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4.7 Review and Practice

  1. What are the adverse consequences of risk? Give examples of each.
  2. What is a common process of risk management for property exposure of a firm?
  3. How was the traditional process of risk management expanded?
  4. The liability of those who own a corporation is limited to their investment, while proprietors and general partners have unlimited liability for the obligations of their business. Explain what relevance this has for risk management.
  5. What are the three objectives of risk mapping? Explain one way a chief risk officer would use a risk map model.
  6. Define the terms loss prevention and loss reduction. Provide examples of each.
  7. What are the types of risks that are included in an enterprise risk analysis?
  8. What has helped to expand risk management into enterprise risk management?

  9. Following is the loss data for slip-and-fall shoppers’ medical claims of the fashion designer LOLA for the years 2004–2008.

    1. Calculate the severity and frequency of the losses.
    2. Forecast the severity and frequency for next year using the appendix to this chapter.

    3. What would be the risk management solution if Lola’s results are above the median of severity and frequency for the industry of the geographical location?

      Year Number of Slip-and-Fall Claims Slip-and-Fall Losses
      2004 700 $2,650,000
      2005 1,000 $6,000,000
      2006 700 $7,000,000
      2007 900 $12,300,000
      2008 1,400 $10,500,000

  10. Brooks Trucking, which provides trucking services over a twelve-state area from its home base in Cincinnati, has never had a risk management program. Shawana Lee, Brooks Trucking’s financial vice-president, has a philosophy that “lightning can’t strike twice in the same place.” Because of this, she does not believe in trying to practice loss prevention or loss reduction.

    1. If you were appointed its risk manager, how would you identify the pure-risk exposures facing Brooks?
    2. Do you agree or disagree with Shawana? Why?

  11. Devin Davis is an independent oil driller in Oklahoma. He feels that the most important risk he has is small property damages to his drilling rig, because he constantly has small, minor damage to the rig while it is being operated or taken to new locations.

    1. Do you agree or disagree with Devin?
    2. Which is more important, frequency of loss or severity of loss? Explain.
  12. Rinaldo’s is a high-end jeweler with one retail location on Fifth Avenue in New York City. The majority of sales are sophisticated pieces that sell for $5,000 or more and are Rinaldo’s own artistic creations using precious metals and stones. The raw materials are purchased primarily in Africa (gold, platinum, and diamonds) and South America (silver). Owing to a large amount of international marketing efforts, Internet and catalog sales represent over 45 percent of the total $300 million in annual sales revenue. To accommodate his customers, Rinaldo will accept both the U.S. dollar and other foreign currencies as a form of payment. Acting as an enterprise risk manager consultant, create a risk map model to identify Rinaldo’s risks across the four basic categories of business/strategic risk, operational risk, financial risk, and hazard risk.