Distinguish between pure risk and speculative risk. List and explain in detail t
ID: 2774110 • Letter: D
Question
Distinguish between pure risk and speculative risk. List and explain in detail the three kinds of pure risk.
Explain the concept of Enterprise Risk Management. How does it differ with the holistic risk management approach? Why did the Harvard Business Review consider it a “game changer” as it applied to strategic planning?
Explain the following financial risks: interest rate risk, market risk, credit risk, and currency risk. How would a global insurance company, for example John Hancock, possibly manage each one of these risks; provide current assumptions and figures in your answer.
You are a claims specialist for YYZ Insurance Company and your policyholder has purchased a trampoline to be placed in their backyard. They tell the neighbor’s kids they cannot use the trampoline, but while the policyholder was on vacation one of the neighbor’s kids jumped on the trampoline and fell, breaking his arm. Who is negligent? Include in your answer a review of the four elements that prove negligence.
In past few years, a number of high-profile retail businesses (e.g., Target, Home Depot) have been subject to personal information hacking. Explain the application of e-commerce risk on these companies and how they can manage the risk. What level of recourse does the patron have against the company (if any)?
Explain a CGL policy. Include the different parts of the policy and also explain how it’s different from a BPP policy.
Explanation / Answer
1) Pure risk a situation where there is a chance of either loss or no loss, but no chance of gain. It is also called as absolute risk. Pure risk is related to events that are beyond the risk taker's control and therefore, a person cannot consciously take on pure risk. It can be insured. Examples are risk of becoming disabled as a result of illness or injury, building will burn down or it will not, insuring an automobile etc.
Speculative risk is a category of risk that when undertaken, results in an uncertain degree of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances. It can not be insured. Example is trading in stock market may result in making either profit or loss
2) Enterprise risk management is a process of planning, organizing, controlling the activities of an organization in order to minimize the effects of risk on an organization's capital and earnings.
As per holistic approach to risk management, ERM is an emerging model at companies and organizations where the management of risks is integrated and coordinated across the organization as a whole.
Deployment of ERM in Strategic planning maximises value when setting goals, finds an optimal balance between performance goals and targets to related risks. Therefore Harvard Business Review considers it as " Game Changer".
3) Interest Rate Risk - It is the risk that arises for bond owners from fluctuating interest rates. In this risk investment's value changes due to change in absolute level of interest rates.
Market Risk - Market risk is the risk that the value of an investment will decrease due to moves in market factors.
Credit Risk - Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.
Currency Risk - It is the potential risk of loss from fluctuating foreign exchange rates when an investor has exposure to foreign currency or in foreign currency traded investments.
4) Negligent is a tort involving failure to use a degree of care considered reasonable under a given set of circumstances. Acts of either omission or commission or both may constitute negligence. In the given case, nobody is negligent.
The four elements of negligence are a duty owned to a plantiff, a breach of that duty by the defendant, proximate cause, and an injury or damage suffered by the plantiff. In the given case, policyholder of YYZ insurance co. owned a trampoline. While going on vacation, he asked neighbor's kids not to jump on trampoline. But they jumped and broke their arm. But the policyholder did not have any damage to trampoline. Therefore, this is not a proximate cause. So this is not an act of negligence.
6) CGL ie. commercial general liability policy is a standard insurance policy issued to business organizations to protect them against liability claims for bodily injury and property damage arising out of premises, operations, products and personal injury liability.
Different parts of CGL policy -
Part A - It pays claims if the insured business is found legally responsible for causing accidental bodily injury or property damage.
Part B - It pays claims of the insured business if it is found legally responsible for causing personal injury or advertising injury.
Part C - It pays medical expenses to individuals injured on the premises of the business within three years of the accident, whether or not the business is found legally liable.
BPP ie. Building and Personal Property policy is an insurance policy which business owner purchases it for providing coverage for most damage to its office or any of the property contained in it.