B. Financial

statement

analysis

C. Physical

inspection

D. Flowchart

construction

E. Contract review

F. Compliance

review

G. Checklists,

surveys, and

questionnaires

H. Insurance policy

review

I. Loss data analysis

J. Procedures and

policies review

_____ Examination of an organization’s nancial information

to identify and value its exposures/assets

_____ A graphical depiction of a process or system

_____ Contributions from experienced individuals in the

identication of exposures

_____ Systematic searches for as many exposures, perils, and

hazards as possible

_____ Visits to physical sites to identify exposures to risk

_____ Historical examination of exposures and their

valuations

_____ Identication of contractual obligations and

examination of contractual compliance

_____ Determination of an organization’s adherence to laws

and regulations

_____ Examination of current policies and procedures for

the purpose of identifying exposures

_____ Identication of exposures and perils arising from

insurance coverage gaps, insufcient limits, coverage

limitations, and exclusions

Section 2: Risk Identication



Knowledge Check

Think about the processes that occur in your organization each day. Select one

of those processes. Draw and label a owchart to show the sequential steps in

the process, and identify risks associated with those steps.

Sample Answer:

Answers will vary depending on participants’ examples.

1. Receive customer order

in back ofce

2. Pick up rolling cart

3. Enter main shopping

area through swinging

doors

4. Pull order from the

shelves

5. Return through swinging

doors to back ofce

1. Incorrect credit card information

is recorded and charged.

Insufcient security allows

customer's personal information

and card number to be stolen/

hacked.

2. Employee cuts hand on rough

edges of the cart.

3. Employee runs into and injures a

customer as he comes through

the swinging doors into the

shopping area.

4. Employee injures customer with

the rolling cart. Employee drops

food items on the oor, creating

a slipping hazard. Employee

makes a wide turn around

the end of an aisle, sending

food items ying from cart,

injuring customers or coworkers.

Customer runs into employee

with his cart, causing injuries.

5. Employee runs into coworker

when returning to the back

ofce area, causing injuries.

Section 2: Risk Identication

Elements of Risk Management

Section 2 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

compliance hazard loss data tangible

economic

human

resources

peril technological

exposure intangible physical

nancial loss juridical political

owcharts legal social

1. The potential for several buildings to be damaged by heavy winds within the

geographical area nicknamed "Tornado Alley" is an example of a(n) exposure.

2. Tornadoes that frequently occur within Tornado Alley represent a(n) peril.

3. An older building that was engineered only to withstand winds of less than 110 miles

per hour, or a tornado in the EF 1 damage category, is an example of a(n) hazard.

4. The most obvious result of overlooking the Risk Identication step in the risk

management process is an increased likelihood of nancial loss.

5. Monetary exchange rates, ination rates, and import-export tariffs are examples of risks

in which general class of risk? economic

6. Government regulation, new legislation, and compliance are examples of risks in which

general class of risk? legal

7. Fire and water damage, earthquake damage, and bodily injury are examples of risks in

which general class of risk? physical

8. The loss of reputation, brand damage, and social trends are examples of risks in which

general class of risk? social

Section 2: Risk Identication

compliance hazard loss data tangible

economic

human

resources

peril technological

exposure intangible physical

nancial loss juridical political

owcharts legal social

9. Lost data and disruption to service or online access are examples of risks in which

general class of risk? technological

10. Legal costs and legal decisions are examples of risks in which general class of risk?

juridical

11. Trade agreements, legislation, and social unrest are examples of risks in which general

class of risk? political

12. Tangible property can be seen or touched and includes real property like buildings and

personal property, such as equipment.

13. Patents and intellectual property are examples of intangible property.

14. Human resources are an organization’s internal people exposure.

15. Check each example of a peril arising from liability.

Libel, slander, false imprisonment



Products and completed operation

Product malfunctions



Failure to enforce or inadequate policies and procedures

16. Check each example of an exposure arising from net income.

International business interests

Investment activities



Weather (no property damage)



Overextension of credit or excessive borrowing

Section 2: Risk Identication

Elements of Risk Management

17. Check each example of a risk identication method.

Checklists, surveys, and questionnaires

Compliance review

Procedures and policies review

Contract review

Flowchart construction

Physical inspection

18. In the risk identication method, loss data analysis, risk managers examine historical

information and data to identify exposures and their valuations.

19. Flowcharts are useful for understanding product development processes, decision-

making processes, architectural site analyses, and scheduling processes.

20. An organization conducts a(n) compliance review to determine how well it complies

with regulations and laws, which may be statutory, state, or federal.

Section 3: Risk Analysis

Elements of Risk Management

Section 3: Risk Analysis

The Uses of Risk Analysis

Check-in

Directions: Use the following terms to ll in the blanks.

chance of loss negative outcome severity

minimal renement validation

Risk is more than a negative outcome or a chance of loss. Risk Analysis provides

validation of loss data. It also provides renement of loss data. Such information allows

risk factors to be prioritized, so those with the greatest frequency or severity receive

more attention than those that have minimal impact on an organization.

Section 3: Risk Analysis



Knowledge Check

Consider each of the following exposures. Then indicate in which quadrant

each exposures should be placed.

High

Severity

Frequency

Low

1 2

1. An earthquake in California

Item 1: The earthquake is a high frequency and high severity exposure. Consequently, it

belongs in quadrant 2.

2. Knife cuts to chefs in a restaurant kitchen

Item 2: Knife cuts to chefs working in busy restaurant kitchens are a high frequency but low

severity type of injury. So, this exposure belongs in quadrant 3.

3. Tornadoes in Kansas and Oklahoma

Item 3: Kansas and Oklahoma are in a geographical region called "Tornado Alley."

Tornadoes occur frequently and often with devastating impact. So, this exposure belongs

in quadrant 2—high frequency and high severity.

4. Fender benders due to icy roads in south Texas

Item 4: Snow and ice are uncommon in South Texas. When they do occur, drivers’

unfamiliarity with such precipitation can easily lead to auto accidents. However, such

weather conditions are rare, making them low frequency-low severity events. So, this

exposure belongs in quadrant 4.

Section 3: Risk Analysis

Elements of Risk Management

5. A bridge collapse during rush-hour trafc

Item 5: In contrast to the other items described so far, a bridge collapse during rush hour

trafc would belong in quadrant 1. It is a low frequency-high severity risk. While such events

do not occur frequently, the nancial consequences can be quite severe.

Check-in

Directions: Use the following terms to ll in the blanks. Terms may be used

more than once.

annual greater risk prioritization

colors impact risk scores

frequency likelihood severity

mitigation

Heat mapping uses colors to indicate patterns or groupings of how risk will impact

an organization. Values are assigned based on measurement scales for both severity

and frequency for each risk. The higher the number assigned to a risk, the greater the

impact or likelihood of an event. A heat map can help assist an organization with

risk prioritization.

A risk register is a highly customizable tool that prioritizes risks based on a scale of

anticipated potential impact. A risk manager can use a risk register to track issues,

likelihood, potential impact, and mitigation measures. The key to using a risk register

successfully is conducting this exercise on a(n) annual basis to see if the controls are

resulting in decreases to the risk scores over time.

Section 3: Risk Analysis

Check-in

Directions: Indicate "A" or "B" to identify each analysis method as

qualitative or quantitative.

A. Qualitative

analysis

method

B. Quantitative

analysis

method

_____ Cost-benet analysis

_____ Heat mapping

_____ Loss projections

_____ TCOR calculations and analyses

_____ Root cause analysis

_____ Risk register

_____ Time value of money calculations

_____ Risk mapping

Section 3: Risk Analysis

Elements of Risk Management



Knowledge Check

As the risk manager for a large beverage distributor, you have identied the

following risks:

1. Catastrophic hurricane

2. Fleet maintenance

3. Vehicular accidents

4. Drivers

5. Supply chain exposures

6. Inventory

7. Competition

8. New distribution opportunities

9. Fuel prices

10. Warehouse re

After being asked to present your ndings to the CEO, you determined that a heat map

would be the best way to help the CEO visualize the impact these risks have on the

organization.

Directions: Write the number of each identied risk in the following heat map. (For

example, you might decide that a hurricane would have low probability but

high negative outcome, so you would write the number 1 in the bottom left

red square.)

A Sample Heat Map

Frequency

High

Probability

Low

Probability

Negative Outcome Positive Outcome

Severity

4 7 8

10 3 5

1 6

Section 3: Risk Analysis

Loss Trending

Check-in

Directions: Check each true statement.

Loss trending converts historical loss data to current dollar amounts.

Loss data are reported to and stored by an insurance carrier in an RMIS.

Loss development is used to calculate anticipated ultimate losses.

Ultimate losses must be calculated because some claims take extensive periods

of time to develop or close.



Losses related to accidents that have occurred but have not been reported are

excluded from loss calculations.



Operational changes within an organization have little or no impact on

loss calculations.

Section 3: Risk Analysis

Elements of Risk Management



Knowledge Check

Your supervisor has been examining unadjusted loss data for claims that have

occurred over the last ve years and identies some trends. Explain to your

supervisor what must be done to loss data before trends can be determined and why those

actions are necessary.

Sample Answer:

Unadjusted loss data can be misleading because they do not account for the following:

•

Claims that take multiple years to develop and reach an ultimate claims cost

•

Accidents that have occurred but have not yet been reported

•

Changes in costs due to ination

•

Changes in exposure base, such as new locations being added, an increase in product

offerings, or a divestiture

For these reasons, risk managers should adjust for:

•

Frequency development

•

Severity development

•

Changes in the exposure base

•

Ination

Section 3: Risk Analysis

Section 3 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

cost-benet loss development risk mapping

event loss projections risk register

heat mapping loss trending root cause

Ishikawa diagram prioritization severity

likelihood qualitative analysis TCOR

1. Validation and renement of loss data allow for the prioritization of risk factors.

2. A risk manager uses a(n) root cause analysis to systematically drill down to the cause of

an incident.

3. This word is used interchangeably with the word “incident.” A(n) event is an incident that

may or may not become a claim.

4. Likelihood is the chance something will happen. It is also known as frequency.

5. Severity describes the impact of an event, should that event occur.

6. A risk manager carries out qualitative analysis to seek information that is initially difcult

to measure mathematically.

7. Risk mapping is a visual analytical tool that identies all risks to an organization and

indicates their frequency, on a scale from low to high, and their potential impact, or

severity, on a scale from low to high.

8. Heat mapping is a visual representation of complex sets of data interpretations that

uses colors to indicate patterns or groupings of how risk will impact an organization.

Section 3: Risk Analysis

Elements of Risk Management

9. The following diagram is an example of a(n) risk register .

Current Risk Score Target Risk Score

Risk Description Prob Impact Rating Controls Prob Impact Rating

Choking hazard

Food poisoning

Theft

10. The head of a “sh” is the identied problem, incident, or accident in a(n) Ishikawa

diagram.

11. Loss projections use historical loss data to predict future risk frequency and severity.

12. A(n) cost-benet analysis measures total anticipated benets after costs are subtracted.

13. A(n) risk manager who conducts a TCOR analysis calculates the sum of all costs and

expenses associated with risks and risk management within an organization.

14. Loss trending takes historical data (losses) and converts that loss data to current

dollar amounts.

15. Loss development is the process by which data are adjusted to account for lag time

to settle claims, recognize frequency development, acknowledge incurred but not

reported (IBNR) accidents, and the index for ination, or a calculation of the rate of

ination in an economy.

Section 4: Risk Control

Elements of Risk Management

Section 4: Risk Control

Risk Control Techniques

Check-in

Directions: Read each statement. Then select True or False.

1. Risk avoidance is the mitigation of an exposure to help reduce the severity of a loss.

True False

Risk avoidance is the complete elimination of an exposure to avoid the chance of

loss entirely.

2. Risk avoidance is a business organization’s preferred risk management method.

True False

Risk avoidance may not align with an organization’s goals and prot motives.

3. Exposures related to past activities may remain despite risk avoidance.

True False

100

Section 4: Risk Control

Check-in

Directions: Use the following terms to ll in the blanks.

budgetary

impact

loss reduction pre-loss

elimination operations prevention

interrupt post-loss

While avoidance is the elimination of exposures, prevention is intended to interrupt

events that lead to loss, not avoid them entirely. Unlike avoidance, prevention is a risk

control technique that permits organizations to continue operations.

Actions taken to minimize the severity, or budgetary impact, of unprevented losses

represent the risk control technique called loss reduction. The approach is applied

before and after losses. A coastal hotel, for example, takes pre-loss actions when it

prepares an emergency evacuation plan and implements post-loss actions when it

provides medical attention to staff and guests after a hurricane has occurred.

Check-in

Directions: Match each term to its example.

A. Segregation

B. Separation

C. Duplication

_____ An ice cream start-up builds a second walk-in freezer in

its warehouse.

_____ A car dealership sells its sports utility vehicles from its

suburban lot and its compact and hybrid cars from its

downtown location.

_____ A waste management company establishes a compost

facility at a site separate from its landll facility to

prevent contamination.

Section 4: Risk Control

Elements of Risk Management

101

Check-in

Directions: Match each term to its example.

avoidance prevention loss reduction

segregation separation duplication

transfer

_______________ 1. A machine shop requires employees to use personal safety

equipment while they are using the shop’s drill presses.

_______________ 2. An appliance store splits unsold inventory between two

warehouses 20 miles apart.

_______________ 3. A company relies on a common carrier to distribute manufactured

goods rather than buying trucks to transport its products.

_______________ 4. A dairy farmer installs generators as an energy alternative in cases

of power failure.

_______________ 5. A large retail company installs a re suppression system.

_______________ 6. After there are several reported cases of babies swallowing

ornaments decorating a crib mobile, the manufacturer ends

production of the mobile.

prevention

separation

transfer

duplication

loss reduction

avoidance

102

Section 4: Risk Control



Knowledge Check

A hurricane struck Florida’s Gulf Coast, causing signicant damage to a ve-star

hotel. The hotel has a golf club, golf course, and separate parking structure. The

hotel maintains a eet of minivans and employs drivers to shuttle guests to and from

the airport.

During the storm, it was necessary to evacuate guests and employees, and injuries were

reported. After the storm, the property required extensive repairs related to wind damage

and ooding. Plus, water damage made it necessary to replace the hotel’s eet of golf carts

and two minivans.

Knowing the extent of the damage, what risk control measures should the hotel have taken

prior to the loss? Write your answers in the chart.

Sample Answer:

Guests

Avoidance

Prevention

Loss Reduction

The hotel should have had basic medical supplies and ample food

and water on hand.

Segregation

Transfer

Section 4: Risk Control

Elements of Risk Management

103

Golf carts

Avoidance

Prevention

Loss Reduction

The carts should have been stored on one of the parking garage’s

higher levels.

Segregation

Transfer

Damage to the building

Avoidance

Prevention

The hotel could have constructed a sea wall between the ocean and

the hotel.

Loss Reduction

The hotel could have used roong and other building materials built

to withstand signicant wind speeds.

Segregation

Transfer

104

Section 4: Risk Control

Minivans

Avoidance The hotel could avoid offering shuttle service.

Prevention

Loss Reduction

The minivans should have been parked in different locations rather

than together.

Segregation

Transfer

The hotel could have contracted a shuttle service to evacuate guests

and employees.

Section 4: Risk Control

Elements of Risk Management

105

Accident Prevention Basics

Check-in

Directions: Use the following terms to ll in the blanks.

identify permitted uncontrollable

lack of

awareness

preventable unsafe acts

operations sinkholes

unsafe

conditions

overlooked training

1. Unsafe acts, or behaviors, are one common and preventable reason for accidents.

Often, the cause is a(n) lack of awareness. Companies have not taken the time to

identify unsafe behaviors. Neither have they provided their employees with

adequate training.

2. Unsafe conditions are also a reason for employee accidents. While some unsafe

conditions are inherent to specic business operations, such conditions are

sometimes overlooked or even permitted by managers seeking to increase

production, promote efciency, or save money.

3. Large natural events like earthquakes are uncontrollable acts and considered

catastrophic. Much smaller natural events like sinkholes can also have signicant

damaging effects on both people and property.

106

Section 4: Risk Control



Knowledge Check

Here are six steps for accident prevention:

1. Eliminate a potential hazard.

2. Substitute a less hazardous substance or process for another.

3. Make physical modications to a design to reduce the likelihood of injury.

4. Establish rules or processes aimed to reduce the likelihood of injury.

5. Provide personal protective equipment to employees.

6. Offer training.

Directions: Read the following scenario. Explain how these steps could prevent an

accident from occurring.

Your organization specializes in mechanical and structural repair. Your employees often

work on scaffolding, outside in the heat, and with open welding ames. Your equipment is

several years old, and the majority of the tanks have visible dents from years of use.

Sample Answer:

1. Eliminate a potential hazard: All equipment should be inspected, and any faulty

equipment should be replaced.

2. Substitute a less hazardous substance or process for another: Use a glue that is less

toxic than the glue currently used.

3. Make physical modications to a design to deduce the likelihood of an injury: Invest

in mechanical lifts that can adjust for height, allowing employees to use proper form

when welding instead of being bent over.

4. Establish rules or processes aimed to reduce the likelihood of injury: Create a safety

plan and a policy outlining what clothing can be worn while welding, including

personal protective equipment.

5. Provide personal protective equipment: Provide all employees with a welding jacket,

re blanket, and re extinguisher.

6. Offer training: Require that all employees participate in safety or job-related training.

Section 4: Risk Control

Elements of Risk Management

107

Section 4 Self-Quiz

Directions: Use the following terms to ll in the blanks. Answers may be used

more than once.

avoidance hold harmless prevention

uncontrollable

events

contractual limit of liability segregation unsafe acts

duplication loss reduction transfer

1. Risk avoidance is the complete elimination of an exposure to avoid the chance of loss.

2. An action intended to interrupt a sequence of events that leads to loss is called

prevention.

3. Prevention reduces frequency of loss, not the severity, or budget impact, of loss.

4. Loss reduction is an action taken to minimize the severity, or budgetary impact, of an

unprevented loss.

5. An action intended to isolate an exposure from other exposures, perils, or hazards is

called segregation.

6. The establishment of backups for critical systems or operations is called duplication.

7. Movement of some or all risk to another party is called transfer.

8. Responsibility for certain liabilities moves to another party in a(n) contractual transfer.

9. A(n) hold harmless agreement is an arrangement whereby one party assumes the

liability inherent in a situation, thereby relieving another party of that liability.

10. A(n) limit of liability clause is a pre-event limitation of the amount, type, or method of

calculation of damages available by one or both parties to an agreement.

108

Section 4: Risk Control

11. What do the items in the following list have in common? Write your answer on the lines.

•

Unsafe acts or behaviors

•

Lack of awareness

•

Lack of or insufcient training

•

Unsafe conditions

•

Uncontrollable events

They are common root causes of accidents.

12. Check each example of accident prevention.



enter into an exculpatory agreement

eliminate a potential hazard

substitute a less hazardous substance or process for another



establish a waiver of subrogation

make physical modications to a design to reduce the likelihood of injury

offer training

Section 5: Risk Financing

Elements of Risk Management

109

Section 5: Risk Financing

Risk Financing

Check-in

Directions: Select each true statement.



Risk nancing involves all acquisitions of funds, regardless of cost.

Internal risk nancing includes unplanned retention.

External risk nancing includes contractual transfers.



The term optimal cost is a precisely dened term that means the best product

for a customer at market prices.

Risk control and risk nancing are closely related, as in the case of a company

that purchases insurance to cover potential losses while also taking steps within

the company to mitigate those losses.

Check-in

Directions: Match each term to its description.

A. the insurer

B. the insured

C. exposure

D. insurance

E. premium

_____ A consideration in exchange for a promise

of indemnication

_____ Susceptibility to loss

_____ A transferee that takes contractual responsibility for the

nancial consequence of a risk

_____ A transferor with a relationship with a transferee

_____ A promise of indemnication for specied losses in

exchange for payment of premium

110

Section 5: Risk Financing



Knowledge Check

You speak to your organization’s management team about creating a risk

nancing program. A manager asks you to explain retention in relation to

creating a risk nancing plan. How do you respond?

Sample Answer:

Retention is the use of internal funds to pay for losses. When developing a risk nancing

program, the organization must determine the amount of internal funds that can be

dedicated/allotted for losses. This determination will be made in part by the organization’s

risk appetite and ability. The risk nancing program will be built around the organization’s

level of retention.

Insurable Risks

Check-in

Directions: Use the following terms to ll in the blanks. Terms may be used

more than once.

calculable many unintended

exceed retention unlikely

few risk manager

An underwriter views risk as something that is unlikely to occur. An insurable risk is one

that is shared by many, and is unexpected and unintended, such as the likelihood that

an audience member will sink a basketball from across a court in a charity event. An

insurable risk is also reasonably calculable and one that generates enough premium

paid by many to pay for the losses of a(n) few, such as auto insurance.

A(n) risk manager has a different perspective on what constitutes an insurable

risk. From this perspective, insurable risks are not reasonably calculable within an

organization and are capable of causing great harm. Insurable risks are those that

exceed an organization’s risk appetite and are less costly than the cost of retention

because of insurance market conditions.

Section 5: Risk Financing

Elements of Risk Management

111

Check-in

Directions: Read each statement. Then

select True or False.

1. From an underwriter’s perspective, an

insurable risk is a risk that generates

enough premium paid by the many to

pay for the losses of the few.

True False

2. From an underwriter’s perspective, an

insurable risk is a non-catastrophic risk

or a risk that is unlikely to strike

many simultaneously.

True False

3. From a risk manager’s perspective,

an insurable risk is not reasonably

calculable by an organization.

True False

4. From a risk manager’s perspective,

an insurable risk stays within an

organization’s risk appetite.

True False

From a risk manager's perspective,

an insurable risk exceeds an

organization's risk appetite.

5. Standard insurance carriers are

admitted and licensed by the states in

which they operate.

True False

6. The majority of coverage

for catastrophic risks such

as oods, earthquakes, and

windstorms is provided

through the excess and surplus lines

market.

True False

7. The NFIP offers affordable ood

insurance to property owners, renters,

and businesses to ll the gaps existing

in ood insurance programs provided

by many insurance carriers.

True False

8. Claims activity levels are a

consideration in assigning the label

high risk to a property.

True False

9. The NFIP is a government-run

program that provides ood insurance

to lower the nancial burden on

property owners who receive limited

coverage from insurance carriers.

True False

The purpose of the NFIP is to offer

affordable ood insurance to property

owners, renters, and businesses. It is

not used to address gaps in coverage

limits.

10. All insurance professionals face the

challenge of determining the right

mix of internal and external funds.

True False

112

Section 5: Risk Financing



Knowledge Check

You meet with your organization’s CFO, who is reviewing the upcoming

policy renewal. She asks two questions. First, why was the property insurance

purchased through surplus lines? And what was the purpose of the additional NFIP policy?

Respond to both of the CFO’s questions.

Sample Answer:

Depending on the value, location, and construction, this property might not have been

able to be written in the standard market. The surplus lines market offers coverage for risks

that the standard market will not. Flood insurance might be required based on the ood

zone of the property. Standard markets typically do not insure for ood exposures. The

purpose of the NFIP is to offer affordable ood insurance to property owners, renters, and

businesses.

Risk Retention and Transfer

Check-in

Directions: Match each term to its purpose in a retention/transfer diagram.

A. Vertical

axis

B. Horizontal

axis

C. External

Financing

D. Budgeted

Retention

E. Tolerance

Corridor

_____ The portion of expected losses an organization is willing

and able to retain

_____ The marginal retention beyond budgeted retention that an

organization may also choose to retain all or part of

_____ Represents the total amount paid for all claims during a

policy period

_____ Insurance purchased to pay for losses that fall outside of an

organization’s risk appetite and ability

_____ Represents the total amount per claim or per occurrence

in dollars

Section 5: Risk Financing

Elements of Risk Management

113

Check-in

Directions: Read each statement. Then select True or False.

1. An organization that chooses to insure everything selects a guaranteed cost plan as

a risk nancing option.

True False

2. An organization that chooses a guaranteed cost plan is likely to have few excess

funds available for covering nancial losses.

True False

3. An organization with a guaranteed cost plan is likely to have the ability to manage

claims services internally but unlikely to have excess funds to cover losses.

True False

Just as an organization with a guaranteed cost plan is unlikely to have excess funds

to cover losses, it is also unlikely to have the ability to manage claims internally.

4. One distinctive advantage of a fully insured program is that an organization has a

high degree of certainty when budgeting for insurable losses.

True False

5. Standardized coverage is a benet of guaranteed cost plans.

True False

6. An advantage of both the guaranteed cost plan and the dividend plan is that

both provide security while also providing a return of premium based on an

organization’s losses.

True False

There is no return of premium associated with guaranteed cost plans.

114

Section 5: Risk Financing

Check-in

Directions: Match each term to its description.

A. Guaranteed

ccost plan

B. Dividend plan

C. Deductible plan

D. Self-insured risk

nancing plan

_____ The insured reimburses the insurer a portion of each

loss up to a stated amount.

_____ The reimbursement from an insurance carrier when

an organization experiences a good year in terms of

losses

_____ A fully insured program that transfers all risk of loss to

an insurance company

_____ The use of internal funds to cover possible losses

and possibly external funds through reinsurance or

excess coverage



Knowledge Check

Select one of the following scenarios. Then explain which risk nancing plan

would be most appropriate.

1. Your organization is extremely risk adverse and desires a plan with the lowest loss

sensitivity.

guaranteed cost: A guaranteed cost plan has little to no loss sensitivity from the viewpoint

of the insured. The cost of insurance remains the same, regardless of the number of claims.

Once the premium is paid, there is no further risk of nancial responsibility for losses other

than the deductible.

2. Your organization has a sophisticated risk management program and prefers to retain

risk as opposed to paying premium.

self-insured: The cost of self-insurance is always less than traditional insurance. This type of

plan requires a strong risk management program, risk professionals, and a sophisticated

risk management information system.

Section 5: Risk Financing

Elements of Risk Management

115

3. Your organization can control most of its risk and has the nancial resources to retain

much of its risk. The organization is interested in retaining risk but wants coverage for

large losses.

deductible plan: A deductible plan allows an organization to take more control of overall

claims, but still provides coverage for losses above the deductible. The insured reimburses

the insurer a portion of each loss up to a stated amount.

116

Section 5: Risk Financing

Section 5 Self-Quiz

Directions: Complete each item. For ll-in-the-blank items, choose the term that correctly

completes the sentence. Answers may be used more than once.

budgeted retention transfer

deductible risk nancing

insurer standard

1. The acquisition of funds at the most favorable or optimal cost to pay losses is called

risk nancing.

2. The use of internal funds to pay losses is called retention.

3. The use of external funds to pay losses is called a(n) transfer of nancial responsibility.

4. A(n) insurer takes contractual responsibility for the nancial consequence of a risk.

5. Insurance carriers that are considered standard are admitted and licensed by the states

in which they operate.

6. A(n) retention or transfer diagram depicts an organization’s nancial ability and risk

appetite.

7. Budgeted retention is the portion of expected losses an organization is willing and able

to retain.

8. In a(n) deductible risk nancing plan, an insured elects to reimburse an insurer for losses

up to a stated amount.

Directions: Select True or False.

9. Insurance is a transfer of risk.

True False

Insurance is not a transfer of risk. It is a contractual responsibility to assume the

nancial consequences of a risk.

Section 5: Risk Financing

Elements of Risk Management

117

10. Insurance is a contractual responsibility to assume the nancial consequences of a risk.

True False

11. A guaranteed cost risk nancing plan provides an insured with the most stability.

True False

12. Check all characteristics of an insurable risk as seen from an underwriter’s perspective.

a risk shared by many



a risk that causes crippling severity to an organization

an unexpected and unintended risk

a risk which generates enough premium paid by the many to pay for the losses of

the few



a risk that exceeds an organization’s risk appetite

118

Section 6: Risk Administration

Elements of Risk Management

119

Section 6: Risk Administration

Implementation and Monitoring of a Risk

Management Program



Knowledge Check

Explain the differences between the implementation and monitoring of a risk

management program.

Sample Answer:

Implementation is the part of the process in which the desired actions are initiated.

Monitoring is the part of process in which the risk manager evaluates the results of the

actions and uses feedback to modify the process.

120