50 Multiple Choice QuestionsChapter 1: IntroductionWhat is Risk?• many definitions• "uncertainty regarding loss"• how do you classify risk? Uncertainty• definition: doubt about our ability to predict future outcomes• uncertainty can differ across individuals even when risk is the same (subjective)• information does not alter risk (objective), but can alter uncertainty• reduction in uncertainty can increase firm valueCategories of Risk• Pure (stolen car) vs. Speculative (stocks)• Subjective (personal view) vs. Objective• Static (slower changes of risks in time - frequency and serve of earthquakes) vs. Dynamic (risks that change throughout time - cell phone risks [stolen/missing/texting and driving]) - plane crashes - Boeing planes• Fundamental (risks that affect a large area/group of people) vs. Particular (risks that affect a particular company or a few)•Core (risks that your in business to manage - taking on financial risks (hedge funds) - taking on technology risks (Apple) )vs. Secondary (risks concerning employee, customer satisfaction risks, etc. risks that can be managed by someone else).•When you talk about of risk you must always consider the reward as wellSources of Pure Risk - loss vs. no loss - things you can loose•Personal Risks - examples: loosing family members (health/injury/death)•Chances of a woman aged 20 dying before 21 -.05%•Chances of a man aged 20 dying before 21 - .015%•Property Risks - example: home (fire/floods), possessions, vehicle•Chances of having an auto-vehicle accident over 5 year window - 25%•Chances of having a house lost in a fire occurs 1 in 15 years•Liability Risks - personal torts; you can be subject to sue•Examples: being involved in a car accident and it being your fault, fraud, defamation, employment•Financial Risks - bank accounts, stock exchangeExposure vs. Peril vs. Hazard•Exposure - person or property facing risk of loss•Things you can actually lose (house, car, money, cell phone)•Peril - the immediate cause of loss•What causes the loss (fire caused you to lose your house)•Hazard - condition affecting the frequency or severity of loss•Types of hazards : hazards - conditions affecting perils (frequency or severity of loss)•Physical hazards - property conditions•Intangible hazards - attitudes or culture•Moral hazards - behavioral changes - Morale hazard - indifference - Prof. Nyce believes these are the same thing•Do you behave differently when your car or cell phone are insured? Because you have an airbag does that mean you drive reckless or you don’t drive as carefully as you can.•Societal hazards - legal or cultural•Example of change: gay changes, television shows being aired (Two and a Half Men), marijuana changes (Colorado, Washington) Risk Measurement - Degree of RiskHow often does this risk occur? Breaks down to probability and statistics when looking at the degree of the risk•Relative variation of actual from expected loss (variation or standard deviation)•Objective risk - (probable variation of actual from expected losses) / expected lossesPeople’s Attitude Toward RiskHow to make decisions with risks based on uncertainty. If you’ve been drinking you question whether to get a cab, get a friend, or risk driving and not knowing where the cops are or getting pulled over.•Risk Neutral - indifferent toward risk•Value of risky situation is expected loss•Risk Averse - prefer to avoid risk - best marketing method for insurance which is why insurance companies create high premiums in the event of a loss (most people)•Willing to pay more than expected loss to avoid risk•Risk seeker - prefer risk - gamblers dilemma; roulette wheel•Would pay more than expected return to engage in risky situationCost of Risk/RIMS•Sum of:•Outlays to reduce risk•Opportunity costs•Expenses from financing potential losses•Cost of unreimbursed lossesGraph illustrates risks companies risk - $10 per $10,000. Cost of risk doubled!Burden of Risk on Society•Need for Larger Emergency Funds•Federal Government Disaster Relief - Hurricane Katrina - $50 Billion Dollars•Setting aside Home Owner’s Insurance to prevent wind damage for hurricane disasters especially if you live in South Florida•Loss of Needed Goods and Services•Supplies, good, and services needed and are limited due to a risk or disaster•Fear and WorryHow Do We Handle Risk?•Entire Industry - Risk Management•Enterprise Risk Management •Holistic view of risk - we are going to create a committee who will focus on the risk of the organization and enterprise view of risk management. Prof. Nyce doesn’t believe in it because there’s a reason why Financial Risks are handled by Financial Departments, etc. Because they are in their areas of expertise. Definition of Risk Management•Scientific approach to dealing with risk - more an art than a science•Broader than just insurance managementRules of Risk Management - it’s Common Sense! - its the hardest to teach•Don’t risk more than you can afford to lose•Don’t risk a lot for a little•Consider the oddsThe Core Functions of an Organization - gain more rewards than risks!•Strategic Management•What is our mission, our goals and objectives, our strategic plan, our means of measuring progress toward our mission?•Operations Management•The activities that move us toward our mission•Risk Management•The activities that facilitate the most direct achievement of our missionThe Risk Management Process (Assessment, Control, Management)Process never changes no matter what the organization is - assessing, controlling, and financing (management) •Determination of objectives•Identification of risks•Evaluation of risks•Consideration of alternatives - selection of the tool•Implementing the decision•Evaluation and review - how well did you do? Evaluation and Review•In theory, the evaluation and review are the final step in the risk management process•Except in the rare case where an organization is newly created, every organization will have a risk management program already in existence.Evaluation and Review Generally•Reevaluate program’s objectives - what were the programs objectives last year? What are their objectives this year? Do they have new or old risks?•Repeat identification process to assure that it was performed correctly•Evaluate the risks that have been identified•Verify that the decision on how to
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