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49 Cards in this Set
- Front
- Back
What is the meaning of risk?
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Uncertainty concerning the occurence of a loss.
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What are the two aspects/ types of risk?
O.S. |
Objective Risk and Subjective Risk.
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What is objective risk?
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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. |
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True or False: Subjective risk is concrete and can be proven on paper where as objective risk is not.
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False; Objective risk is CONCRETE. Subjective is an opinion and is not proveable.
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What is subjective risk?
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Defined as uncertainty based on a person's mental condition or state of mind.
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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.
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This type of risk is Subjective Risk.
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Define Chance of Loss
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The Probability that an event will occur.
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What are the two types/ aspects of probability?
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Objective Probability and Subjective Probability
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Define Objective Probability
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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. |
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Define subjective probability
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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. |
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Define peril
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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. |
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Define hazard
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a condition that increases the chance of loss.
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List the four types of hazards
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Physical, Moral, Morale, Legal
Most Monkeys Like Pears |
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Define Physical Hazard
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Physical conditions that increase the chance of loss (icy roads, defective wiring)
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Define Moral Hazard
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Dishonestry or character defects in an individual, that increase the chance of loss (faking accidents, inflating claim amounts)
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Define Morale Hazard
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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. |
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Define Legal hazard
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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; |
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What are the basic categories of risk?
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1) Pure
2) Speculative 3) Fundamental 4) Particular 5) Enterprise PS - FP - E |
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Define pure risk
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Risk in which there are only the possibilities of loss or no loss (earthquake)
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Define speculative risk
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Risk in which both profit or loss are possible (gambling)
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Define fundamental risk
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risk that affects the entire economy or large numbers of persons or groups (hurricane)
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define particular risk
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risk affects only the individual (car theft)
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define enterprise risk
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risk encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk
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examples of fundamental risk
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rapid inflation, cyclical unemployment, and war because large numbers of individuals are affected.
Risk of natural disaster. |
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define strategic risk
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uncertainty regarding the firm's financial goals and objectives
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define operational risk
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results from the firm's business operations
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define financial risk
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refers to the uncertainty of loss because of adverse changes in commodity prices interest rates, foreign exchange rates, and the value of money.
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List the major types of pure risk
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1) personal risks
2) property risks 3) liability risks pers prop liab |
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define personal risks
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risks that directly affect an individual. invovle the possibility of a loss or reduction in income, extra expenses or depletion of financial assets
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List the four major types of personal risks
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risk of premature death
risk of insufficient income during retirement risk of poor health risk of unemployment |
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Define property risks
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the risk of having property damaged or lost from numerous causes.
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What are the two major types of loss associated with the destruction or theft of property?
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Direct and Indirect loss
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Define direct loss
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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. |
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Define indirect loss
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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. |
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Define liability risks
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possibility of being held liable for bodily injury or property damage to someone else
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Is there a maxmimum upper limit with the respect to the amount of the loss?
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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. |
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What are the three major burdens risks place on society?
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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 |
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What are the 5 major methods of handling risk?
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1) Avoidance
2) Loss Control 3) Retention 4) Noninsurance transfers 5) Insurance |
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Define loss control
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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 |
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define loss prevention
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refers to activities to reduce the frequency of losses
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define loss reduction
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refers to activities to reduce the severity of losses
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define retention
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an individual or a business firm retains all or part of a given risk.
May be active or passive retention |
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define active retention
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an individual is consciously aware of the risk and deliberately plans to retain all or part of it.
auto insurance. |
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define passive retention
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certain risks may be unknowingly retained because of ignorance, indifference, or laziness.
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define noninsurance transfers
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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 |
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define transfer of risk by contracts
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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.
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define hedging price risks
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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.
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define incorporation
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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 |
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define insurance
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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. |