Tutorial Question 1
Question 1
a. Explain the historical definition of risk.
b. What is a loss exposure?
c. How does objective risk differ from subjective risk? Question 2
a. Define chance of loss
b. What is the difference between objective probability and subjective probability?
Question 3
a. What is the difference between peril and hazard?
b. Define physical hazard, moral hazard, attitudinal hazard, and legal hazard.
Question 4
a. Explain the difference between pure risk and speculative risk. b. How does diversifiable risk differ from nondiversifiable risk? Question 5
a. Explain the meaning of enterprise risk management (ERM). b. What types of risks are included in enterprise risk management?
c. How are these risks managed in enterprise risk management? Question 6
a. Briefly explain personal risk and commercial risk.
b. What are the major types of personal risks?
c. What are the major types of commercial risks?
Question 7
List the major types of pure risk that are associated with economic insecurity.
Question 8
Describe the major social and economic burdens of risk on society.
Question 9
Explain the difference between a direct loss and an indirect or consequential loss.
Question 10
Identify the major risks faced by business firms.
Question 11
a. Briefly explain each of the following risk-control techniques for managing risk:
1. Avoidance
2. Loss prevention
3. Loss reduction
b. Briefly explain each of the following risk-financing techniques for managing risk:
1. Retention
2. Noninsurance transfers
3. Insurance.
Case Application Question
Michael is a college senior who is majoring in marketing. He owns a high-mileage 2003 Ford that has a current market value of $2500. The current replacement value of his clothes, television, stereo, cell phone, and other personal property in a rented apartment totals $10,000. He uses disposable contact lenses, which cost $200 for a six-month supply. He also has a waterbed in his rented apartment that has leaked in the past. An avid runner, Michael runs five miles daily in nearby public park that has the reputation of being extremely dangerous because of drug dealers, numerous assaults and muggings, and drive-by shootings. Michael’s parents both work to help him pay his tuition.
For each of the following risks or loss exposures, identify an
appropriate risk management technique that could have been used to deal with the exposure. Explain your answer.
a. Physical damage to the 2003 Ford because of a collision with another motorist
b. Liability lawsuit against Michael arising out of the negligent operation of this car
c. Total loss of clothes, television, stereo, and personal property because of a grease fire in the kitchen of his rented apartment
d. Disappearance of one contact lens
e. Waterbed leak that causes property damage to the apartment
f. Physical assault on Michael by gang members who are dealing drugs in the park where he runs
g. Loss of tuition assistance from Michael’s father who is killed by a drunk driver in an auto accident.
Application Question 1
AOL Company is an oil and gas company, operating in Southeast Asia. The management decided to expand its commodity –based business to countries in Asia and Europe. What types of risk may be faced by the company and what are the techniques that can be used to manage these risks? Application Question 2
Several types of risk are present in the American economy. For each of the following, identify the type of risk that is present. Explain your answer.
a. The Department of Homeland Security alerts the nation of a possible attack by terrorists.
b. A house may be severely damaged in a fire.
c. A family head may be totally disabled in a plant explosion.
d. An investor purchases 100 shares of Microsoft stock.
e. A river that periodically overflows may cause substantial property damage to thousands of homes in the floodplain.
f. Home buyers may be faced with higher mortgage payments if the Federal Reserve raises interest rates at its next meeting.
g. A worker on vacation plays the slot machines in a casino. Application Question 3
There are several techniques available for managing risk. For each of the following risks, identify an appropriate technique, or combination of techniques, that would be appropriate for dealing with the risk.
a. A family head may die prematurely because of a heart attack. b. An individual’s home may be totally destroyed in a hurricane. c. A new car may be severely damaged in an auto accident
d. A negligent motorist may be ordered to pay a substantial liability judgment to someone who is injured in an auto accident. e. A surgeon may be sued for medical malpractice.
Application Question 4
Andrew owns a gun shop in a high crime area. The store does not have a camera surveillance system. The high cost of burglary and theft insurance has substantially reduced his profits. A risk management consultant points out that several methods other than insurance can be used to handle the burglary and theft exposure. Identify and explain two noninsurance methods that could be used to deal with the burglary and theft exposure.
Application Question 5
Risk managers use a number of methods for managing risk. For each of the following, what method for handling risk is used? Explain your answer.
a. The decision not to carry earthquake insurance on a firm’s main manufacturing plant.
b. The installation of an automatic sprinkler system in a hotel
c. The decision not to produce a product that might result in a product liability lawsuit
d. Requiring retailers who sell the firm’s product to sign an
agreement releasing the firm from liability if the product injures someone.