【正文】 y, and much of its effort is designed to smooth the course of merce by reducing perceived risk in the minds of customers. Information reduces perceived risk by making it easier for the buyer to understand the product and the ways in which the product will solve problems for the buyer. The purpose, of course, is to make it easier for the buyer to e to an intelligent buying decision. 13. Risk is defined as uncertainty as to loss, and variation is a measure of uncertainty. Expected annual loss is not a measure of uncertainty. There is a higher degree of risk when there is a lower probability of occurrence because as a loss bees more certain to occur there is less uncertainty that it will not occur. Risk would totally disappear only when the probability of occurrence is 0% and 100%. 14. Property losses would be easiest to estimate because the value of the property concerned can help in estimating the maximum possible loss. Liability risks would be difficult to estimate because they Chapter 2: Risk Identification and Evaluation 3 are subject to wide variation and are contingent on several factors both within and outside of the pany’s direct control. Personal risks are also difficult to estimate because evaluation involves such problems as placing a value on human life or health, which can be a very difficult undertaking. SUPPLEMENTARY QUESTIONS 1. What is involved in an entity’s cost of risk? An entity’s cost of risk is the sum of its (1) outlays to reduce risks, (2) opportunity cost of activities foregone due to risk considerations, (3) expenses of strategies to finance potential losses, and (4) the cost of unreimbursed losses. 2. What words, if any, should be substituted for risk in the following statements to make them more accurate? a. When children play with fire in a dry forest, a serious risk is present. b. An icy highway is a risk factor in safe driving. c. To underwrite this risk is dangerous. d. Flood is a risk that we will not retain. e. You don’t have a large enough group of people to enable us to reduce the risk sufficiently to handle this on a group basis. a. hazard b. hazardous c. exposure unit d. peril e. Risk is used properly since the statement refers to uncertainty. The statement might be improved, however, by using degree of risk. 3. What type of risk is involved in betting on a sports game? How would your answer change if the game had already been played and you knew the results of the game before the bet? Speculative risk is involved in betting. If the oute was already known before the bet, then there would be no risk involved. (An exception would be the personal risk involved with the chance of the person finding out that you had prior knowledge.) CHAPTER 2 Risk Identification and Evaluation RISK IDENTIFICATION Loss Exposure Checklists Financial Statement Analysis Flowcharts Contract Analysis OnSite Inspections Statistical Analysis of Past Losses RISK EVALUATION Risk Mapping or Profiling Chapter 2: Risk Identification and Evaluation 4 Statistical Concepts Probability Measures of Central Tendency or Location Measures of Variation Loss Distributions Used in Risk Management The Binomial Distribution The Normal Distribution The Poisson Distribution Integrated Risk Measures ACCURACY OF PREDICTIONS Law of Large Numbers Number of Exposure Units Required KEY TERMS AND CONCEPTS Binomial formula Coefficient of variation Continuous Contractual liability Discrete Empirical probability distribution Expected value Financial statement analysis Flowchart Independent Law of large numbers Loss exposure Loss exposure checklist Maximum possible loss Maximum probable loss Mean Measures of central tendency Median Mode Normal distribution Poisson distribution Probability Probability distribution Random Riskadjusted return on capital (RAROC) Risk management information system (RMIS) Risk mapping Risk profiling Standard deviation Theoretical probability distribution Value at risk (VAR) Variance ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. One method uses loss exposure checklists that enumerate various specific sources of loss. Another is the financial statement method that involves analyzing each item on a firm’s ine statement and balance sheet regarding risks that may be present. A third method uses flowcharts to map out the physical flow of goods. Flowcharts can be analyzed with respect to the types of risks that may affect goods at each point. 2. The important elements are the frequency and severity of an occurrence, the maximum probable loss, and the maximum possible loss. Chapter 3: Property and Liability Loss Exposures 5 3. A risk manager can use the information from a distribution to approximate the actual experience. This information is useful for monitoring past losses and predicting future losses. 4. The first peril produces an expected annual loss of $20,000 ( $1,000,000). The other peril produces an expected annual loss of $20,000 (20 $1,000). 5. The mean is [(3+4+3+3+1+0+2+2+3+3) / 10]. The median is 3 (rearrange from 0 to 4 like this: 0, 1, 2, 2, 3, 3, 3, 3, 3, 4 and take the value between the fifth and sixth values, which are both 3s). The mode is 3, since it shows up the most times. The variance calculation is: Losses Mean Loss Deviation from Mean Squared Deviation 0 1 2 2 3 3 3 3 3 4 Total 24 Total Variance = / 10 = Standard Deviation = ? = Coefficient of Variation = / = % 6. MDC Corporation’s probable range of los