SOLUTION MANUAL FOR RISK MANAGEMENT AND INSURANCE 12TH EDITION JAMES TRIESCHMANN SANDRA GUSTAVSON SANDRA GUSTAVSON, ROBERT HOYT SANDRA GUSTAVSON, ROBERT HOYT,DAVID SOMMER

SOLUTION MANUAL FOR RISK MANAGEMENT AND INSURANCE 12TH EDITION JAMES TRIESCHMANN SANDRA GUSTAVSON SANDRA GUSTAVSON, ROBERT HOYT SANDRA GUSTAVSON, ROBERT HOYT,DAVID SOMMER
ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION
1. Risk can be defined as uncertainty as to loss. Risk can create an economic burden by requiring
reserve funds to pay for contingent losses and price increases of some goods and services. Risk
may deprive society of some goods and services that are determined to involve too much risk to
justify their production.
2. a. Pure risk involves uncertainty as to whether loss will occur. It does not involve a possibility
of gain. Speculative risk involves uncertainty about an event that could produce either a
profit or loss.
b. Static risks are those that would exist in an unchanging society that is in stable equilibrium.
Dynamic risks are caused by societal changes.
c. Subjective risks arise from psychological uncertainty that is based on an individual’s mental
attitude or state of mind. Objective risk is more precisely observable and measurable.
3. Windstorm, flood, and other natural disasters are examples of risks that are both pure and static.
4. A peril is a specific contingency that may cause loss. A hazard is a condition that introduces or
increases the chance of loss from the existence of a given peril. Examples of perils include fire,
windstorm, collision, war, etc. Examples of hazards include oily rags, icy roads, a dishonest
employee, a careless driver, etc.
5. a Morale
b. Moral
c. Morale
d. Moral
e. Physical
6. Risk management is the process used to systematically manage exposures to pure risk. The four
steps are: (1) identify risks, (2) evaluate risks, (3) select risk management techniques, and (4)
implement and review decisions. Traditionally, risk management has dealt primarily with pure
risks. Enterprise risk management considers all of an entity’s risks together, both pure and
speculative.
7. As a loss becomes more and more certain to happen, there is less and less uncertainty that it will
not happen. If a point is finally reached when an event is certain to occur, then there is no risk at
all.
8. Company ABC: (70 - 60) / 65 = 15 percent
Company XYZ: (80 - 50) / 65 = 46 percent
9. a. Collision or oil spill
b. Flood
c. Fire or explosion
d. Death
e. Theft or vandalism
10. Answers will vary. It can be pointed out that the mathematical value of the game is (0.90 ×
$1,000) + (0.10 × $100,000) = $10,900, and a ―gambler‖ should choose the game. Most
students will probably choose the cash. Since most persons are risk-averting and will take the
certain amount, ventures like the game, similar to real-life investments bearing considerable risk
and low probabilities for hitting it big (e.g., oil drilling), are not widely sought. Hence, the
capital cost of such ventures must be high in order to overcome risk. This high cost is the
economic burden imposed by risk because it will produce higher consumer prices for the final
product.
iv
11. A has the greater risk. B has the greater probability of loss. Using the objective risk formula
(Probable Variation of Loss / Probable Losses), we get 3 / 2 = 150% for A and 12 / 30 = 40%
for B. The probable loss is 2 / 100 = 2% for A and 30 / 1,000 = 3% for B.
12. This question opens an opportunity to discuss subjective risk and its effect on economic or buyer
behavior. Information and explanation is a major industry today, and much of its effort is
designed to smooth the course of commerce 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 come 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 becomes 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 are subject to wide variation and are contingent on several factors both within and
outside of the company’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 outcome 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.)

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