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Chapter 1

The document contains review questions and application questions from a chapter about risk management. It asks about topics such as the definitions of risk, probability, hazards, types of risks businesses face, and techniques for managing risk including risk control methods like avoidance, loss prevention, and risk financing methods like retention and insurance. It also provides scenarios and asks to identify risks, hazards, and appropriate risk management techniques.

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Nazlı Yumru
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27 views

Chapter 1

The document contains review questions and application questions from a chapter about risk management. It asks about topics such as the definitions of risk, probability, hazards, types of risks businesses face, and techniques for managing risk including risk control methods like avoidance, loss prevention, and risk financing methods like retention and insurance. It also provides scenarios and asks to identify risks, hazards, and appropriate risk management techniques.

Uploaded by

Nazlı Yumru
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 1

Review Questions

1. a. Explain the historical definition of risk.

b. What is a loss exposure?

c. How does objective risk differ from subjective risk?

2. a. Define chance of loss.

b. What is the difference between objective probability and subjective probability?

3. a. What is the difference between peril and hazard?

b. Define physical hazard, moral hazard, attitudinal hazard, and legal hazard.

4. a. Explain the difference between pure risk and speculative risk.

b. How does diversifiable risk differ from nondiversifiable risk?

5. a. Explain the meaning of enterprise risk management (ERM).

b. What types of risks are included in ERM?

c. Explain what is meant by property risks and liability risk.

6. How does enterprise risk management differ from traditional risk management?

7. Explain the meaning of personal risk and list the major types of personal risks.

8. Differentiate between risk control and risk financing.

9. Explain the difference between a direct loss and an indirect or consequential loss.

10. Identify the major risks faced by business firms.

11. a. Briefly explain each of the following risk-control techniques for managing risk:

1. Avoidance
2.Loss prevention
3. Loss reduction
4. Duplication
5. Separation
6. Diversification
b. Briefly explain each of the following risk-financing techniques for managing risk:

1. Retention
2. Noninsurance transfers
3. Insurance
Application Questions

1. AOL Company is an oil and gas company, operating in Southeast Asia. The management decided to
expand its commodity-based business to countries in Asia and Europe. What types of risk may be
faced by the company? What are the techniques that can be used to manage those risks?

2. The chance of loss could be increased or decreased by different conditions which are called
hazards. For each of the following, identify the type of hazard.

a. The presence of ice on the road.


b. A motorist drives too fast.
c. A man fakes an accident to collect money from an insurer.
d. The new state regulation that require insurers not paying any claims in case of suicide.
e. An individual leaves the windows open at home during night.
f. The age of a human being.
g. A businessman intentionally burns unsold goods that are not insured.

3. There are several techniques available for managing risk. For each of the following risks and risk-
control methods, give an example of how the method can be implemented.

a. Avoidance: the risk of sinking (by human).


b. Loss prevention: the risk of family head’s premature death because of a heart attack.
c. Loss reduction (in general):the risk of burning a car because of fire.
d. Loss reduction (by duplication): the risk of losing accounting documentation.
e. Loss reduction (by separation): the risk of losing all money by pickpockets during a
vacation.
f. Loss reduction (by diversification): the risk of our bankruptcy because of the bankruptcy of
our main customer.

4. Andrew owns a gun shop in a high-crime area.The store does not have a camera surveillance
system. The high cost of burglary and theft insurance has substantially reduced his profits. A risk
management consultant points out that several methods other than insurance can be used to handle
the burglary and theft exposure. Identify and explain two noninsurance methods that could be used
to deal with the burglary and theft exposure.

5. Everycompanyfacesavarietyofpurerisksthatcanhave serious financial consequences if a loss occurs.


For each of the following threats, identify the category of risk. Explain your answer.

a. Breaking into company’s IT system and databases


b. Plantsdestroyedbyahurricane
c. Shutting down the firm for some time after a physical damage loss
d. Cables connecting the company’s sole computer damaged by rats

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