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CHAPTER 2
Risk Identification
I. SUGGESTED CLASSROOM TIME: 60–75 MINUTES
II. CHAPTER OVERVIEW
Chapter 2 looks at the first and most critical step in the risk-management process. The key
to risk identification is a systematic and continuous process. Firms use many means to
identify exposures, and the best-managed firms engage their employees in the activity.
An important issue in exposure identification, and one that ties together pure risk
III. LECTURE OUTLINE
A. Introduction
1. Risk identification is the most important step in the risk management process.
B. Useful Methods of Risk Identification (The beginnings of a systematic process)
1. Distinguish between internal and external exposures
a. Location
b. Ability to control
2. Distinguish between pure and speculative risks
C. Direct and Indirect Losses
1. Direct—damage, destruction, loss of use, liability claim
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2. Liability risks
a. Tort liability (covered in a later chapter; distinguished for crimes and breach of
contract)
3. Human resources risks
a. Key employee
E. Enterprise Risk Management Risks
1. Hazard risks (essentially pure risks)
IV. ANSWERS TO REVIEW QUESTIONS
1. Explain how risk identification has changed in recent years, as well as the
reasons for the change. Risk identification has become broader and more
2. Provide an example of an internal and external risk for a large automaker.
An internal risk for the automaker is possible damage to, or destruction of, their
3. Consider the losses resulting from a large fire loss to a commercial
building. Provide two examples of direct losses commonly associated with
a fire, as well as two examples of indirect losses. Two direct losses related to
the fire are damage to the structure and damage to the contents. Two indirect losses
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4. List and briefly describe the three broad categories of hazard risks. 1)
Property risks—damage to, destruction of, or loss of use of property; 2) liability risks—
5. Define and provide two examples of tangible and intangible property.
6. Provide two examples of situations in which risk managers are concerned
about damage to the property of others. A firm might be a bailee, holding the
7. What differentiates torts from liability for criminal acts and breach of
contracts? These are separate branches of law. Torts are civil breaches of law and
8. List and briefly describe the four requirements that a plaintiff must prove
when suing a defendant in a negligence case.
1) The plaintiff must show that there is a relationship with the defendant where the
defendant owed a duty to the plaintiff.
9. Describe the difference between compensatory and punitive damages.
Compensatory damages are meant to compensate in injured party for such things as
10. Describe two common-law defenses that are available to a defendant in a
negligence lawsuit. The “assumption of risk” defense states that the injured plaintiff
was aware of risky conditions and willingly assumed them when pursuing an activity.
11. Describe the difference between contributory and comparative negligence.
Contributory negligence, under common law, is a “perfect” defense, i.e., if the injured
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12. List and briefly describe the three broad categories of human resource risk
found in most firms.
1) The key employee risk—the possibility that an employee is so valuable to the firm
13. Define and briefly describe the differences between the four categories of
risk found in an ERM program.
1) Hazard risks—the classic pure risks, i.e., property, liability, and human resources
14. What is price risk? In your answer, describe the difference between input
costs and output costs. Price risk involves changes in the costs of inputs or the price
15. Explain why failures of accounting systems can be considered a financial
risk or an operational risk in two different organizations. A failure of
accounting systems might be considered a financial risk in a situation where a firm
V. ANSWERS TO OBJECTIVE QUESTIONS
1. An earthquake is an example of
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2. Which of the following is not an example of a direct loss resulting from a fire at
Bubba’s Bar-BQ, a Southern-style restaurant?
3. Which of the following statements about intangible property is correct?
I. Examples of intangible property include a firm’s brand value and its reputation.
II. Because it pertains to the ability of the firm to compete against its rivals, the duty
to protect intangible property belongs to the corporate CEO, not the risk manager.
4. Bobby slips on an icy sidewalk when entering Skip’s sporting goods store. Bobby requires $12,000 of medical treatment for the head injury that he suffered in the fall. Bobby goes to court to attempt to collect the medical costs from Skip. This
Legal action is an example of which of the following?
5. Which of the following is not a requirement that the plaintiff must prove to the courts
in a negligence case against a defendant?
6. If Amy wins a lawsuit from Tess for injuries suffered in an auto accident, this is an
example of Included in the judgment is $40,000 in compensation for pain and suffering. Pain and suffering is which of the following?
7. Which of the following is not an example of a corporation’s human resource risk?
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8. Scary Airlines, a large commercial airline, suffers a huge loss of profitability due to a 30
percent increase in the cost of jet fuel. The risk that caused this loss is an example of
which of the following?
9. Gamer Industries suffers a 22 percent decline in quarterly revenues after a
longshoreman’s strike prevents the firm from shipping its new video game product to
its international markets. The risk that caused this loss is an example of which of the
following?
10. Sleeper Film Company estimates that it loses about 2 percent of its annual sales
revenue as a result of counterfeiters selling bootleg copies of the movies that Sleeper
produces. The risk that caused this loss is an example of which of the following?
VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Get articles about lawsuits from your local newspaper. Discuss with your class whether
the suits contained all of the required elements of establishing negligence.
2. There have been instances when a criminal case and a civil case have been filed related
to the same incident and have been resolved differently. (It is unlikely that your
students will remember the O.J. Simpson case.) Discuss this proposition, perhaps