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1. The management of risk is a small part of global business.
2. An enterprise risk management (ERM) program has a goal of defining which risks the
program will manage.
3. Companies adopt risk management procedures to minimize the chance of business failure
due to unplanned events such as security breaches, terrorist attacks, and natural disasters.
4. Risk management involves minimizing the losses from unexpected events.
5. Risk management is getting much simpler thanks to the Internet.
6. Southern Deliveries has decided to manage risk by requiring drivers to wear seat belts,
have a commercial driver's license, monitor any moving violations each driver obtains, and to be
sure that this information is kept in the employee records. Furthermore Southern has decided to
carry an insurance policy with a very large deductible, preferring to pay for small damages to its
trucks out-of-pocket. Southern has built enterprise risk management into their organization.
7. Fairweather Farms is located on Florida's Gulf Coast and is primarily engaged in raising
and harvesting citrus fruit. The owners of Fairweather Farms are correct in beginning to think
about how the risk of climate change might impact their crops in the future.
8. Risk is a term that refers to the chance of loss, the degree of probability of loss, and the
amount of possible loss.
9. There are two different kinds of risk: passive and active.
10. Speculative risk involves a chance of either profit or loss.
11. Pure risk involves the chance of either a profit or a loss.
12. An entrepreneur takes a speculative risk when starting a new business.
13. The chance of a fire is an example of a pure risk.
14. If a pure risk occurs a company loses money; but if the events do not occur, the company
gains nothing.
15. Businesses can often reduce the risk to which they are exposed.
16. The type of risk that is of most concern to businesspeople is speculative risk.
17. One way to lower the need for outside insurance is to self-insure.
18. Product recalls can reduce risk.
19. The beginning of an effective risk management strategy is a good loss-prevention
program.
20. Outsourcing helps some companies avoid risk.
21. Self-insurance is the practice of setting aside money to cover routine claims and buying
only "catastrophe" policies to cover big losses.
22. Self-insurance makes more sense for firms that operate one large facility than it does for
firms with facilities scattered all over the country.
23. Going bare is a much less risky strategy for self-insurance.
24. When a firm that is self-insuring against risk decides to cover losses straight out of its
budget, it is said to be "going bare."
25. A well-designed and implemented risk-prevention program can eliminate the potential of
loss.
26. All risks are insurable.
27. The federal government provides some insurance protection.
28. Federal Housing Administration (FHA) insurance provides insurance to property owners in
high-crime areas.
29. The Pension Benefit Guaranty Corporation provides retirement benefits, life insurance,
health insurance, and disability income insurance.
30. An uninsurable risk is one that no insurance company will cover.
31. Any risk is insurable as long as you can pay the premium.
32. "Insurable interest" means that the policyholder is the one at risk to suffer a loss.
33. Insurance companies will provide coverage only for losses that are accidental.
34. The terrorist attack against the World Trade Center in 2001 is an example of pure risk.
35. Water sprinklers and smoke detectors can be used to minimize speculative risks.
36. Typically, the only option that firms have to deal with pure risk is to buy insurance.
37. UPS requires their delivery people to wear seat belts as they drive their trucks. This is an
example of self-insuring as a risk management strategy.
38. Procter & Gamble Inc. is ready to launch a new shampoo in the marketplace. They will
incur a speculative risk.
39. All-Star Manufacturing has decided to stop producing football helmets due to the
potential size of losses involved in product liability cases. This is an example of avoiding risk as a
risk management strategy.
40. Kuhlman Appliances produces all of its products in one gigantic production facility near
an earthquake fault line. Kuhlman is the classic example of a firm that should use self-insurance
to manage its risks.
41. An example of an uninsurable risk would be the potential losses suffered by Domino's
Pizza resulting from a popular new product from Pizza Hut.
42. The Ford Motor Company has an insurable interest in the lives of its top executives.
43. John has decided that his neighbor Sam is quite careless and is in danger of burning his
own house down. John tried to buy a fire insurance policy on Sam's house so that he could collect
the payment when Sam inevitably burned down his own house. The insurance company would
not allow John to purchase the policy because he did not have an insurable interest in the
property.
44. The best strategy for a profit-seeking insurance company would be to specialize in
providing protection to people in a specific geographical area.
45. An insurance premium is the fee charged by the insurance company in return for their
promise to pay for all or part of a loss.
46. An insurance policy is a written contract.
47. The law of large numbers states that if a large number of people are exposed to the same
risk, a predictable number of losses will occur during a given period of time.
48. According to the rule of indemnity, an insured person cannot collect more than the actual
loss from an insurable risk.
49. A stock insurance company is owned by its policyholders.
50. A mutual insurance company is a nonprofit organization.
51. A mutual insurance company is owned by its policyholders.
52. An insurance company can use the law of large numbers to predict the number of people
in your community that will have a car accident in a given month.
53. The car insurance premium charged for young male drivers is higher than the premium
for young female drivers. This is due to the rule of indemnity.
54. Insurance companies make predictions such as how recent health trends will affect the
number of heart attacks that men in the United States over the age of 45 will suffer.
