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RMI 2101 Exam 1

by: Jacob Notetaker

RMI 2101 Exam 1 RMI 2101 - 002

Jacob Notetaker

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About this Document

Topics 1,2,3 -Types of risk: pure, speculative, static, dynamic, etc. -Risk Management Process -TRM vs ERM
Michael Mccloskey (P)
Study Guide
Risk Management and Insurance, business
50 ?





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This 38 page Study Guide was uploaded by Jacob Notetaker on Saturday August 20, 2016. The Study Guide belongs to RMI 2101 - 002 at Temple University taught by Michael Mccloskey (P) in Fall 2016. Since its upload, it has received 27 views.


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Date Created: 08/20/16
Pure Risk deals with: Uncertainty Uncertainty regarding events which could produce Loss a: Can be losses for firms Individuals and/or: In financial terms, a loss of: Money ______ Risk Management Traditional focuses on pure risk ____ can be known with Losses certainty There's a __% chance when losses happen 100 Impossible loss has _% 0 chance of happening RMI is about everything between the ____ and the Certain and the impossible _____ If no risk is present, there is Uncertainty no: To avoid loss, if no risk is budget, plan and avoid the present: loss situation Risk does not equal: Loss Chance of loss: Probability of the loss Probability ranges from _ to 0 to 1 _ Risk does not equal the Probability _____ of a loss Pure vs Speculative Risk Pure vs Speculative Risk Pure and Speculative risk both involve: Uncertainty Pure and Speculative risk Outcomes have different: 3 outcomes (future states) of Gain, Loss, no gain or loss (gambling, buying stock or Speculative risk: homes) 2 outcomes (future states) of Loss, no loss (fire, flood, Pure risk: death, sickness) Pure risk has no _____ Positive outcome Static vs Dynamic Risk Static vs Dynamic Risk Change over time (always Static risk does not: present) Dynamic risk arises out of: changing circumstances 2 different ways to measure Subjectively or Objectively risk: An individual's view of uncertainty or the situation Subjective Risk involving risk: Subjective measurements of risk influence how a firm or handle risky situations key decision maker will: _____ is key when dealing Variation with Objective risk actual outcomes around or Variation of: about expected outcomes Expected losses under experience and data objected risk are based on: The problem with objective timing, we are uncertain risk measurements is: when it is going to happen *refer to variation problem in (Actual Loss-Expected notes Loss)/EL Sources of Pure Risk- Sources of Pure Risk- Person Person Personal pure risk refers to Human capital ____ ____ at risk The ability to ____ ____ is generate income at risk We are subject to ____ and life and health (injury, ____ exposures illness, death, disability) These in turn would result in the loss of: income, life, and/or health Would also result in loss or Retirement or unemployment reduction in income: Retirement or Possible higher medical unemployment would also expenses result in: Sources of Pure Risk- Sources of Pure Risk- Property and Liability Property and Liability 1. Ownership of financial or physical assets 3 sources of pure risk under property and liability: 2. Theft/Damage 3. Wealth losses from liability exposure (lawsuit, legal fees) 2 types of losses: Direct and Indirect Factors Affecting Risk Factors Affecting Risk The immediate cause of the Peril (fire, flood, theft, injury, loss: sickness, death) How often losses occur: Frequency Given that a loss has Severity occurred, how bad was it?: Severity is conditional upon frequency being: Positive If frequency is zero, ____ is severity not an issue Underlying condition behind Hazard a loss occurrence: Hazards can increase: Frequency, severity, or both A certain location (shore) is a: Physical Hazard Living at the shore would increase the ____ of the frequency peril (flood) The distance a house is from a fire hydrant would severity determine the _____ of a peril Construction and use -If the peril is fire, wood structure is the 2 other factors determining physical hazard hazards: -If the peril is fire, the use of a building as a church poses a physical hazard When people act differently because of the existence of Moral Hazard insurance: ___ and ____ increase because of the existence of Frequency and severity insurance Moral Hazards result in ____ fraud and ___ Insurance fraud and arson Common thread of moral -Presence of insurance hazards: -Change in behavior Cash Bar vs Open Bar Effect Moral Hazard in Health -the person with insurance will consume more Insurance: healthcare because they have insurance premiums go up for This results in: everyone because more people are using insurance There's nothing bad about it morally, but ____ changes behavior occur because of insurance Carelessness concerning Morale Hazard losses: - Texting while driving Morale Hazard has nothing the existence of insurance to do with: 1. Expected Cost of Loss Financial Consequences of - Financial losses - Goodwill losses Risk and the Burden of Risk: 2. Cost to manage risk - Police (3 factors) 3. Residual Uncertainty Loss of goods or services because they are deemed Residual Uncertainty "too risky": Risk Management Process Risk Management Process The risk management process involves managing 2 categories of Pure risk and Speculative risk risk: Pure risk falls under _____ risk management Traditional (TRM) Speculative risk falls under _____ Enterprise (ERM) risk management The goal of the Risk Management Minimize losses Process: Within a firm, Risk Management has become a specialized branch financial management of: 2 key personnel members of Risk Risk Manager Management: Chief Risk Officer Risk management is continuously: evolving Risk management does not equal: insurance buying Evolution of Risk Management Evolution of Risk Management In the 1950's company's didn't really manage risk, they just: bought insurance 1960's Temple professor who Wayne Snider coined "risk management": Today, risk management is much Strategic more: 1. Identify Exposures to loss 2. Evaluate Exposures to loss The 6 Steps of The Risk 3. ID possible alternatives 4. Select among the alternatives Management Process: 5. Implement the chosen option(s) 6. Re-evaluate, periodically, the chosen strategies Step one: ID loss exposure Step one: ID loss exposure Possibility of a financial loss that a particular entity faces as the result Loss exposure of peril striking a thing of value: Step one is the most: crucial step Failure to properly ID loss bankruptcy exposures can lead a company to: 1. Inspections of plant and facility 2. Contract analysis 3. Look at past information 4. Share loss information with other similar firms through trade 8 ways to ID loss exposures: associations 6. Flow chart approachized surveys from insurance companies 7. Ask employees/ managers in the firm 8. Financial statement approach Inspections of plants and facilities walk-arounds are also called: 2 examples of contracts to be Leases analyzed: Hold Harmless Agreements Problem with looking at past does not work in all situations information: where things could go wrong Flow charts show: Ex: a-b-c-d-e easier to locate problem in frame "c" Balance sheets Assets 6 areas to analyze in the Financial Liabilities Statement Approach: Income statement Sources of Revenue Budget Property 4 Categories of loss exposures: Net Income Personnel Liability Real Property 3 types of property exposed to Personal Property loss: Legal interest in property land 2 examples of real property: buildings Tangible (equipment, accounting records) 2 categories of personal property: Intangible (goodwill, patent, trademark, copyright, account receivables) If you have a legal interest in a property then you also have a Financial (co-signer) _____ stake in the property Situations Giving Rise to Interest Situations Giving Rise to Interest in Property in Property Most common type of interest: ownership interest A person can have ____ or ____ present or future ownership interest Buyers and sellers have a shared interest in property when the Shipped product is: Shipping products deals with ____ FOB points. An entity who receives property from another under a contract of Bailee bailment: The property interest for the bailee is a ____ liability to return Legal or cost to replace the property. ______ have property interest Tenants when renting a house/apt. Net Income Loss Exposures Net Income Loss Exposures Net income loss exposures occur the normal productive process of when: a firm is interrupted 1. Damage to property owned by 2 categories of events causing net the firm (stolen delivery truck) 2. Damage to property owned by income losses: others (supplier has a property loss) Common example of damage to property owned by others: Power or telephone outage A firm has a key employee who Personnel Loss Exposures suffers a personal loss: The employee is at risk of a loss income of ____ and incurring: medical expenses The firm may also suffer with a revenue decrease in ____ because ____ sales are down and _____ are not being made. decisions The firm also faces an increase in replacing the person expenses due to the cost of: Topic 3: Liability Loss Exposures Topic 3: Liability Loss Exposures + ERM + ERM Lawsuits are mainly the result of: 1. Bad behavior (2) 2. Breaking a contract The behavior is commonly Intentional classified as either: (2) Unintentional Negligence or carelessness would unintentional be classified as ____ behavior Examples of intentional behavior: assault, libel, slander Negligence and Legal Liability Negligence and Legal Liability 2 things needed to establish legal 1. There was negligence 2. There was actual damage or liability: loss The failure of a person to exercise What constitutes negligence? the proper degree of care. The burden of proof is on the injured ____ party Under ____ liability, legal liability is established because accidents absolute/strict happen Absolute/strict liability imposes whether anyone was at: fault Absolute/strict liability usually children deals with situations involving: (2) workers compensation Under absolute/strict liability, it's usually ____ to establish injury or easy damage has occurred. The difficult part is to establish: the AMOUNT of damage ____ losses are relatively easy to property calculate It gets tricky to measure damages when dealing with ____ ____ bodily injury situations. When dealing with bodily injuries, Medical expenses it's easy to calculate special Loss of income damages of: (2) But difficult to measure intangible pain and suffering losses like: (2) mental anguish _____ damages cover intangible General losses Damages assessed as a form of Punitive damages punishment: ____ negligence is involved when punitive damages are awarded. Gross Defenses to Liability Defenses to Liability One recognizes the dangers Assumption of Risk by the Injured involved in an activity: Party Plaintiff was partially to blame for Comparative/Contributory what happened: Negligence Res Ipsa Loquitur means: "the thing speaks for itself" Res Ipsa Loquitur is a modification to the law of: negligence Under Res Ipsa Loquitur the ______ is presumed to be defendant negligent. Under Res Ipsa Loquitur the fact injury of an ____ is sometimes enough 1. Normally wouldn't occur unless negligent 3 Requirements of Res Ipsa 2. Defendant exclusively controls the Loquitur: tool/equipment 3. Injured party does not contribute to the loss One person becomes legally liable for the negligent behavior of Vicarious Liability another: Employers are responsible for employees acting within the their: capacity as employees Negligence of two or more parties contributes to the injury or Joint and Several Liability damage: The injured party may recover the entire amount of compensation The injured party may recover the damages by what means? from any negligent party who is able to pay-regardless of the degree of that party's negligence. This is also known as " ______ " "Search for deep pockets" Manufactures of a faulty product that injures someone or damages Product liability property: Product could be negligently ____ made or improperly ____ labeled 1. cost of defending and paying claims for injury 3 Product liability losses: 2. cost of recalling any batches of products suspected of being defective 3. Damage to company name Owner or tenant may be held liable for damages if someone is Premises liability injured: Owner or tenant is also responsible for ____ damages Property resulting from the condition in or arising out of the premises. Someone who comes w/o right and consent onto another's Trespasser property: A person is only obligated to abstain from _______ ______ a intentionally harming trespasser. Unless: they are acting in self-defense A person who comes onto property with knowledge of owner: Licensee A licensee holds no _____ or purpose or benefit _____ to owner The owner must warn the licensee hidden dangers of: A person who has been invited for Social guest/ Invitee some purpose: Example: Customer in store Regarding Social Guests and keep premises safe so no harm property, an owner must: comes Regarding animal liability, exotic animals have _____ liability strict/absolute Some states even have strict dogs liability for ____ Other states have the "________" "One Bite Rule" -If dog never bit before then owner rule for dogs could escape liability. Enterprise Risk Management Enterprise Risk Management ERM manages _____ and seizes risk ______ opportunities ERM takes a very _____ and ______ approach to risk strategic and scientific management. 1. Hazard Risks 2. Financial Risks 4 Quadrants of ERM: 3. Operational Risks 4. Strategic or Business Risks (SWOT) 3 examples of Hazard Risks: Fire, Floods, Lawsuits Prices Volatility (changes in prices) 5 categories of Financial Risks: Liquidity (how quick an asset can be turned into cash) Credit Interest Rates Risks that arise out of business Operational Risk opportunities: 1. Manufacturing products 2. Regulatory issues 3 main areas involved in 3. Employment Operational Risk: practices/Company policies and procedures 1. Supply chain failures 4 risks in Manufacturing Products: 2. Service provider failures 3. System failure 4. Product recall 3 areas of risk involved in 1. Discrimination Employment Practices/Company 2. Turnover Policies and Procedures: 3. Workplace violence 1. Customer Service Issues 2. Public Relations (BP example) 5 areas of risk regarding Strategic or Business Risk (4th quadrant of 3. Competition (Blockbuster example) 4. Ethical Issues (Donald Trump example) ERM): 5. Social Trends (Book store vs Tech store) TRM vs ERM TRM vs ERM __RM is a silo or departmentalized approach. TRM Under TRM, each department is _______ when it comes to independent managing risk. TRM focuses mainly on _____ hazard risks Under TRM, financial risks are handled by: CFO, finance, or accounting Under TRM, not much effort is put into making relative comparisons the cumulative impact on the firm. among various risks to understand: Under ____, risk management is an integrated approach. ERM ERM occurs at _______ level, enterprise instead of individual _______. departments ERM is crucial because risk management activities heavily business decisions impact company-wide: ERM is designed to facilitate/allow ______ and ______ across a comparison and evaluation firm's business structure. ERM allows a firm to ID risks and determine if risks are ________ or correlated independent. The _____ in charge can overrule department functional areas. CRO CRO's tool for managing risk: Risk Map Target Case Study Target Case Study The Target security breach began contractors (Target case study, with one of Target's: article 1) The Target breach and other's like cyber insurance (Target case it have increased the demand for: study, article 2) Along with Targets direct losses of private customer information and net expenses of net income- dropped 16% $18 million, it faced related ____ ______ personnel- CEO resigned losses impacting it's bottom line and _______ losses effecting the company's (Target case study, article 3) decision making process. Article 4 of the Target case study, addressed the issue of ______ personnel loss exposure. *Watch the Pope visit case study *Watch the Pope visit case study video and understand who is video and understand who is involved, what risks they face, and involved, what risks they face, and how they are all working together how they are all working together with ERM. with ERM.


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