Chapter 1

Question 1

What is Risk?

Answer 1

a calculated possibility of a negative outcome

Question 2

what is calculated possibility?

Answer 2

a probabilistic outcome that is known or estimated

Question 3

what does a calculated possibility range from?

Answer 3

0 to 1 (0% to 100%)

Question 4

what is negative outcome?

Answer 4

loss

Question 5

what must be quantifiable (in $)?

Answer 5

negative outcome

Question 6

what is frequency?

Answer 6

the number of losses that occur within a specified time period

Question 7

what question do you ask for frequency?

Answer 7

how often does a loss occur?

Question 8

what is the formula for frequency?

Answer 8

number of losses / number of exposures

Question 9

what is severity ?

Answer 9

the dollar amount of loss for a specific peril

Question 10

what question do you ask for severity ?

Answer 10

how much does it cost when a loss does occur?

Question 11

what is the formula for severity ?

Answer 11

total losses ($) / number of losses

Question 12

what is peril?

Answer 12

cause of loss

Question 13

what are examples of peril?

Answer 13

fire, windstorm, flood, collision, burglary

Question 14

what is hazard?

Answer 14

condition that creates or increases the frequency and/or severity of a loss

Question 15

what does not cause a loss?

Answer 15

hazard

Question 16

what are the 4 types of hazards?

Answer 16

physical
moral
morale (attitudinal)
legal

Question 17

what is a physical hazard?

Answer 17

a physical condition that increases the frequency and/or severity of a loss

Question 18

what is a moral hazard?

Answer 18

the presence of insurance changes the behavior of the insured

Question 19

what is an example of a moral hazard?

Answer 19

using a hammer to create “hail” damage to the roof

Question 20

what is morale hazard?

Answer 20

carelessness or indifference to a loss, which increases the frequency and/or severity of a loss

Question 21

what is an example of morale hazard?

Answer 21

leaving car keys in an unlocked car

Question 22

what is legal hazard?

Answer 22

characteristics of legal system or regulatory environment that increases the frequency and/or severity of a loss

Question 23

what is an example of legal hazard?

Answer 23

juries in some jurisdictions are more sympathetic than other areas

Question 24

what is under pure risk?

Answer 24

1. loss
2. no loss

Question 25

what are some examples of pure risk?

Answer 25

auto accident, fire, flood, cancer, slip and fall

Question 26

what is under speculative risk?

Answer 26

1. loss 2. no loss/ no gain 3. gain

Question 27

what is an example of speculative risk?

Answer 27

investment and gambling

Question 28

what type of risk only affects individuals or small groups, not entire economy?

Answer 28

diversifiable risk

Question 29

how can diversifiable risk be reduced/ eliminated?

Answer 29

through diversification (have multiple facilities, cloud/ back up data centers)

Question 30

for diversifiable risks, risk are not correlated. TRUE OR FALSE

Answer 30

true

Question 31

what type of risk affects the entire economy or large numbers of groups/ persons within the economy ?

Answer 31

non-diversifiable risk

Question 32

what cannot reduce/ eliminate non-diversifiable risk?

Answer 32

diversification

Question 33

what may be need to endure a non-diversifiable risk?

Answer 33

government assistance

Question 34

are risks correlated for non-diversifiable risks?

Answer 34

yes !

Question 35

what is an enterprise risk?

Answer 35

encompasses all major risks faced by a business firm

Question 36

what are all the major risks faced by a business firm?

Answer 36

pure risk speculative risk strategic risk operational risk financial risk

Question 37

what is systematic risk ?

Answer 37

risk of collapse of an entire system/market due to the failure of a single entity/group that can result in the breakdown of the entire financial system

Question 38

what are the major types of pure risk?

Answer 38

personal property legal liability loss of business income risk cyber security

Question 39

what is personal risk ?

Answer 39

directly affects an individual or family; involves the possibility of income. extra expenses, depletion of financial assets

Question 40

what perils must be involved for personal risk?

Answer 40

premature death unemployment disability/ injury/ poor health inadequate retirement income

Question 41

what is property risk?

Answer 41

the possibility of losses associate with the destruction or theft of property

Question 42

what is direct loss of property ?

Answer 42

cost to repair or replace property damaged by a peril

Question 43

what is indirect loss to property ?

Answer 43

financial loss resulting as a consequence of a direct loss

Question 44

what is an example of indirect loss of property ?

Answer 44

fire damages your home, you have to pay to live elsewhere while its repaired

Question 45

what is legal liability risk?

Answer 45

(financial consequences) resulting from injuries or damages you caused to someone else

Question 46

is there a cap on losses for a legal liability risk?

Answer 46

no (in most situations)

Question 47

what can be placed on income and assets seized for a legal liability risk?

Answer 47

liens

Question 48

what is loss of business income risk?

Answer 48

if a business has to shut down for a period of time due to a direct physical damage loss, it is unable to generate income

Question 49

is loss of business income risk direct or indirect?

Answer 49

indirect

Question 50

what are the burdens of risk on society ?

Answer 50

larger emergency fund loss of certain goods and services worry and fear

Question 51

what are the techniques on managing risks?

Answer 51

risk control risk financing

Question 52

what is under risk control?

Answer 52

loss prevention loss reduction duplication, separation, diversification avoidance

Question 53

what does loss prevention do?

Answer 53

reduces frequency

Question 54

what does loss reduction do?

Answer 54

reduces severity

Question 55

when can loss reduction occur?

Answer 55

pre loss and post loss

Question 56

what is proactive avoidance?

Answer 56

a technique in which a certain loss exposure is never acquired

Question 57

what is reactive avoidance?

Answer 57

a technique in which an existing loss exposure is abandoned

Question 58

why might avoidance be a bad technique?

Answer 58

do not have any business opportunities

Question 59

what is under risk financing?

Answer 59

retention non insurance risk transfer insurance

Question 60

what is retention?

Answer 60

retaining part or all losses that can occur from a given risk

Question 61

what is active retention?

Answer 61

deliberately retaining risk (choosing a high deductible)

Question 62

what is passive retention?

Answer 62

unknowingly retaining risk (not purchasing disability insurance)

Question 63

what is non insurance risk transfer by?

Answer 63

contractual agreement (hold harmless, indemnification)

Question 64

what is non insurance risk transfer helping?

Answer 64

derivatives such as options, futures, etc.

Question 65

what is insurance?

Answer 65

transfer to insurer in exchange for paying a premium

Question 66

when might risk transfer retention be a good strategy?

Answer 66

not your fault and sufficient

Question 67

when might risk transfer retention be a bad strategy?

Answer 67

push liability on an entity that cannot absorb that risk