Study Guide Risk Management

Study Guide

Risk Management

By

A. J. Cataldo

About the Author

A. J. Cataldo is currently a professor of accounting at West Chester University, in West Chester, Pennsylvania. He holds a B.S. degree in accounting/finance and a master of accounting degree from

the University of Arizona. He earned a Ph.D. from the Virginia Polytechnic Institute and State University. He is a certified public accountant and a certified management accountant. He has worked in public accounting, as a government auditor, controller, and provided expert testimony in business litigation engagements. His publications include three Elsevier Science monographs, and his articles have appeared in Journal of Accountancy, National Tax Journal, Research in Accounting Regulation, Journal of Forensic Accounting,and Accounting Historians Journal,among others. Hehas also published in and served on editorial review boards for Institute of Management Accounting association journals, including

Management Accounting, Strategic Finance,and Management Accounting Quarterly,since January 1990.

All terms mentioned in this text that are known to be trademarks or service marks have been appropriately capitalized. Use of a term in this text should not be regarded as affecting the validity of any trademark or service mark.

Copyright © 2009 by Penn Foster, Inc.

All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton, Pennsylvania 18515.

Printed in the United States of America

INSTRUCTIONS

1

LESSON ASSIGNMENTS

7

LESSON 1: INTRODUCTION TO RISK MANAGEMENT

11

EXAMINATION—LESSON 1

23

LESSON 2: GENERAL THEORY OF

INSURANCE MARKETS

27

EXAMINATION—LESSON 2

51

LESSON 3: LOSS CONTROL AND LEGAL LIABILITY

55

EXAMINATION—LESSON 3

63

LESSON 4: PERSONAL INSURANCE ISSUES

67

EXAMINATION—LESSON 4

79

LESSON 5: EMPLOYEE-EMPLOYER

RELATIONSHIPS

83

GRADED PROJECT

109

EXAMINATION—LESSON 5

115

LESSON 6: BUSINESS RISK MANAGEMENT—

THEORY

119

EXAMINATION—LESSON 6

129

LESSON 7—BUSINESS RISK MANAGEMENT—

TYPES OF CONTRACTS

133

EXAMINATION—LESSON 7

145

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C o n t e n t s

iii

LESSON 8—BUSINESS RISK MANAGEMENT—

ADDITIONAL TOPICS

149

EXAMINATION—LESSON 8

161

SELF-CHECK ANSWERS

165

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iv Contents

INTRODUCTION

Welcome to Risk Management! This course will provide you with insights into how the insurance industry operates. All business decisions involve risk, and while all risks might not be quantified with a high degree of certainty, the objective of your business education is to learn how to minimize the sub-jective component and maximize the objective component of any business decision and the risks associated with it.

While there are quantitative components to risk management, the vast majority of this course requires you to master new terminology. Therefore, you’ll succeed in easily passing this course if you

? Proceed to a new assignment only after you’ve mastered the terminology and concepts from the prior assignment

? Proceed to take the lesson exam only after you’ve mas-tered the terminology and concepts from all assignments and related quizzes contained in that lesson

? Proceed to take the final exam only after you’ve mastered the terminology and concepts from all lessons and related lesson exams

This study guide focuses, primarily, on most of the terms that are in bold type in the body of the text. The study guide will prepare you for the questions in the Self-Checks that follow each assignment, for the lesson exams, and for the final exam. Many chapters and lessons don’t require home-work, so, in these cases, you should focus on mastering new terminology and concepts.

Lesson 4 covers automobile, homeowner’s, and life insurance; Lesson 5 covers employee benefits, retirement plans, workers’ compensation, and Social Security. These seven assignments will contain information likely to better prepare and benefit anyone taking this course, regardless of their field of expert-ise and/or area of professional employment.

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I n s t r u c t i o n s

1

OBJECTIVES

When you complete this course, you’ll be able to

? Discuss different meanings of the term risk, including business risk, personal risk, pure risk, and other types of risk

? Describe major risk management methods and organiza-tion of the risk management function within business

? Explain how minimizing the cost of risk maximizes busi-ness value and the possible conflicts between business and societal objectives

? Describe how pooling of independent loss exposures reduces risk

? Discuss the role of insurer capital and factors that affect insurer capital decisions

? Explain the fundamental legal doctrines underlying insurance contracts

? Discuss the circumstances in which the assignment of legal liability affects safety incentives

? Explain compulsory and no-fault automobile insurance laws and their rationale and effect

? Analyze the impact of catastrophes on property insur-ance and the market’s response to large catastrophes

? Describe the tax benefits associated with life insurance and annuity products

? Analyze the pricing of basic life insurance policies and annuities

? Explain major types of employee benefits and why firms provide them

? Describe the basic history, features, and economic rationale of workers’ compensation laws and liability insurance

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2 Instructions to Students

? Describe Social Security retirement, survivor, and disability and Medicare programs, benefits, and their financing

? Identify major types of property-casualty insurance contracts purchased by businesses and describe the negotiation of commercial insurance programs

? Explain basic derivative contracts (options, forwards, futures, and swaps) commonly used for hedging, and distinctions between insurance and derivatives contracts

? Describe major types of risk typically hedged using derivatives

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