Rmin Chapter 1

Front 1

What is the meaning of risk?

Back 1

Uncertainty concerning the occurence of a loss.

Front 2

What are the two aspects/ types of risk?

O.S.

Back 2

Objective Risk and Subjective Risk.

Front 3

What is objective risk?

Back 3

Defined as the relative variation of actual loss from expected loss.

It can be statistically calculated using a measure of dispersion, such as the standard of deviation.

Front 4

True or False: Subjective risk is concrete and can be proven on paper where as objective risk is not.

Back 4

False; Objective risk is CONCRETE. Subjective is an opinion and is not proveable.

Front 5

What is subjective risk?

Back 5

Defined as uncertainty based on a person's mental condition or state of mind.

Front 6

What type of risk is this - Two persons in the same situation may have different perceptions of risk. This type of risks, if high, often results in conservative behavior.

Back 6

This type of risk is Subjective Risk.

Front 7

Define Chance of Loss

Back 7

The Probability that an event will occur.

Front 8

What are the two types/ aspects of probability?

Back 8

Objective Probability and Subjective Probability

Front 9

Define Objective Probability

Back 9

Refers to the long run relative frequency of an event assuming an infinite number of observations and no change in the underlying conditions.

Can be determined by deductive or inductive reasoning.

Front 10

Define subjective probability

Back 10

The individual's personal estimate of the chance of loss.

A person's perception of the chance of loss may differ from the objective probability.

Front 11

Define peril

Back 11

Defined as the cause of the loss.

It is the damaging force.

In an auto accident, the collision is the peril.

Common perils - fire, lightning, windstorm, hail, tornadoes, earthquakes, theft, and burglarly.

Front 12

Define hazard

Back 12

a condition that increases the chance of loss.

Front 13

List the four types of hazards

Back 13

Physical, Moral, Morale, Legal

Most Monkeys Like Pears

Front 14

Define Physical Hazard

Back 14

Physical conditions that increase the chance of loss (icy roads, defective wiring)

Front 15

Define Moral Hazard

Back 15

Dishonestry or character defects in an individual, that increase the chance of loss (faking accidents, inflating claim amounts)

Front 16

Define Morale Hazard

Back 16

Carelessness or indifference to a loss because of the existence of insurance (leaving keys in an unlocked car).

Laziness. Lethargy. Don't care. Not caring about other's stuff.

Front 17

Define Legal hazard

Back 17

refers to characteristics of the legal system or regulatory environment that increase the chance of loss (large damange awards in liability lawsuits)

EX: adverse jury verdicts or large damage awards in liability lawsuits, statutes that require insurers to include coverage for certain benefits in health insurance plans, such as coverage for alcoholism;

Front 18

What are the basic categories of risk?

Back 18

1) Pure
2) Speculative
3) Fundamental
4) Particular
5) Enterprise

PS - FP - E

Front 19

Define pure risk

Back 19

Risk in which there are only the possibilities of loss or no loss (earthquake)

Front 20

Define speculative risk

Back 20

Risk in which both profit or loss are possible (gambling)

Front 21

Define fundamental risk

Back 21

risk that affects the entire economy or large numbers of persons or groups (hurricane)

Front 22

define particular risk

Back 22

risk affects only the individual (car theft)

Front 23

define enterprise risk

Back 23

risk encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk

Front 24

examples of fundamental risk

Back 24

rapid inflation, cyclical unemployment, and war because large numbers of individuals are affected.

Risk of natural disaster.

Front 25

define strategic risk

Back 25

uncertainty regarding the firm's financial goals and objectives

Front 26

define operational risk

Back 26

results from the firm's business operations

Front 27

define financial risk

Back 27

refers to the uncertainty of loss because of adverse changes in commodity prices interest rates, foreign exchange rates, and the value of money.

Front 28

List the major types of pure risk

Back 28

1) personal risks
2) property risks
3) liability risks

pers
prop
liab

Front 29

define personal risks

Back 29

risks that directly affect an individual. invovle the possibility of a loss or reduction in income, extra expenses or depletion of financial assets

Front 30

List the four major types of personal risks

Back 30

risk of premature death

risk of insufficient income during retirement

risk of poor health

risk of unemployment

Front 31

Define property risks

Back 31

the risk of having property damaged or lost from numerous causes.

Front 32

What are the two major types of loss associated with the destruction or theft of property?

Back 32

Direct and Indirect loss

Front 33

Define direct loss

Back 33

defined as a financial loss that results from the physical damage, destruction, or theft of the property.

EX: If you own a restaurant that is damaged by a fire, the physical damage to the restaurant is known as a direct loss.

Front 34

Define indirect loss

Back 34

a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss.

EX: loss of proifts resulting business closing due to fire damange.

Front 35

Define liability risks

Back 35

possibility of being held liable for bodily injury or property damage to someone else

Front 36

Is there a maxmimum upper limit with the respect to the amount of the loss?

Back 36

No. With liability risks, there is no maxmimum upper limit with the respect to the amount of the loss.

A lien can be placed on your income and financial assets

Defense costs can be enormous.

Front 37

What are the three major burdens risks place on society?

Back 37

1) In the absence of insurance, individuals would have to maintain large emergency funds
2) the risk of a liability lawsuit may discourage innovation, depriving society of certain goods and serrvices
3) Risk causes worry and fear

Front 38

What are the 5 major methods of handling risk?

Back 38

1) Avoidance
2) Loss Control
3) Retention
4) Noninsurance transfers
5) Insurance

Front 39

Define loss control

Back 39

important method for handling risk. loss control consists of certain activities that reduce both the frequency and severity of losses.

Loss control has two main objectives: loss prevention and loss reduction

Front 40

define loss prevention

Back 40

refers to activities to reduce the frequency of losses

Front 41

define loss reduction

Back 41

refers to activities to reduce the severity of losses

Front 42

define retention

Back 42

an individual or a business firm retains all or part of a given risk.

May be active or passive retention

Front 43

define active retention

Back 43

an individual is consciously aware of the risk and deliberately plans to retain all or part of it.

auto insurance.

Front 44

define passive retention

Back 44

certain risks may be unknowingly retained because of ignorance, indifference, or laziness.

Front 45

define noninsurance transfers

Back 45

risk is transferred to a party other than an insurance company. can be transferred by:

1) transfer of risk by contracts
2) hedging price risks
3) incorporation of a business firm

Front 46

define transfer of risk by contracts

Back 46

unwanted risks can be transferred by contracts. Service contract - defective television risk can be transferred to the retailer by purchasing a service contract, making the retailer responsible for all repairs.

Front 47

define hedging price risks

Back 47

hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange.

Front 48

define incorporation

Back 48

if a firm incorporates , personal assets cannot be attached by creditors for payment of the firm's debts.

By incorporation, the liability of the stockholders is limited, and the risk of the firm having insufficient assets to pay business debts is shifted to the creditors

Front 49

define insurance

Back 49

Risk transfer is used because a pure risk is transferred to the insurer. Pooling technique is used to spread the losses of the few over the netire group so that average loss is substituted for actual loss.

Law of large numbers predicts future loss experience with greater accuracy.