Risk Management Exercise Chapter 1

3)
a) What is the difference between peril and hazard?
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A peril is a situation where a person can possibly be exposed to harm or loss,

hence described in simple words as a danger. Hazard is an action or object that is
most likely to place a person in peril/danger.

b) Define physical, mental and legal hazards.

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Physical hazards are hazards that can cause severe bodily damages. Injuries
resultant of particular dangerous activities, such as broken arms, cuts, or even
chocking are measured as physical hazards.

Mental hazards can be found under violence and abuse. A person being abused or
facing violence and stress is most likely to have a mental breakdown. This will
impend his/her work and growth and must be considered with great caution.

Legal hazard is the act of law imposed upon the already present hazard. An
example would be, a child chocked on a toy. The toy manufacturer faces legal
charges and is found by the court to be guilty and must pay a maximum penalty.

4)
a) Explain difference between pure risk and speculative risk.

The difference between pure risk and speculative risk is the outcome of each type
of risk. Pure risk is a term used when a situation only has one result to the
investor, which is loss which takes place due to uncontrollable circumstances.
Pure risk cannot be in anyway beneficial towards the investor. Speculative is the
opposite of pure risk, whereby there investor can foresee the impact of his/her
decision and is able to determine the possibility of loss or gain from the
investment.

b) How does fundamental risk differ from particular risk?

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Fundamental risk and particular risk differ in the sense that each poses a different
type of threat. Fundamental risk is usually tied in with natural disasters, such as
earthquakes and floods, tornados. Fundamental risk is also present when inflation
and unemployment is rampant.

Particular risk however is a risk associated with man-made exposure to risk, such
as a break-in and robbery, or a fire.

5)
a) Explain the meaning of enterprise risk.
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Enterprise risk refers to risk found within the structure of a company and its many
departments. Its a risk associated with the loss of revenue as well as taking into
account factors of fundamental risk and particular risk (e.g.; facing threats such as
floods and earthquakes as well as hackers and organized fraudulent deals) which
can cause shareholders to loss.
b) What is financial risk?

Financial risk talks about the possibility of investors losing their initial funds due
to lack of governance in the business or external reasons such as a defaulting in
bonds by the government or banks, resulting in a loss for the business.

6)
a) What is enterprise risk management?
-

Refers to the process of preparing and leading an organization/business through

success while mitigating the risk involved. In order to do so, strict control over the
businesses activities and funds are undertaken and monitored.

b) How enterprise risk management differs from traditional risk

management?
-

The difference between ERM and traditional risk management is the scope of risk
mitigation or scope of risk covered. Traditional risk management covers physical,
mental and legal hazards, the common three hazards face in an organization.
Enterprise risk management however moves to enhance risk management and also
include and analyse and find a solution to potential risk that includes fundamental
risk and particular risk as well taking into account the financial risk. ERM also
focuses its energy on producing strategies that take into account all factors of risk
that the company is exposed to and introduce a plan to mitigate the risk area.

Extra Question
Discuss briefly the benefits of insurance to society and discuss in detail at least one of
the benefits.
Insurance works as a safety net for many individuals, acting as a mitigation to the
uncertainty of soon to be events. One such way that society has benefitted from the
subscription of insurance is the ability to hedge unnecessary loss. Speaking in frank terms, an
individual can purchase a home insurance that covers losses in case of a fire destroying the
home, or even the passing of a family member. The insurance company will reimburse, or
award the individuals under the policy with a proper repayment as accorded in the insurance
policy taken by the holder.

Risk Management Exercise Chapter 2

Page 76 question:
5)
A. Explain the meaning of risk control
B. Explain the following risk control techniques:
1. Avoidance
2. Loss prevention
3. Loss reduction
Answer:
a) Risk Control are important measures taken by the firm in order to identify and
mitigate impeding hazards that may cause loss to the business.
b) Risk Control Techniques
I.

Avoidance refers to not performing actions that may lead to

uncontrollable/unrecoverable hazards. Risk avoidance first aims to eliminate
the risk involved in certain activities, failing that, the business will look for
alternative activities with the same results that pose a lower risk. If at all
necessary, the firm will forgo the activity if the risk is too high.

II.

Loss prevention are actions that act as a barrier towards risk. These actions
either block of the risk as a whole or prevents the risk from affecting the firm
to some extent. For example: grocery stores have scanners at the exits of the
store in order to ensure that people leaving without paying will be caught.

III.

Loss reduction. There are times when firms have no choice but to be exposed
to certain risk. Loss reduction aims to make the risk more manageable and
reduce its severity and effects on the business. An example would be the
firewalls and sprinkler system installed in most buildings, as when a fire
occurs, these systems will act to reduce the total damage.

6)
A. Explain the meaning of risk financing
B. explain the following risk-financing techniques
1. retention
2. noninsurance transfers
3. insurance
Answer:
a) Risk Financing refers to the funds allocated in order to combat/offset impending risk.
These funds are used to manage risk that may cause the business to destabilize, in the
senses that the risk forces the company to reduce its production or forces the business
to retrench its employees or the sudden malfunction of key equipment and machinery.
Risk financing acts as a safety net to support and balance these risk. Risk financing is
either done internally, by which firms set aside a sum of funds specifically for
combating risk, or through the purchases of insurance. Typically firms rely on both
these techniques.
b) Risk Financing techniques
I.

Retention refers to the firm paying for the losses caused by the risk from their
own pockets. The firm can decide if they want to bear the full cost or only
partially pay for the losses incurred. The balance of the cost can be covered
with:

II.

Non-Insurance Transfers: is a way to fund for paying risk without going to an

insurance firm. These can be done through transferring the responsibility
entitled with the risk to another business by paying them a premium. Normally
bigger businesses act as insurer from smaller businesses. Can also be done
through banks and by hedging through speculating on currency to cover the
expenses. But speculating currency is more of a hit and miss at most times.

III.

Insurance refers to transferring all risk to one particular firm that will cover
the cost of the risk. The insurance company is used to hedge against uncertain
loss. The insurance policy is issues to our business by the company selling
insurance and we, who buy the insurance is forth known as the policyholder
and are charged a premium for the policy coverage. Once this is done, as per
the policy, risk faced by the firm will be diverted to the insurance company
who will bear the further cost.

Page 77 question
8)
A. define a captive insurer
B. Explain the advantage of a captive insurer in a risk management program.
Answer:
a. Captive insurer is a derivative of its parent company. Businesses can open up
their own insurance company to represent and take care of their sole interest.
Companies are no longer at the mercy of third party insurance companies who
charge a premium for certain policies, and gain a deeper control on the
financing and risk mitigation processes taken by their derivative insurance
company (captive insurer)
b. Captive Insurer benefits its parent company in ways that third party insurance
companies never will do. The most important advantage is that the insurance
coverage is tailored specifically to the parent companys needs. There is no
use of a universal policy shared between hundreds of companies as practiced
with third party insurers. There is also a stronger grip on the way claims are
handled as well as being much cheaper compare to the premiums paid to third
party insurance companies. A captive insurer is paid only for the insurance
policy. The policy payment made by the parent company to its captive insurer
will be used to fund necessary investments and the returns on those
investments offset the losses the parent company faces.

Risk Management Exercise 3:- page 265 question 3

3.
a. Explain the requirement for reinstating a lapsed life insurance policy.
A lapsed life insurance policy occurs when the premium has not been paid up till the
grace period, and also taking into account the premium loan provision is not in effect,
meaning that, whatever returns made from the insurance will be used to cover the cost of the
premium until such funds are depleted.
To reinstate a lapsed policy, the policy holder must provide evidence of insurability,
as well as settle all overdue payments of premiums, including its interest, up till the current
date. There is also a clause stating that the policy must not surrendered for its cash value in
order for it to be eligible to go through the reinstatement process.
Policy holders must note however that reinstatement of policies must occur within a
given period, from the time it lapse. Typically 3 to 5 years from the date of lapse is allowed,
however this must be confirmed with the insurance company.

b. What are the advantages and disadvantages of reinstating a lapsed life insurance
policy?
First and foremost, since the policy was issued at an earlier date, the premium paid by
the policy holder will be lower as compared to newly introduced policies that come at steeper
premiums. The policyholder also safes valuable finance when they reinstate a lapsed life
insurance policy instead of opening a new one as they are able to safe the initial setup cost
and expenses incurred.
With a reinstated policy, there is also the chance of reaping ripe fruit as dividends are
usually higher under reinstated policies as compared to a newer policy. Also with a newer
policy, the holder will have to wait until the third year before there will be any returns.
As with opening new life insurance policies, owners are face with a 2 year
incontestable period, whereby the action of grievously being harmed or committing suicide
will not be compensated by the insurer until the period of the 2 years is over. However by
reinstating a previously lapsed insurance policy, owners need not repeat the 2 year
incontestable period and are entitled to full insurance claims for any harm, or suicide

attempts, instead of just receiving back the premium, which is the case of purchasing a new
insurance policy.
What I considers a most important value to a reinstated insurance policy is the fact
that the statements contained within the agreement cannot be revised as per the insurers like.
Meaning any new policies that contain revision of policies will not affect the reinstated policy