RMIN 4000: Test 1
63 Cards in this Set
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Risk
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Uncertainty concerning the occurrence of a loss: the possibility of an adverse deviation from a desired outcome that is expected or hoped for.
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Loss Exposure ex: plant that could be damaged by flood/earthquake
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Any situation or circumstances in which a loss is possible, regardless of whether a loss occurs
example?
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objective vs. subjective pure vs. speculative diversifiable vs. nondiversifiable
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3 ways to categorize risk
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objective risk
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the relative variation of action loss from expected loss
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dispersion; standard deviation
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objective risk can be statistically calculated using a measure of _______, such as the _______ ________
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flipping a coin; 50% is expected but there will be a variance
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Example of objective risk
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Law of Large Numbers
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the more often we do something, the more likely your actual results will approach you expected results
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Subjective Risk
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uncertainty based on a person's mental condition or state of mind
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conservative; less conservative
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high subjective risk results in ___________ behavior, while low subjective risk results in __________ behavior
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different; drunk driving example from book
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2 persons in the same situation can have __________ perceptions of risk
example?
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indifferent; is
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Risk neutral/tolerant people are _________towards risk
value of risky situation ___ the expected loss
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avoid; expected loss
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risk averse people prefer to _____ risk
willing to pay more than _______ ______ to avoid situation
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prefer; expected return
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risk seeker/takers ______ risk.
would pay more than _______ ______ to engage in risk
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chance of loss
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probability that an event will occur
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objective probability; ex: rolling a die
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the LT relative frequency of an event assuming and infinite number of observations and no change in the underlying conditions
example?
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large
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when objective probability is applied to the chance of a loss occuring there must be a ____ number of possibly events
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(number of losses expected/ total number exposed)
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equation of probability of loss
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subjective probability: ex: may feel luckier buying lottery ticket on birthday, gambling etc.
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the individual's personal estimate of the chance of loss
example?
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50/50
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what is the riskiest percentage?
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peril ex: collision in car wreck, fire when house burns down
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the actual cause of loss
example?
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hazard
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a condition that increases the chance of loss
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physical, moral, morale (attitudinal) and legal
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4 types of hazards
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physical hazard ex: icy roads, defective wiring
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physical conditions that increase the chance of loss
example
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moral hazard ex: insurance fraud, burning down own house to collect
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dishonesty or character defects in an individual, that increase the chance of loss
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morale hazard ex: leaving keys in unlocked car, leaving door unlocked
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carelessness or indifference to a loss, which increases the frequency of severity of a loss
example
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legal hazard ex: large damage rewards in liability lawsuits
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characteristics of the legal system or regulatory environment that increase the chance of loss
example
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pure risk ex: natural disasters, car wreck, premature death
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risk in which there are only the possibilities of loss or no loss
examples
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speculative risk ex: gambling, business venture, investments
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risk in which both profit or loss are possible
examples
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speculative; pure
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society can benefit from ___________ risk but not usually from _____ risk
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diversifiable risk ex: robberies, fires
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risk that affects only individuals or small groups
examples
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nonsystematic; particular
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diversifiable risk can also be called _____________ or ____________ risk
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nondiversifiable risk ex: inflation, wars, natural disasters
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risk that affects the entire economy or large number of persons or groups within the economy
examples
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systematic; fundamental
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nondiversifiable risk can also be called ____________ or __________ risk
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government ex: worker's comp, Federal Flood Insurance Program
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____________ assistance may be necessary to insure nondiversifiable risk
examples
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traditional
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__________ risk management focuses on pure risk
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enterprise; pure, speculative, strategic, operational, financial risks
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___________ risk management combines into a single unified treatment program all major risks faced by firm, such as (5 types)
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integrated; pure; speculative
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__________ risk management focuses on 2 or more risks facing a firm, usually ______ and ________
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personal
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risks involving the possibility of a loss or reduction in income, extra expenses or depletion of financial assets: directly affect an individual
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premature death of family head insufficient income during retirement, poor health, involuntary unemployment
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4 types of personal risks
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property; physical damage to home and personal property from fire, tornado etc.
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risks involving the possibility of losses associated with the destruction or theft of property
examples
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direct loss
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financial loss the results from the physical damage, destruction, or theft of the property, such as fire damage to home
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indirect loss
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loss that results indirectly from the occurrence of a direct physical damage or theft loss such as the additional living expenses after a fire to home
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liability risk
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risks involve the possibility of being held liable for bodily injury or property damage to someone else
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maximum lien defense
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liability risk has no _____ upper limit with respect of amount of the loss
a ____can be placed on your income and financial assets ______ costs can be enormous (attorney etc.)
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commercial risks
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a variety of risks that firm faces that can have serious financial consequences if loss occurs
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property, liability, loss of business income, and other (exposures)
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types of commercial risks- think cruise ship example
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intangible; tangible
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__________ losses can be greater than ________ losses for some
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1. large emergency funds 2. may discourage innovation 3. causes worry and fear
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3 burdens risk puts on society
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avoidance, loss control, retention, non-insurance transfers, insurance
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techniques for managing risk (5)
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0; if you dont want liability lawsuit, dont make certain product
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avoidance reduces risk to __
example
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loss prevention, loss reduction
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2 types of loss control
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frequency ex: brake lights on a car
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loss prevention activities reduce ___________ of losses
example
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severity ex: airbags/ seatbelts in a car
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loss reduction reduces _________ of losses
example
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active passive self insurance
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types of retention (3)
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active retention ex: petty theft of employees
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means that an individual is consciously aware of the risk and deliberately plans to retain all or part of it
example
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passive retention ex: becoming injured for life
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means risks may be unknowingly retained ecaise of ignorance, indifference or laziness
example
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self insurance ex: employees health benefits
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special form of planned retention by which part of all of a given loss exposure is retained by the firm
example
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non-insurance transfers
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risk that is transferred to another party
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contract-hold harmless clause hedging incorporation
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3 methods of non-insurance transfers
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insurance
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the most practical method for handling major risk
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outlays to reduce risk, opp cost of forgone activities, expenses, un-reimbursed losses
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4 costs of risk
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risk management
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process to identify loss exposures faced by an organization and to select the most appropriate techniques for treating such expenses
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broader
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risk management is _______ than insurance management
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RMIN 4000: Test 2