74 Cards in this Set
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corporate risk management
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the process of protecting the earnings power and the assets of a firm from the financial losses resulting from pure risk events
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enterprise risk management
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a senior-level corporate process involving the identification, assessment, and treatment of all sources of risk within a firm or organization
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pure risk
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a loss exposure in which the only outcome is a loss or no change in condition
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speculative risk
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an exposure to loss that could result in a loss, gain, or no change as a result of fortuitous circumstances. for example, investing in common stocks creates a speculative risk
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risk pooling
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a process used by insurers involving the diversification of risk across a group or pool of homogenous firms or individuals
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law of large numers
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a statistical process used by insurers to diversify risk. when an event based on chance is observed, the larger the number of observations is, the more likely it is that the actual result will coincide with the expected result
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non-diversifiable risk
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risk that cannot be reduced through the use of risk pooling or other means of risk diversification
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well-diversified portfolio
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a group consisting of a large number of items (e.g. investments) whose losses exhibits little or no correlation, allowing for the effective reduction of risk
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diversifiable risk
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financial risks that can be reduced across the members of a risk pool or portfolio
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risk aversion
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a behavioral tendency exhibited by many individuals faced with risky decisions in which the person prefers the alternative that involves the least risk
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risk-return trade-off
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in financial markets, the tendency for investments offering higher returns to exhibit higher levels of risk
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insurance
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a contractual relationship between two parties in which one party, the insurer, is paid a premium by the other party, the insured. in return for the premium, the insurer promises to indemnify the insured in the event of a covered loss. a money transfer scheme in which those exposed to a l…
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social insurance
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insurance protection available to individuals and firms through programs administered and funded by governmental bodies
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private insurance
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insurance provided by nongovernmental insuring organizations, such as stock or mutual insurers, with terms of protection defined by terms set in a private contract
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risk management process
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a systematic approach by which an organization can identify and manage its exposures to risk in ways that best fit its strategic goals
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property risk
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losses to a firm that result from the damage of the assets of the firm
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tangible property
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the physical assets of an organization, such as real estate, vehicles, or inventory
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intangible property
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the nonphysical assets of value in an organization, such as intellectual property or legal rights
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liability risk
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the risk that an individual or organization may be held legally and financially responsible for the harm that it caused to another person
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human resource risk
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source of financial loss to an organization that can result from the death, injury, or discontinuation of employment of key employees
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indirect losses
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the loss of income following a direct loss. for example, if fire destroys a motel, the structural damage is the direct loss; the lost income, continuing expenses, or extra expenses to keep operating are the indirect losses
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frequency
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a measure of the number of losses that occur over a given period of time
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severity
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a measure of the size of a financial loss
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loss control
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a risk-handling technique designed to limit financial loss by reducing the frequency of loss, the severity of loss, or both
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loss prevention
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an activity designed to reduce the frequency of the loss. examples include driver training programs, better design of equipment, and better lighting in factories
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loss reduction
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an activity designed to reduce the severity of losses. examples include automatic fire sprinklers, directions for first aid found on containers of poisons, and separating a large exposure to loss into smaller units
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loss financing
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a risk-handling technique in which the organization makes arrangements to pay for their incurred losses. examples include buying insurance or designing a self-insurance program
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self-insurance
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a risk-handling technique in which an organization pays for its risk management losses internally through the use of financial risk pooling
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hazard risk
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a term used in enterprise risk management that refers to the adverse financial loss exposures associated with pure risk
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operational risk
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a term in enterprise risk management that refers to financial losses that result from the failure of an organization's systems or processes, technology, or people
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strategic risk
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a term in enterprise risk management that refers to the risk that an organization cannot successfully compete with its competitors to achieve its goals or mission statement
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direct loss
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the physical damage that occurs as a consequence of a covered peril, such as the damage to property caused by a fre
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business interruption insurance
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this coverage provides protection from indirect losses, such as lost profits or extra expenses, that arise after a direct loss of property
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real property
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a term that refers to land and anything permanently attached to land
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breach of contract
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a failure, without legal excuse, to fulfill one's contractual duties
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criminal acts
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an act in violation of penal law. an offense against the state
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plaintiff
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the individual alleging injury in a negligence lawsuit
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tort
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a wrongful act, other than a breach of contract, that results in another's injury
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defendant
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the party allegedly causing the plaintiff's loss in a lawsuit
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judgment
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the finding of the court in a lawsuit, such as a suit seeking damages due to negligence
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special damages
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compensatory damages awarded to the plaintiff in a lawsuit for monetary or economic losses, including such items as medical expenses or lost wages
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general damages
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compensatory damages awarded to the plaintiff in a lawsuit for hard-to-measure items like pain and suffering or emotional distress
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punitive damages
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damages awarded by courts in addition to the compensatory damages, for cases in which the defendant's outrageous conduct requires special punishment. the purpose, in part, is to discourage similar future conduct, both by this defendant and by others who might find themselves in a similar …
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gross negligence
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cases in which the defendant in a lawsuit willfully disregards the potential harm inflected upon the defendant by his or her actions, potentially resulting in the courts awarding punitive damages to the plaintiff
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compensatory damages
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payments set by the court to restore the victim to the same financial condition after an injury that he or she was in before the injury
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contributory negligence
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a legal doctrine applied in negligence litigation that allows the defendant to avoid payment for the plaintiff's injuries once it is established that some action of the plaintiff contributed to the loss
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comparative negligence
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a modification of the contributory negligence doctrine. allows the plaintiff some recovery for injuries sustained, despite the fact that the plaintiff contributed to the loss
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assumption of risk
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a legal defense in negligence litigation. when the plaintiff knew, or should have known, that a course of behavior could lead to his or her own injury, and persisted in such behavior despite this knowledge, the defendant can assert this defense in attempting to avoid compensating the plai…
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succession planning
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a process used to minimize the cost of losing a key employee by making plans to replace the missing executive through the promotion of an internal subordinate
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price risk
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losses incurred by an organization that are attributable to changes in the cost of key inputs (such as interest rates or the cost of commodities used in production) or changes in the price at which the organization's output can be sold
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credit risk
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loss potential caused by a borrower defaulting on a loan
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random variable
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a statistical term referring to a variable whose future value is not known with certainty
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expected value
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a statistical term that refers to the mean or average value of a future unknown random variable, such as the expected loss that a firm's risk manager should anticipate from its exposure to risky activities like worker injuries or auto accidents
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variance
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a statistical term used to measure the degree to which the outcomes of a random variable may differ from its expected value
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probability distribution
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a statistical term referring to a table or graph that shows all possible outcomes for a random variable, as well as their respective probabilities of occuring
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standard deviation
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a statistical term used to measure the degree to which the outcomes of a random variable may differ from its expected value, calculated as the square root of the variance
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exposure unit
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the person or object exposed to a risk that could result in a financial loss
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mean loss distribution
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a probability distribution showing the possible losses that a member of a risk pool may have to pay to cover its share of the losses covered under the pool
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normal distribution
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a statistical distribution for a random variable that is shaped like a bell and symmetrical around the mean at the midpoint of the distribution. in risk pooling, each pool member's share of the losses owed to the pool is this
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confidence interval
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a statistical technique used to set a range between two values located around the estimate of a random variable such that, with repeated sampling, the actual value of random variable falls within that range a given percentage of time
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risk charge
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in the calculation of an insurance premium, an amount that is added and subtracted to the estimate of the mean loss in a risk pool to allow a margin for measurement error
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avoidance
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a risk-handling technique in which the organization consciously chooses not to engage in a risky activity that could result in financial loss
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duplication
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a process in which an individual or firm reduces its exposure to risk by holding multiple copies of a key resource or asset
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diversification
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a method of handling risk within a group of individuals such that the financial losses of a few group members are shared across all the members of the group
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risk assumption
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a loss-financing technique in which the party exposed to the risk of loss pays for its own losses if they occur
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contractual transfer agreement
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contractual arrangements that shift the financial responsibility for losses from one party in the contract to another
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hedging
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taking two simultaneous and offsetting financial positions so that an increase in one position is matched by a decrease in the other position, typically taken to reduce risk
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risk-bearing financial institution
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a financial institution such as an insurer or mutual fund that assumes its customers' risk exposure, which is typically reduced through diversification
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exculpatory clauses
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clauses in business contracts in which one party agrees to give up its right to sue another party under specific circumstances
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hold-harmless agreement
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a contract transferring one party's legal liability to another. for example, a railroad may ask a lumberyard to sign this agreement before building a spur on the yard's site. the agreement would transfer the railroad's liability for accidents on the spur to the lumberyard.
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limited liability
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a legal doctrine that prevents creditors or business claimants from attaching to the personal assets of the owner of an incorporated firm, thus limiting the size of the claim to the assets of the firm
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deductible
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the first dollars of loss that are deducted by the insurer from the amount that it pays to the insured. may be worded in terms of dollar amount or as a percentage of the loss
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high-deductible insurance
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insurance coverage incorporating an exceptionally large deductible, designed for large corporations with considerable financial strength
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funded risk assumption
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a risk retention arrangement in which a party exposed to financial loss makes financial arrangements to pay for the losses that it assumes
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FIN 330: FINAL