You are on page 1of 8

ARM 54

Chapter 1-3
Question Answer
Uncertainty about outcomes that can be either negative or
Risk Management
The process of making and implementing decisions that
will minimize the adverse effects of accidental losses on an
Business Risk
Risk that is inherent in the operation of a particular
organization, including the possibility of loss, no loss, or
Hazard Risk
Risk from accidental loss, including the possibility of loss
and no loss.
Loss Exposure
Any condition that presents a possibilty of loss, whether or
not an actual loss occurs.
Enterprise Risk Management
An approach to managing all of an organization's key
business risks and opportunities with the intent of
maximizing sharholder value.
Identify the possible
meanings of risk apart from
uncertainty about outcomes
that can be either negative or
The possible meanings of risk include the following: -The
subject matter of an insurance policy -The insurance
applicant (the insured) -The possibility of a loss or injury -
A cause of loss (or peril) - Variavility associated with a
future outcome.
List the six steps in the risk
management process.
(1) Identify loss exposures (2) Analyz loss exposures
(3)Examin the feasibility of RM techniques (4) Select the
appropriate RM techniques (5) Implementing the selected
RM techniques (6) Monitor results and revising the RM
Explain why risk
management is an ongoing
RM is an ongoing process because past choices of RM
techniques must continueally reevaluated in light of
changes in the following. -Relative costs, Legal
requriements, goals, economic environment, resources
and activities.
How does hazard risk differ Hazard risk results in only two outcomes: Loss or no loss.
from business risk? Business risk can result in either loss, no loss, or gain.
Explain how enterprise risk
management differs from
traditional risk management.
-ERM is both hazard risk and business risk: TRM focuses
on hazard risk. - ERM seeks to enable an organization to
fulfill its greatest productive potential; TRM seeks to rstore
an organization to its former pre-loss condition.
Describe the four categories
of risk used by some
enterprise risk management
(1)Strategic risk - uncert. w/long-term goals &
management. (2) Operational risk - uncert. w/operations
(3) Financial risk - uncert. w/finacial actitives (4) Hazard
risk - Uncert. w/redcuction in value resulting from the
effects of accidental losses.
Using the enterpirse RM
model described in the ch.
categorize the following risks.
a. Cost of materials
increases. b. Regulatory
sanctions block the launch of
new product. c. Securities
and Exchange Commission
investigate accounting
a. Cost of materials increases - opertional risk b.
Regulatory sanctions block the launch of a new product -
strategic risk. c. Securities and Exchange Commission
investigate accounting practies - strategic risk.
Using the enterpirse RM
model described in the ch.
categorize the following risks.
d. Computer hackers steal
confidential information.
e.Competitor hires key
employees. f.Customer files
for bankruptcy. g. Some
consumers experience an
allergic reactio
d. Computer hackers steal confidential information - hazard
risk e. Competitior hires key employees - strategic risk
f.Customer files for bankruptcy - strategic risk. g. Some
consumers experience an allergic reaction - hazard risk
Using the enterpirse RM
model described in the ch.
categorize the following risks.
h. Manufacturing facilities in
Iraq are threatened by
insurgents. i. US dollar falls
against the euro, making the
organization's debt more
expensive to pay
h. Manufacturing facilities in Iraq are threatened by
insurgents - strategic risk i. US dollar falls against the euro
making the organization's dollar more expensive to pay -
financial risk
Using the enterpirse RM
model described in the ch.
categorize the following risks.
j. Union calls for a "sick-out"
k. Merger plans fall through l.
Pollution m. Credit ratings
reduced by a credit rating
agency, resulting in
increased cost of borrowing.
j. Union calls for a "sick-out" - stategic risk k. Merger plans
fall through - strategic risk. l. Pollution - Hazard risk m.
Credit rating is reduced by a credit rating agency resulting
in increased cost of borrowing - finacial risk.
Cost of risk
The total cost incurred by an organization because of the
possibility of accidental loss.
Identify the three broad
categories of costs imposed
by accidental losses.
(1) Reduction in property value, income, earning capacity,
or quality of life because of damage, destruction, or injury.
(2) Loss of net benefits that could have been gained from
deterred actitives. (3)Cost of resources devoted to
managing accidental loss
Identify what is included in an
organization's cost of risk.
-Costs of accidental losses not reimbursed by insurance. -
Insurance preminum or expenses incurred for
noninsurance indemnity -Costs of risk control techniques to
prevent or reduce the size of accidental losses -Cost of
administering RM activites.
Identify the benefits of risk
management for the entire
- Reduce waste of resources - min.the waste & need to
use productive resources to restore damage from
accidential loss. - Improved allocation of productive
resources -improves willingness of management to
undertake risky activities that might max. profit
Calculate the cost of risk. RM
department budget - $1.2 mil
Retained losses - $10.5 mil
Insurance Premiums - $20
mil Risk control techniques -
$5 mil
$1.2 mil + 10.5 mil + 20 mil + 5 mil = 36.7 mil
Risk Management Program
A system for planning, organizing, leading, and controlling
the resources and activites that an organization needs to
protect itself from the adverse effects of accidental losses.
Pre-loss goals
Risk management goals that should be in place even if no
significant losses occur.
Post-loss goals
Risk management goals that should be in place in the
event of a significant loss.
Describe four pre-loss goals
of risk management program.
(1) Ecomomy of operations- operate RM economically and
efficiently (2) Tolerable uncertainty-keep managers'
uncertainty about accidental loss tolerable (3) Legality-
ensure legal obligations are satisfied (4) Social
responsibility- promote ethical cond
How might the economy of
risk management program be
The economy of a risk management program might be
measured by comparing the organization's
riskmanagement costs with those of similar organizations,
then relating these cost to revenue.
Describe six post-loss goals
of a risk management
(1) Survival (2) Continuity of operations (3) Profitablity (4)
Earnings stability (5) Social responsibility (6) Growth
organization's resources.
The essential goals of a risk management program, such
as survival and continuity of operations, generally require
smaller resource commitments than do the desirable goals,
such as social responsibility and growth.
Identify the steps an
organization should take to
forestall an intolerable
-Identify activities whose interruptions cannot be tolerated -
Identify types of accidents that could interrupt such
activities -Determine resources that are available to
counter the effects of these accidents -Ensure availability
of standby resources
Explain why continuity of
operations is considered an
essential goal for all public
Continuity of operations is considered an essential goal for
all public entites because any sustained interruption in
services is likely to have serious consequences and
interfere with the well-being of citizens and the community.
The RM professional of the
Barnton Corporation is
periodically consumed with
anxiety regarding the
effectiveness of the RM
program. Explain which of the
program's pre-loss goals best
addresses this RM
professional's concern.
The RM professional's concerns are best addressed by the
pre-loss goal of tolerable uncertainty. The RM program
should anticipate and plan for accidental losses so that
they will be effectively treated, thereby reducing
uncertainty about accidental loss
Give an example of how each a. Tolerable uncertainty might conflict because of the cost
of the following risk
management program goals
conflict with the pre-loss goal
of economy of operations. a.
Tolerable uncertainty b.
Legality c. Social
of RM efforts. b. Legality might conflict because safety
standards require expense to implement. c. Social
responsibility might conflict because obligations (charitable
contributions raise cost
Describe how a risk
management department
changes as an organization
Small organizations often begin w/a RM director, a safety
and loss prevention manager, and a claim manager. As
more complex aspects of safety emerge and the number of
claims increase, departmental expansion occurs - adding
risk financing personnel.
Identify departments that
might provide information
support to the RM
Accounting- provides historical cost information Information
Systems-tracks loss exposures Legal-advice on liability
claim management Human Resources-identify essential
personnel Production-informs on essential processes
Marketing- informs on product
Identify the types of
information that might be
communicated into and out of
an organization's RM
Loss exposure reports, Bulletins on new loss exposures,
Briefs from trade asociations, reports from gov. agencies,
info from seminars, data reported to trade associations or
gov. agencies, facts or procedures shared at meetings,
direction on reporting.
Identify the ten ways that the
quality of information can be
(1)Accessible (2) Comprehensive (3) Accurate (4)
Appropriate (5) Timely (6) Clarity (7) Flexible (8) Verifiable
(9) Free from bias (10) Quantifiable
Baby Crib Manufactuer is
concerned that its RM
department is not getting all
the info it needs to make
sound decisions. Describe
the info the RM professional
may expect from the
following department
regarding RM issues. a.
Legal b. Marketing c. Account
a.Legal dept - US Consumer Product Safety Commission
guidelines, case law, past court cases involving baby cribs.
b.Marketing dept. - consumer reaction to crib safety
features. c. Accounting dept - vendor of models sold and
where each model is being sol
Identify the four generic
categories of RM
professionals' duties that are
(1) Risk management program (2) Risk assessment (3)
Risk control (4) Risk financing
usually not delegated to
Identify the responsibilities of
the RM professional in an
organization's RM program.
-Guide senior management in establishing the RM
program. -Plan, organize, lead, and control the resources
& activites of the RM dept. -Establih responsibility and
communication regarding RM matters -define the
responsibilities and motivate.
Identify the responsibilites of
the risk management
profesional in an
organization's risk control
Identifying the benefits and measuring and controlling the
costs of alternative risk control techniques. -Reconizing
hazards and implement apropriate risk control techniques -
Advize senior mangt how to emphasize safety -advise how
to prevent accidents
Identify the tasks the risk
management professional
must complete in an
organization's risk financing
-work w/finanical and senior executives to determine the
extent to which the organization should retain losses and
transfer potential losses. - Decide which retention and
transfer techniques should be used to finance losses from
specific loss exposures.
Through a leveaged
buyout,Regional Department
Store has purchased National
Department Store. Explain
how the risk management
department of Regional
Department Store may need
to be restructured as a
consequence of this
organizational change.
As a consequence of its acquisition the RM department will
be expanded. The roles of insurance manager, safety and
loss prevention manager, claim manager, and security
manager will be greater and will have personnel reporting
to them.
Risk Management Policy
A tool for communicating the goals of the risk management
program and the roles that people throughout the
organization have in achieving the organization's risk
management goals.
What does a risk
management policy
statement communicate?
A RM policy statement communicates the goals of the RM
program and the roles that people throughout the
organization have in achieving the organization's RM
Describe the purpose of a
written risk management
policy statement.
-Establish goals of the organization's RM function. -Define
responsibilities of the RM personnel. -Coordinate tx of loss
exposures -Establish and improve communication
channels -provide program continuity & facilitate transition
during personnel chang
Identify the typical content of
a written risk management
policy statement.
-General description of risk management and its
importance to the organization - Risk management
department's internal structure -Senior management's risk
management goals -Decision rules for selecting risk
management techniques.
Results Standards
Stadards that focus on achievements regardless of the
efforts they require.
Activity Standards
Standards that focus on activity undertaken to achieve a
particular results regardless of the success of that activity.
Identify how results
standards can be measured.
Results standards can be measured using dollars,
percentages, ratios, or numbers of losses or claims. These
standards focus on achievements regardless of the efforts
Describe three results that
may occur when actual
performance is compared
with performance standards.
-Meets established standards -Falls below established
standards - corrective action is needed; performance is
raised or more realistic standard is set. -Exceeds
established standards - indicates exceptiional performance
or that the standards are too low
What conclusions might be
drawn when performance
substantially exceeds a
When performance substantially exceeds a standard, an
organization might conclude that the standard was set too
low, the standard was incomplete or that the standard is
appropriate and the performance is exceptional.
Suggest a standard that a
RM professional might use to
gauge performance: a.
Shipments to customers are
damaged in transit.
b.Customers are injured
when premises are wet. c.
Vehicles are damaged in
backing incident d. EE's are
injured while cutting m
a. less than 5 percent of all shipments damaged in transit.
b. no customer injury claims when premises surfaces are
wet. c. less than 5 percent of vehicle accidents resulting
from backing up. d. no employee injuries while cutting
sheet metal.
Describe what the risk
management process does
for an organization.
The RM process provides a methodology for assessing
and treating accidental loss exposures to enable an
organization to meet its pre-loss and post-loss goals.