ESB Risk Management 2 — Questions and Answers
Question 1: Which of the following is the FIRST step in a formal risk management process?
- Implement risk controls
- Transfer risk to insurers
- Identify and assess potential risks (Correct answer)
- Monitor existing risks
Correct answer: Identify and assess potential risks
The first step in risk management is identifying and assessing potential risks before any controls or mitigation strategies can be applied.
Question 2: A small retailer installs a sprinkler system and fire extinguishers to reduce potential fire damage. This is an example of:
- Risk transfer
- Risk avoidance
- Risk reduction (Correct answer)
- Risk acceptance
Correct answer: Risk reduction
Risk reduction involves taking proactive steps to lower the likelihood or severity of a risk, such as installing safety equipment.
Question 3: What is 'speculative risk' in entrepreneurship?
- Risk that can result in loss, gain, or no change (Correct answer)
- Risk that only results in harm or status quo
- Risk associated exclusively with product liability
- Risk that cannot be insured against
Correct answer: Risk that can result in loss, gain, or no change
Speculative risk has three possible outcomes — gain, loss, or no change — making it inherent to entrepreneurial decision-making.
Question 4: A small business uses a SWOT analysis partly to:
- File annual tax returns
- Identify internal and external risks alongside opportunities (Correct answer)
- Calculate break-even points
- Hire qualified employees
Correct answer: Identify internal and external risks alongside opportunities
A SWOT analysis helps identify Weaknesses and Threats — internal and external risk factors — alongside Strengths and Opportunities.
Question 5: Which type of insurance specifically protects a small business owner if a client claims that professional advice caused them financial harm?
- General liability insurance
- Workers' compensation insurance
- Professional liability (errors & omissions) insurance (Correct answer)
- Property insurance
Correct answer: Professional liability (errors & omissions) insurance
Professional liability insurance (also called E&O) covers claims that a business's professional advice or services caused a client financial loss.
Question 6: An entrepreneur signs a contract requiring a supplier to carry its own liability insurance for delivery accidents. This risk management technique is called:
- Risk retention
- Contractual risk transfer (Correct answer)
- Risk avoidance
- Risk pooling
Correct answer: Contractual risk transfer
Contractual risk transfer shifts risk responsibility to another party through contract terms, such as requiring suppliers to carry their own insurance.
Question 7: What does a risk matrix help a small business owner do?
- Calculate the exact cost of each risk
- Prioritize risks based on likelihood and potential impact (Correct answer)
- Automate insurance claim filing
- Determine employee benefit packages
Correct answer: Prioritize risks based on likelihood and potential impact
A risk matrix plots risks by their probability of occurring against their potential impact, helping prioritize which risks need immediate attention.
ESB Risk Management 2
Which of the following is the FIRST step in a formal risk management process?