Essay question (course work): (15 marks)

John is planning to establish a fitness center in central. He is very concerned about the safety of the center because the compensation to customers if getting injured could be tremendous. After checking, he finds insurance cost on relevant risk is quite high. Suggest five ways through which the risk can be prevented or reduced.

Ans:

The five ways are:

a) People: the trainer of the fitness center should be qualified and have received good training especially on how to operate the equipment safely

b) Equipment: the equipment should be well maintained, having checked frequently and receiving immediate repair once any defect is discovered

c) Procedure: detailed and comprehensive guidelines and instructions should be issued to the trainers as well as customers, adequate briefing and training should be conducted before allowing free usage

d) Method: only well-tried and commonly used training methods will be taught to the clients

e) Environment: the place should be kept safe e.g. no wet floor, the layout of equipment should be spacious enough to avoid hazards

(3 marks each, total = 15 marks)

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Risk Management Homework (Lessons 3 to 5)

A. Multiple Choice (10 marks)

1. Which of the following is NOT the benefit of applying risk reduction strategy?

a) Reduce chance of having loss b) Lower insurance costs c) Promote safety culture d) Eliminate all possible risks

Ans: d

2. Which of the following is NOT the problem of applying risk assumption strategy?

a) Could be disastrous to the business if catastrophic loss occurs b) Great pressure on risk reduction measures

c) Relationship with insurance company turns bad

d) Management would be anxious about the possible loss Ans: c

3. Which of the followings is the most favorable condition for applying the self-insurance strategy?

a) The firm is very large and have good financial support b) The firm has good estimate about the loss

c) The firm is facing a lot of risks

d) The firm have an effective risk reduction strategy Ans: a

4. Which of the following is NOT one of the steps in risk management process?

a) Identifying the risks b) Analysis of the risks

c) Developing risk management strategies to deal with the identified risks d) Evaluating which risk is speculative leading to gains for the company

Ans: d

5. Which of the following is not the benefit of taking Insurance to shift risk:

a) Loss will be paid by insurer

b) Less pressure on prevention and reduction measures c) No need to be anxious about the possible loss

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d) Guarantee that the firm will not fail in its business Ans: d

6. Self-insurance belongs to which of the following risk management strategies:

a) Risk avoidance b) Risk reduction c) Risk assumption d) Risk transfer

Ans: c

7. Those risks that have not been identified and taken care of in the risk management process will most likely be settled by which of the following risk management strategies?

a) Risk avoidance b) Risk reduction c) Risk transfer d) Risk assumption

Ans: d

8. In which of the following situations would risk avoidance strategy be regarded as a better choice to business:

a) When the company is facing non-insurable risk

b) When the risk is remote but would lead to a huge loss

c) When the chance of loss is quite certain and the amount of it is tremendous d) When the company does not want to pay for the insurance premium

Ans: c

9. Which of the following statement is correct?

a) Risk reduction strategy can be used alone since it can prevent all possible risks

b) Risk avoidance is the best strategy since all risks associated with business can then be avoided

c) Risk assumption strategy would cover all losses which have not been fully settled by other risk management strategies

d) Risk transfer strategy can transfer all possible risk to other party Ans: c

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10. A production firm outsources its delivery function to another company is a _______

strategy

a) Risk avoidance b) Risk reduction c) Risk transfer d) Risk assumption

Ans: c

(1 mark each, total = 10 marks)

B. Short questions (homework): (15 marks)

1. Briefly describe the steps involved in the risk management process. (5 marks) Ans:

The steps are:

- Risk identification - Risk analysis

- Development and evaluation of alternative risk management strategies - Selection and implementation of the strategies

- Evaluation of the effectiveness of the strategies used

2. Suggest two ways by which an online retailer can adopt to transfer the risk of

having inventory being stolen. (5 marks)

Ans:

Firstly: don’t keep any stock, by asking the producer to ship the product to the customer directly, thus the risk of theft of inventory lied on the producer Secondly: buy insurance for stolen inventory

3. Explain what risk management strategies would be more appropriate for managing the loss from shoplifting in a stationery shop. (5 marks) Ans:

In such case, risk avoidance is not quite feasible since the shop does not have a control on when will the theft be happened and when will its business be stopped. As for risk transfer, since the loss amount incurred in shoplifting is usually insignificant, insurance company will find it unworthy to accept after taking into consideration its administrative costs involved. In view of such, risk reduction strategies e.g. installing anti-theft device such as CCTV can be applied to reduce the chance of theft from happening. And the remaining loss can be picked up by risk assumption strategy.

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