Operational risks include public relations risks, environmental risks, and several others not detailed in the map in Figure 1.4 "Risk Balls". The step in the risk management process that is most likely to be overlooked is, The most difficult step in the risk management process is likely to be. All homes in the path will be damaged or destroyed when a flood occurs. These will be further explored in a later chapter about the tools to mitigate risks. Which of the following best describes Smith's loss? Fundamental vs Particular Fundamental risk is a type of risk that affect a large number of people in an economy. There are two basic approaches to the interpretation of probability. the tendency of the poorer than average risks to seek insurance to a greater extent than do the better than average risks. It considers all risks simultaneously and manages risk in a holistic or enterprise-wide (and risk-wide) context. More important than replaceable hardware or software is the data they store; theft of proprietary information costs companies billions of dollars. The categorization is often a matter of perspective. However, did the myopic concentration on terrorism risk derail the holistic view of risk management and preparedness? According to the FBI, the fastest growing form of white collar crime is. A case at point is the little media coverage of the devastation of Galveston Island from Hurricane Ike during the financial crisis of September 2008. Damage to the motor car due to â¦ An ongoing concern is the electronic risk (e-risk) generated by the extensive use of computers, e-commerce, and the Internet. none of the above. Pure risk is often transferred by purchasing insurance coverage, which transfers the risk to an insurance company. fundamental risks are a source of gain to society. These types of risk include high inflation, stock market crashes, high instances of unemployment and widespread natural disasters. social insurance, private insurance, and public guarantee programs. management of risks for profit-making organizations. are those that can have their adverse consequences mitigated simply by having a well-diversified portfolio of risk exposures. Under most legal systems, a party can be held responsible for the financial consequences of causing damage to others. For example, the risks of an accident, a car theft or earthquake are pure risks. 2. Classify the following as pure or speculative risk: (1) speculative, (2) speculative, (3) pure. Speculative risks on the other hand are a family of risks in which some possible outcomes are beneficial. are desirable, but some insurable risks do not possess them. How does e-risk fit into the categories of risk. Pure risk, also known as absolute risk, is insurable. Adverse selection is a term used to describe. 2. Situation in which a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was responsible in producing it. Like any property, computers are vulnerable to theft and employee damage (accidental or malicious). These events may be catastrophic or accidental. Likewise, professional people who study risk use several words to designate what others intuitively and popularly know as “risk.” Professionals note several different ideas for risk, depending on the particular aspect of the “consequences of uncertainty” that they wish to consider. This outcome also points to the importance of having a committed stakeholder who is vested in the outcome and cares to lower and mitigate the risk. Speculative risksRisk that features a chance to either gain or lose. Hurricanes in Florida and the southern and eastern shores of the United States, floods in the Midwestern states, earthquakes in the western states, and terrorism attacks are the types of loss exposures that are associated with fundamental risk. Example:- Tsunami, flood, earthquake, etc 6. This will be discussed in detail below and in later chapters. Fundamental Risk:- Exposure to loss from a situation affecting a large group of people or firms, and caused by (a) natural phenomenon such as earthquake, flood, hurricane, or (b) social phenomenon, such as inflation, â¦ event giving birth to a loss) can be measured in monetary terms.The losses can be assessed and a proper money value can be given to those losses. In other words a speculative risk is a situation that might also end in a gain. risk management has relevance for organizations of all sizes. The combination of a large number of exposure units by an insurer is important for the operation of insurance because: For the insurance company, a meaningful measure of risk is. If a firm experiences a fire in the warehouse, the direct cost is the cost of rebuilding and replacing inventory. Definition of risk Exposure to premature death, sickness, disability, unemployment, and dependent old age are examples of personal loss exposures when considered at the individual/personal level. meeting social responsibility and meeting external obligations. The surety company issuing a bond to a principal. a condition that increases the chance of loss. The capital market has become an important player in the area of risk management with creative new financial instruments, such as Catastrophe Bonds and securitized instruments. Some people say that Eskimos have a dozen or so words to name or describe snow. You will also learn several different ways to split risk exposures according to the risk types involved (pure versus speculative, systemic versus idiosyncratic, diversifiable versus nondiversifiable). of hazard defined by Kulp. Figure 1.6 Life Insurers’ Enterprise Risks. They used their skills to create models and new products but lacked the business acumen and the required safety net understanding to ensure product sustenance. Particular Risk:- Exposure to loss from a situation associated with specific individual events, such as a break-in, fire, or robbery. Table 1.2 "Examples of Pure versus Speculative Risk Exposures", Figure 1.3 "Roles (Objectives) Underlying the Definition of Risk", Chapter 4 "Evolving Risk Management: Fundamental Tools", Chapter 5 "The Evolution of Risk Management: Enterprise Risk Management", Figure 1.5 "A Photo of Galveston Island after Hurricane Ike", Table 1.3 "Examples of Risk Exposures by the Diversifiable and Nondiversifiable Categories", Figure 1.6 "Life Insurers’ Enterprise Risks", http://www.iso.com/index.php?option= com_content&task=view&id=932&Itemid=587, http://www.iso.com/index.php?option= com_content&task=view&id=930&Itemid=585, Physical damage risk to property (at the enterprise level) such as caused by fire, flood, weather damage, Market risks: interest risk, foreign exchange risk, stock market risk, Liability risk exposure (such as products liability, premise liability, employment practice liability), Innovational or technical obsolescence risk, Operational risk: mistakes in process or procedure that cause losses, Credit risk (at the individual enterprise level), Mortality and morbidity risk at the individual level, Environmental risks: water, air, hazardous-chemical, and other pollution; depletion of resources; irreversible destruction of food chains, Natural disaster damage: floods, earthquakes, windstorms, Man-made destructive risks: nuclear risks, wars, unemployment, population changes, political risks, Mortality and morbidity risk at the societal and global level (as in pandemics, social security program exposure, nationalize health care systems, etc. In property insurance terminology, all the following are considered hazards except: a fire which is started in a waste paper basket. Risk management is a very important topic in both Strategic Management and Operations Management. personal risks, property risks, liability risks, and risks arising out of the failure of others. Today, there is no media that is not discussing the risks that brought us to the calamity we are enduring during our current financial crisis. How would you classify the risks embedded in the financial crisis of fall 2008 within each of cross-classification? Some risks can be transferred to a third party—like an insurance company. The simultaneous consideration of pure and speculative risks within the objectives continuum of Figure 1.3 "Roles (Objectives) Underlying the Definition of Risk" is an approach to managing risk, which is known as enterprise risk management (ERM)The simultaneous consideration of all risks and the management of risks in an enterprise-wide (and risk-wide) context.. ERM is one of today’s key risk management approaches. Differentiating higher risk offenders from lower risk offenders is important for the police, courts, correctional workers, and the general public. and those they refer to as speculative risk. The ground was fertile for mishandling the extreme hurricane catastrophes. As we noted in Table 1.2 "Examples of Pure versus Speculative Risk Exposures", risk professionals often differentiate between pure riskRisk that features some chance of loss and no chance of gain. As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. D. The management of the consequence of something happening, described in either quantitative terms of probability or frequency. A picture of the enterprise risk map of life insurers is shown later in Figure 1.5 "A Photo of Galveston Island after Hurricane Ike". Firms that are evaluated by credit rating organizations such as Moody’s or Standard & Poor’s are required to show their activities in the areas of enterprise risk management. Insuranceopedia explains Static Risk. Assuming speculate risk is usually a choice and not the result of uncontrollable circumstances. The type of retention that is always undesirable is, The two broad approaches to dealing with risk are. Wrong. As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. The question is what is the cost and what is the impact both financially and socially. The two most important of the pre-loss and post-loss objectives are. The three broad general classes into which the types of insurance may be classified are. the exposure has catastrophic potential and the risk cannot be reduced or transferred. In common English language, many people continue to use the word “risk” as a noun to describe the enterprise, property, person, or activity that will be exposed to losses. Fundamental and particular risks: Particular risk can be confined to individuals or smaller groups.. Definition of Fundamental Risk Exposure to loss from a situation affecting a large group of people or firms, and caused by (a) natural phenomenon such as earthquake, flood, hurricane, or (b) social phenomenon, such as inflation, unemployment, war. As such the flood impacts a large number of exposures, and as such, all these exposures are subject to what is called a fundamental riskRisks that are pervasive to and affect the whole economy, as opposed to accidental risk for an individual.. Generally these types of risks are too pervasive to be undertaken by insurers and affect the whole economy as opposed to accidental risk for an individual. Definition Fundamental Risk â a risk intrinsic to the state of being, or an absolute hazard producing no uncertainty about whether the loss will occur, making the risk commercially uninsurable. You should also understand the general concept of enterprise-wide risk. Product liabilitySituation in which a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was responsible in producing it. The distinction between fundamental and particular risks is important because normally only particular risks are insurable. Today, the extreme risks of mismanaged innovations in the financial markets combined with greed are stretching the field of risk management to new levels of governmental and private controls. Diversification is the core of the modern portfolio theory in finance and in insurance. An expected deviation of an occurrence from what one expects. feature a chance to either gain or lose (including investment risk, reputational risk, strategic risk, etc.). In this section, you will learn what a risk professional means by exposure. may be social or private, depending on other characteristics. Using different terminology to describe different aspects of risk allows risk professionals to reduce any confusion that might arise as they discuss risks. Risk management may be defined as the systematic process of managing the risks threatening an organization in order to accomplish its goals in a way consistent with common interest, human protection, environmental factors and the law. So a house built on the coast near Galveston, Texas, is called an “exposure unit” for the potentiality of loss due to a hurricane. decision theory, risk financing, and risk control. The right-hand side focuses on speculative risk. As discussed above, the opportunities in the risks and the fear of losses encompass the holistic risk or the enterprise risk of an entity. The possibility of loss resulting from a flood is an example of, Unemployment would generally be considered to be, The definition of "risk" suggested in the text views risk as, A peril, as distinguished from a hazard, is defined as, A business firm with an inventory of obsolete stock and high notes payable might represent. You should be able to delineate the main categories of risks: pure versus speculative, diversifiable versus nondiversifiable, idiosyncratic versus systemic. The field of risk management deals with both diversifiable and nondiversifiable risks. Risks whose adverse consequences can be mitigated simply by having a well-diversified portfolio of risk exposures. The term enterprise risk management refers to. The challenge facing the risk management practitioner of the twenty-first century is not just breaking free of the mantra that risk management is all about insurance, and if we have insurance, then we have managed our risks, but rather being accepted as a provider of advice and service to the risk makers and the risk takers at all levels within the enterprise. When a firm retains its risk, self-insuring against adverse contingencies out of its own cash flows. The examples provided in Table 1.2 "Examples of Pure versus Speculative Risk Exposures" are not always a perfect fit into the pure versus speculative risk dichotomy since each exposure might be regarded in alternative ways. For example, social support programs and employer-sponsored health or pension plan costs can be affected by natural or man-made changes. 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