Ch 1: Introduction to Risk Management

risk
the uncertainty about outcomes, with the possibility that some outcomes can be negative
uncertainty of outcome, possibility of negative outcome
two elements within the definition of risk
possibility
an outcome or event may or may not occur; does not quantify risk, only verifies that it is present
probability
the likelihood that an outcome or event will occur; quantifies risk
assessing, controlling, financing
three areas in which classifying risk can help
pure risk
a chance of loss or no loss, but no chance of gain
speculative risk
risk that involves a chance of gain, can be desirable
subjective risk
risk that is based on opinion rather than on fact
objective risk
risk that is based on fact rather than on opinion
diversifiable risk
risks that are not correlated and can be managed through diversification or spread of risk
nondiversifiable risk
risks that are correlated
hazard, operational, financial, strategic
4 quadrants of risk
hazard risks
risks traditionally managed by risk management professionals
operational risks
pure risks that fall outside the traditional hazard risk category and could jeopardize service-related or manufacturing-related business functions
financial risks
risks that directly affect an organization’s financial position via changes in revenue, expenses, business valuation, or the cost or availability of capital
strategic risks
risks that are fundamental to an organization’s existence and business plan because they have a current or future effective on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsivess in the industry or changes in demand
expected cost of losses or gains, expenditures on risk management, cost of residual uncertainty
3 financial consequences of risk
risk management
the efforts of individuals or organizations to efficiently and effectively assess, control, and finance risk in order to minimize the adverse effects of losses or missed opportunities
risk management program
a system for planning, organizing, leading, and controlling the resources and activities that an organization needs to protect itself from the adverse effects of accidental losses
risk management process
the method of making, implementing, and monitoring decisions that minimize the adverse effects of risk on an organization
enterprise-wide risk management (ERM)
the term commonly used to describe the broader view of risk management that encompasses all types of risk
loss exposure
any condition or situation that presents a possibility of loss, whether or not an actual loss occurs
asset exposed to loss, cause of loss, financial consequences
3 elements of a loss exposure
hazards
a condition that increases the frequency or severity of a loss
moral, morale, physical, legal
4 classifications of hazards
moral hazard
a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss
morale hazard
a condition of carelessness or indifference that increases the frequency or severity of loss; attitudinal hazard
physical hazard
a tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss
legal hazard
a condition of the legal environment that increases loss frequency or severity
property loss, liability loss, personnel loss, net income loss
4 types of loss exposures
property loss exposure
a condition that presents the possibility that a person or an organization will sustain a loss resulting from damage to property in which that person or organization has a financial interest
tangible property
property that has a physical form
real property
tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land
personal property
all tangible or intangible property that is not real property