Quiz 4: Evolving Risk Management: Fundamental Tools

In times of high insurance prices, the likelihood of using risk transfer is greater than in times of high rates.

In a small company or sole proprietorship, the owner usually hires one experienced risk manager to perform the risk management function.

Risks cannot be segregated-they interact and affect one another.

Holistic risk mapping is the outcome of risk profiling.

Risk mapping involves charting individual risk "silos" from each separate business unit.

The first step in mapping risk is to identify the firm's loss exposures and estimate and forecast the frequency and severity of each potential risk.

IT system failures and intellectual property violation risks fall under hazard risks.

When we focus on only one risk, we work with the risk management matrix.

A firm's data warehousing of risk data allows decision makers to evaluate multiple dimensions of risks, but not overall risk.

Risk solutions are only as good as their underlying assumptions.

Because a sole proprietorship is a separate legal entity, investors who wish to limit possible losses connected with a particular venture may create a sole proprietorship and transfer such risks to it.

If the firm is organized as a sole proprietorship, the proprietor's personal assets are separable from those of the firm because the firm is a separate legal entity.

Like sole proprietorship, general partnership assumes unlimited liability for the firm's obligations.

Insurance is a common form of planned risk retention as a financing technique for individuals and most organizations.

When a business creates a subsidiary to handle the risk exposures, the business creates a captive.

Risk retention groups are similar to group self-insurance.

Loss reduction efforts seek to reduce the probability of a loss occurring.

Both loss prevention and loss reduction techniques reduce the probability of loss.

Risk management is a continuous process requiring constant monitoring of the program.

This is a visual tool used to consider alternatives of the risk management tool set.It forms a grid of frequency and severity intersection points of each identified and measured risk.Identify the topic of discussion. A)Risk profile B)Kernel's risk matrix C)Risk map D)Forced matrix E)Risk management matrix

Which of the following provides fundamental possible solutions to risks with high and low severity and frequency? A)Risk map B)Forced matrix C)Risk profile D)Kernel's risk matrix E)Risk management matrix

Self-insuring is a _____ strategy. A)risk avoidance B)risk transference C)risk reduction D)risk retention E)risk ignorance

The role of chief risk officer (CRO) expanded the traditional risk manager's role by: A)developing an entirely independent department specialized in risk management. B)hiring professionals who are specialized in mitigating specific types of risks. C)performing only the risk management functions in an organization. D)integrating the firm's silos, or separate risks, into a holistic framework. E)treating all the risks individually and finding a solution to mitigate each risk independently.

Identify the process that evaluates all the risks of the organizations and measures the frequency and severity of each risk. A)Principal agent analysis B)Risk profiling C)Risk mapping D)Risk benchmarking E)Risk retention

This process involves charting entire spectrums of risk, not individual risk "silos" from each separate business unit.It becomes useful both in identifying risks and in choosing approaches to mitigate them.They present a cumulative picture of all the risks in one risk management solution chart.Identify the process. A)Risk mapping B)Risk benchmarking C)Risk profiling D)Risk retention E)Principal agent analysis

You are plotting intersection points between measures of frequency (on an x-axis) and severity (on a y-axis) and visually plotting intersection points.Each point represents the relationship between the frequency of the exposure and the severity of the exposure for each risk measured.What are you preparing? A)A risk profile B)A forced matrix C)A risk map D)Kernel's risk matrix E)A risk management matrix

Which of the following are risks unforeseen events that arise outside of the normal operating environment? A)Financial risks B)Operational risks C)Business risks D)Natural and man-made risks E)Household risks

While preparing a risk map, risks like earthquake, tornado, mold exposure, and terrorism would usually: A)fall into the low-frequency/high-severity quadrant. B)fall into the high-frequency/high-severity quadrant. C)fall into the low-frequency/low-severity quadrant. D)fall into the high-frequency/low-severity quadrant. E)be excluded because they usually cannot be insured and have to be retained.

Identify the risks arising from changing market conditions involving prices, volatility, liquidity, and foreign exchange risk. A)Household risks B)Business risks C)Operational risks D)Natural and man-made risks E)Financial risks

Glasgow Tech.is a highly leveraged corporation.What does this mean? A)Glasgow Corporation has numerous risk exposures due to operations all over the world. B)Glasgow Corporation has taken many loans to finance its operations. C)Glasgow Corporation has a very high P/E ratio. D)Glasgow Corporation has to receive huge amounts of money they owe (accounts receivables). E)Glasgow Corporation has financed its operations by itself and has not taken any loans.

Reputation risk is a type of: A)hazard risk. B)financial risk. C)business risk. D)household risk. E)operational risk.

Identify the type of risk that relates to the ongoing day-to-day business activities of the organization. A)Reputation risk B)Business risk C)Financial risk D)Operational risk E)Hazard risk

Which of the following is an example of operational risk? A)Foreign exchange risk B)Intellectual property risk C)Workers' compensation risk D)Interest rate risk E)Product liability risk

When we focus on one risk only, we work with this matrix.It provides alternative financial action to undertake for each frequency/severity combination.Identify this matrix. A)A space risk matrix B)A forced matrix C)A risk map D)Kernel's risk matrix E)A risk management matrix

Identify the statement that explains the function of a cash flow analysis. A)It looks at the amount of cash that will be saved and brings it into today's present value. B)It is used to inform a firm's planning activities particularly around decision of purchases of capital equipment. C)It enables the actual financial operation of the business to be measured against the forecast. D)It provides a forecast of revenues and expenditures. E)It focuses on identifying the changes to an organization that are required for it to achieve strategic goals.

Which of the following is a system of housing large sets of data for strategic analysis and operations? A)Data mining B)Data integration C)Data warehousing D)Data modeling E)Data processing

Identify the correct statement about the risk management matrix. A)It is also referred to as a risk map. B)It involves charting entire spectrums of risk, not individual risk "silos" from each separate business unit. C)It includes all important risks a firm is exposed to. D)It includes on one axis, categories of relative frequency (high and low) and on the other, categories of relative severity (high and low). E)It puts the risks a company faces into a visual medium to see how risks are clustered and to understand the relationships among risks.

According to the risk management matrix, risk exposures with low frequency of losses and low severity of losses are: A)retained. B)transferred. C)avoided. D)ignored. E)retained with loss control.

According to the risk management matrix, risk exposures with low frequency of losses and high severity of losses are: A)retained or self-insured. B)transferred or insured. C)avoided. D)ignored. E)retained with loss control.

According to the risk management matrix, risk exposures with high frequency of losses and low severity of losses are: A)retained or self-insured. B)transferred or insured. C)avoided. D)ignored. E)retained with loss control.

According to the risk management matrix, risk exposures with high frequency of losses and high severity of losses are: A)retained or self-insured. B)transferred or insured. C)avoided. D)ignored. E)retained with loss control.

When a corporation insures a risk, it is: A)retaining its risk. B)avoiding its risk. C)retaining its risk with loss control. D)assuming its risk. E)transferring its risk.

The formation of a corporation with limited liability for its stockholders and contractual arrangements like insurance are strategies to: A)transfer risk. B)avoid risk. C)retain risk. D)retain risk with loss control. E)assume risk.

Which of the following statements is true about the different forms of business? A)If the firm is organized as a sole proprietorship, the proprietor's personal assets are separable from those of the firm because the firm is a separate legal entity. B)If the firm is organized as a sole proprietorship, the proprietor has limited liability for the firm's obligations. C)In general partnership, active partners have unlimited liability, whereas sleeping partners have limited liability. D)Corporation is a separate legal entity. E)Corporations have unlimited liability for the firm's obligations.

When an organization uses a highly formalized method of retention of a risk, it is said the organization has: A)insured the risk. B)self-insured the risk. C)limited the risk. D)reinsured the risk. E)eliminated the risk.

What of the following statements is true about risk assumption? A)Retention is especially attractive to small organizations. B)Many large corporations use captives, which are a form of reinsurance, to transfer their risk. C)When a business creates a subsidiary to handle the risk exposures, the business creates a captive. D)A captive firm is independent of its parent company. E)When an organization uses a highly formalized method of retention of a risk, it is said the organization has reinsured the risk.

If you want to ski in spite of the hazards involved, you can take instruction to improve your skills and reduce the likelihood of you falling down a hill or crashing into a tree.This is an example of: A)loss reduction, which reduces the probability of loss. B)loss prevention, which reduces the severity of loss. C)loss reduction, which reduces the severity of loss. D)loss reduction, which reduces the frequency of loss. E)loss prevention, which reduces the probability of loss.

If you want to ski in spite of the hazards involved, you can engage in a physical fitness program to toughen your body to withstand spills without serious injury.This is an example of: A)loss reduction, which reduces the probability of loss. B)loss prevention, which reduces the severity of loss. C)loss reduction, which reduces the frequency of loss. D)loss reduction, which reduces the severity of loss. E)loss prevention, which reduces the probability of loss.

Risk managers avoid risks that have: A)low frequency and low severity of losses. B)high frequency and high severity of losses. C)low frequency and high severity of losses. D)high frequency and low severity of losses. E)been insured or reinsured.

When insurers or risk managers use frequency and severity to project the future, they use trending techniques that apply to the loss distributions known to them.Identify the most commonly used tool to predict future losses and claims based on the past. A)Regression analysis B)ANOVA C)Factor analysis D)Chi square testing E)Analysis of covariance

In linear regression, the intercept is 7.2 and the slope is 0.64.Calculate the number of claims in projected year 7. A)7.84 B)14.84 C)11.68 D)51.04 E)11.608

In linear regression, if 'X' is the year (Year 1, 2, 3… and so on), how would you calculate future claims? A)Future claims = X + Slope + Intercept B)Future claims = Slope + Intercept * X C)Future claims = (Slope + Intercept)/X D)Future claims = Intercept + Slope * X E)Future claims = (Intercept + Slope) * X

Summarize the functions of a CRO in a firm.

Explain risk profiling and its importance in the risk management process.

Write a short note on risk management information system.

How can risks be transferred through the formation of a corporation?

Explain the difference between loss prevention and loss reduction strategies with an example.

In our technological and information age, every person involved in finding solutions to lower the adverse impact of risks uses _____, which are data bases that provide information with which to compute the frequency and severity, explore difficult-to-identify risks, and provide forecasts and cost-benefits analyses.

Typically, the traditional risk management position has reported to the _____.

_____ are separate insurance entities under the corporate structure-mostly for the exclusive use of the firm itself.

Risk management _____ are the primary tools to communicate risk management objectives.

A(n) _____ puts the risks a company faces into a visual medium to see how risks are clustered and to understand the relationships among risks.

In a risk map, natural and man-made risks are also known as _____ risks.

_____ involves projecting the frequency and severity of losses into the future based on current data and statistical assumptions.

A(n) _____ analysis looks at the amount of cash that will be saved and brings it into today's present value.

A(n) _____ provides risk managers with the ability to slice and dice the data in any way that may help risk managers assess and evaluate the risks their companies face.

Once they are evaluated and forecasted, loss frequency and loss severity are used as the vertical and horizontal lines in the _____ for one specific risk exposure.

_____ is the displacement of risk to a third, unrelated party.

Some risks can be _____ through the formation of a corporation with limited liability for its stockholders.

A(n) _____ insurance company is one that provides risk management protection to its parent company and other affiliated organizations.

A _____ provides risk management and retention to a few players in the same industry who are too small to act on their own.

Loss _____ efforts seek to lessen loss severity.

_____ regression attempts to explain the relationship among observed values by applying a straight line fit to the data.