Risk Management Fundamentals Quiz

Risk-Based Auditing

• Risk-based auditing prioritizes using limited internal audit resources in areas posing the greatest risk to the organization
• Three key principles are auditing to business objectives, focusing on materiality of risk, and identifying threats to business goals
• Risk management is used to control or contain losses and satisfy customers
• Common risk management objectives include balancing risk and reward, supporting decision-making, achieving goals such as tolerable uncertainty, legal and regulatory compliance, survival, continued business, earnings stability, profitability, growth, and social responsibility

Underwriting

• Underwriting helps insurers develop a growing, profitable book of business by minimizing adverse selection, ensuring adequate policyholders' surplus, and enforcing underwriting guidelines
• Underwriters perform tasks like selecting insureds, classifying and pricing accounts, recommending or providing coverage, managing a book of business, supporting producers and insureds, and contributing to the insurer's marketing objectives

Staff Underwriters

• Involved in market research, policy formulation, underwriting guideline revision, evaluating loss experience, developing coverage forms, reviewing rates, arranging reinsurance, supporting complex accounts, and conducting underwriting audits
• Underwriting policies guide individual and aggregate policy selection in support of insurer mission statements

Essential Knowledge for Underwriters

• Underwriters require knowledge of insurance principles, practices, loss exposures and pricing, insurance rates, loss analysis, and various internal and external information sources

Rating

• Rating involves applying an applicable rate and rating plan to an exposure and performing calculations to determine the policy premium

Moral Hazard

• Moral hazard increases the likelihood of intentional loss or exaggeration

Property Application

• Underwriters examine loss history, COPE elements, and property values in property applications

Supplemental Information

• Supplemental information such as risk management programs, financial statements, risk control reports, and property valuation guides helps underwriters assess the quality of a property account

COPE and Loss Run

• COPE elements in commercial property underwriting include construction, occupancy, protection, and external exposures
• A loss run details an insured's claims history over a specific period

Morale Hazard

• Morale hazard is carelessness or indifference that increases loss frequency or severity

Fire Protection and Division

• Underwriters analyse loss exposures from nearby properties or the surrounding area
• A fire division in a structure is well-protected and prevents fire spread to other sections.

Public and Private Fire Protection

• Public fire protection involves government-supplied equipment and services within a defined area
• Private fire protection involves property owner-implemented measures to protect from loss by fire

Residential and Occupational Loss Exposures

• Underwriters consider hazards that can increase liability losses from invited guests when evaluating residential losses
• Personal insurance applications often include questions about occupation to determine potential loss frequency and severity

Rating Plan

• Directions specifying criteria for exposure base, exposure unit, and rate per exposure unit to determine insurance premiums for a particular line

Combined Ratio

• A combined ratio under 100 indicates insurer profit from underwriting insurance; over 100 indicates a loss

Nonfinancial Measures

• Tools used to monitor underwriting results, including selection, pricing, product line mix, retention ratio, hit ratio, customer service, and premium volume

Retention Ratio

• The percentage of expiring policies an insurer renews
• Retaining policies is often more profitable than acquiring new business as previously completed work is utilized.

Hit Ratio

• Measures how well underwriters meet sales goals by comparing the number of policies written to quoted applications

Physical Controls

• Used to limit physical access to protected information or facilities (e.g., locks, fences)

Technical Controls

• Also known as logical controls, these are implemented in the computing environment (e.g., operating systems, application programs, database frameworks, firewalls)

Directive Control

• Specifies expected employee behavior through policies and guidelines (e.g., acceptable use policy)

Deterrent Control

• Discourages security policy violations through effort to circumvent policies or consequences (e.g., CCTV monitoring)

Preventative Control

• Stops a security incident (e.g., background screenings)

Compensating Control

• Mitigates risk to an acceptable level when standard protection is insufficient (e.g., acceptable agreed exceptional process)

Detective Control

• Alerts security professionals to attempted security violations

Corrective Control

• Responds to security violations, reducing or eliminating their impact (e.g., escorting unauthorized persons offsite)

Hazard

• A condition or activity with the potential for harm

Risk

• The chance or probability of injury, loss, or a hazard occurring

Incident

• An event where a work-related injury, illness, or fatality occurs/could have occurred

Risk Response Strategies

• Avoidance, transfer, retention, and reduction are four strategies for managing risks

Risk Assessment

• The overall process of identifying, analyzing, and evaluating risks

ALARA and ALARP

• Acronyms for "As Low As Reasonably Achievable/Practical"

Loss Control Measures

• Examples include hazcom training, machine guards, and confined space programs

Domino Theory

• All accidents are caused by a chain of events, and the removal of any chain of events can prevent the accident.

Peterson's Accident/Incident Theory

• Causes of accidents/incidents are human error and/or system failure

Risk Analysis vs. Risk Management

• Risk analysis: estimating risk.
• Risk management: determining acceptability and methods to reduce risk to an acceptable level.

Hazard Analysis Categories

• Three categories of hazards

Environmental Issues

• Environmental issues, inherent properties, and failures create stress, hazards, and material failures

Primary Methods for Reducing Accidents

• Two methods; Prevention and Financial (cost reduction)

Poka-Yoke

• Lean manufacturing technique to prevent errors/mistakes

Kaizen

• Japanese term for continuous improvement

5-S

• Effective housekeeping technique (Sort, Straighten, Scrub, Systematize, Standardize)

Risk Management Techniques

• Controlling risk and risk financing for losses

Risk Management

• Examining feasibility of risk management (financial/non-financial factors)

Financial Considerations

• Factors include forecasted losses, insurance types, and deductibles

Non-Financial Considerations

• Factors include business operations, customer and employee safety, and reputation

Risk Management Techniques

• Risk financing and risk control, including communication and training
• Techniques such as risk financing, risk control and risk communication

Insurance Rating Plan

• Set of directions specifying criteria for exposure base, exposure unit, and rate per exposure unit for premium calculations

Combined Ratio

• Ratio less than 100 indicates underwriting profit; more than 100 indicates underwriting loss

Non-Financial Measures

• Measures include selection, product mix, pricing, retention, hit ratio, and customer service

Retention Ratio

• Percentage of expiring policies an insurer renews

Hit Ratio

• Measuring underwriters' sales goal accomplishment

Personal and Advertising Injury Liability

• Includes false arrest, wrongful eviction, slander, libel etc

Medical Payments

• Covers necessary medical expenses for injuries on/from insured property

Real Property

• Includes land, structures, and growing assets

Ethical Principles

• Fair presentation, confidentiality, due professional care, independence, evidence-based approach, risk-based approach

Pure Risk

• Loss potential but no gain

Whole Person Theory

• Evaluating a person’s ability after an injury

Indemnity

• Benefit associated with wage replacement

Wage Loss Theory

• Method for evaluating lost wages

Life Care Plan

• Comprehensive report of medical condition/ongoing care

Residual Risk

• Risk remaining after risk treatment

Retained Risk

• Risk organization chooses to retain.

Risk Management

• Uncertainty about loss occurrence; goals to decrease frequency/severity of risk/paying for losses.

Pure Risk

• Potential for loss, but no possibility of gain (property damage, injury)

Speculative Risk

• Possible loss, no loss, or gain (investment, gambling)

Risk Assessment Methods

• Qualitative and quantitative approaches including Delphi Method, categorical/non-numeric values, and numerical historical incidents/re-occurrence

Risk Assessment Steps

• Identify hazard/risk, affected parties, impact assessment, record results, review periodically

Risk Management Guidelines

• Analysis, prioritization, response, and monitoring for risk programs.

Risk Exposure Analysis

• Identifying and analyzing an organization's risks (tools like checklists, loss histories, computer software, audits)

Risk Treatment Techniques

• Preventative methods: avoid or modify the risk

Risk Financing Techniques

• Managing funding for losses (e.g, retention, transfer)

Risk Control Techniques

• Reduce frequency/severity of losses (e.g, risk avoidance, risk modification, loss prevention)

Transfer of Risk

• Shifting financial liability to another party via contract

Personal Umbrella Policy

• Extends coverage above the limits of existing policies for large liabilities

Underwriting

• Considering underlying coverage requirements for personal umbrella insurance

Physical & Technical Controls

• Physical (locks, fences) and technical (computer systems, software, firewalls) security measures

Types of Controls

• Directive (policies/guidelines), Deterrent, Preventative, Compensating, Detective, Corrective, Recovery

Consequences (Modern Management)

• Consequences must be identified, positive/negative, immediate/future, certain/uncertain, and motivating factors

Risk (Definition/Analysis)

• Risk definition: combination of severity and probability; residual/retained risk, after risk treatment.

Analysis Techniques

• Pareto analysis (ranking severity/frequency), FMEA (failure modes and effects), FMECA (failure modes, effects, criticality analysis), FTA (fault tree analysis), FHA (fault hazard analysis), and common-cause failure analysis (CCA)

Test your knowledge on risk management concepts with this quiz. It covers essential terms and theories, such as ALARA, the Domino Theory, and financial techniques related to risk. Ideal for students and professionals in the field of risk management.