FINA 4358 MODULE 1 QUIZ

Commercial Property Insurance

Homework Questions

Module 1

1. One of the steps in the “risk management process” is ‘analyzing exposures. What does this step

entail?

The ‘analyzing exposures’ step in the “risk management process” entails estimating the

significance of possible losses identified in the ‘identifying loss exposure’ step. There are four

dimensions of analyzing exposures:

- Loss frequency: number of losses within a time period

- Loss severity: the monetary value of a loss during a specific event

- Total dollar losses: total dollar amount of losses for all events within a time frame

- Timing: when losses are incurred and when loss payments are made

Rank exposures. Risk is a constant issue.

2. One of the “Risk Management Techniques is “retention”. What does this step refer to?

The “retention” technique of the “Risk Management Techniques” refers to creating and

maintaining funds from within the organization to pay for losses. It is intended for the

firm to be financially ready to take care of a loss that may occur. Basically self-insurance.

Generating funds from within the organization to pay for possible losses. Deciding to

pay for the loss yourself (Self-insure).

3. Explain the major difficulty in using the Balance Sheet as a source for insurable property values.

The major difficulty of using the Balance Sheet as a source for information for insurable

property value is that assets and liabilities are recorded at Historical Cost and companies

use their judgement and estimates to determine many reported items. Furthermore,

when using the balance sheet, the net income loss exposure cannot be recorded.

Balance sheet value reflects depreciation - nothing to do with the amount of insurance

you need to buy. Market value is what item can be sold for.

4. Explain the difference between “loss prevention” and “loss control”.

Loss prevention means reducing the likelihood of a particular loss occurring. On the

other hand, loss control means reducing the severity of a particular loss. The difference

is that loss prevention focuses on avoiding the loss and loss control focuses on limiting

loss after the loss has occurred.

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