Exam #1 Flashcards
Traditional Definition of Risk
Uncertainty concerning the occurrence of a loss
Physical Hazard
A physical condition that increases the frequency or severity of a loss
Moral Hazard
Dishonesty or character defects in a individual that increases the frequency or severity of loss
Attitudinal Hazard
Carelessness or indifference to a loss, which increases the frequency or severity of a loss
Legal Hazard
Characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
Pure Risk
Situation in which there are only the possibilities of loss or no loss
Speculative Risk
A situation in which either profit or loss is possible
Diversifiable Risk
Affects only individuals or small groups. Can be reduced or eliminated by diversification
Non-diversifiable Risk
Affects entire economy or large number of people or groups within the economy. Also called fundamental risk
Direct Loss
A financial loss that results from the physical damage, destruction, or theft of the property, such as fire damage to a home
Indirect Loss
A financial loss that results indirectly from the occurrence of a direct physical damage or theft loss
Insurance
Pooling of fortuitous losses by transfer of such risk to insurers, who agree to indemnify insureds for such losses, to provide pecuniary benefits on their occurrence, or to render services connected with the risk
Pooling
Spreading of losses incurred by the few over the entire group, so that in the process, the average loss is substituted for the actual loss
Fortuitous Losses
Unforeseen and unexpected circumstances that occur by chance
Risk Transfer
When the risk is passed on to the insurance company
Indemnification
Insured is restored to pre-loss financial position
Law of Large Numbers
The larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss - expected loss does not change, but SD does
Six Characteristics of an Ideally Insurable Risk
- Large Number of Exposures
- Accidental and Unintentional Loss
- Determinable and Measurable Loss
- No Catastrophic Loss
- Calculable Chance of Loss
- Economically Feasible Premium
Large Number of Exposures
Predict average loss based on the law of large numbers
Accidental and Unintentional Loss
To assure random occurrence of events
Determinable and Measurable Loss
To determine how much should be paid
No Catastrophic Loss
The pooling technique works this way when the loss is not too large to bare
Calculable Chance of Loss
To establish a premium that is sufficient to pay all claims and expenses and yields a profit during the policy period
Economically Feasible Premium
People need to afford purchasing the insurance policy so the premiums paid must be substantially less than the face value, or amount, of the policy
Risk Management
A process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures
Pre-Loss Objectives
Prepare for potential losses in the most economical way to reduce anxiety and meet legal obligations
Post-Loss Objectives
- Survival of the Firm
- Continue Operating
- Stability of Earnings
- Continued Growth of the Firm
- Minimize the effects that a loss will have on other people and society
Traditional Risk Management Process
- Identify
- Measure and Analyze
- Select
- Implement and Monitor
Identify Loss Exposures
Key risks and potential losses like property, liability, and businesses
