Chapter 1

Question 1

uncertainty concerning the occurence of loss.

Answer 1

risk

Question 2

According to the American Academy of Actuaries, the term ____ is used in situations where the probabilities of possible outcomes are known or can be estimated with some degree of accuracy, whereas ____ is used in situations where such probabilities cannot be estimated.

Answer 2

risk; uncertainty

Question 3

any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs. Examples include a manufacturing plant suffering damage from natural disaster or defective product that may result in a lawsuit.

Answer 3

loss exposure.

Question 4

relative variation of actual loss from expected loss. is also referred to as degree of risk. varies inversely with the square root of the number of cases under observation.

Answer 4

objective risk

Question 5

because objective risk can be ____, it is very useful for an insurer or corporate risk manager.

Answer 5

measured

Question 6

states that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience.

Answer 6

law of large numbers.

Question 7

uncertainty based on a person’s mental condition or state of mind. also called perceived risk.

Answer 7

subjective risk

Question 8

the probability that an event will occur.

Answer 8

chance of loss

Question 9

refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions.

Answer 9

objective probability.

Question 10

objective probabilities can be determined in two ways. first, they can be determined by ___ ____, which is also called a priori probability. uses example of odds of getting heads on a coin, or rolling a 6 with a single die.

Answer 10

deductive reasoning.

Question 11

second part of objective probabilities, uses ___ ____ rather than by deduction. uses example that you don’t know odds of someone at age 21 will die before age 26, but analyzing past mortality experience to estimate the probability.

Answer 11

inductive reasoning

Question 12

individual’s personal estimate of the chance of loss.

Answer 12

subjective probability.

Question 13

defined as the cause of loss. examples include if your house burns because of a fire, the cause of loss is the fire, or if your car is damaged in a collision with another car, collision is the cause of loss.

Answer 13

peril.

Question 14

condition that creates or increases the frequency or severity of loss.

Answer 14

hazard

Question 15

4 major types of hazards:

physical, moral, ____ and legal.

Answer 15

attitudinal (morale)

Question 16

physical condition that increases the frequency or severity of loss. examples include icy roads that increase the chance of auto accident, or a defective lock on a door that increases the chance of theft.

Answer 16

physical hazard

Question 17

dishonesty of character defects in an individual that increase the frequency or severity of loss. examples include faking an accident to collect benefits from insurer and submitting a fraudulent claim. causes insurance premiums to be higher for everyone.

Answer 17

moral hazard.

Question 18

carelessness or indifference to a loss, which increases the frequency or severity of a loss. examples include leaving car keys in an unlocked car or leaving a door unlocked, which increases chances of theft.

Answer 18

attitudinal or morale hazard.

Question 19

refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of losses. examples include adverse jury verdicts or large damage awards in liability lawsuits

Answer 19

legal hazard.

Question 20

risk can be classified into several distinct classes. the most important include the following:

• pure and speculative risk
• diversifiable and nondiversifiable risk
• ___ risk
• ____ risk

Answer 20

enterprise, systemic

Question 21

defined as a situation in which there are only the possibilities of loss or no loss. examples include premature death, job-related accidents.

Answer 21

pure risk.

Question 22

defined as situation in which either profit or loss is possible. example is if you purchase 100 shares of common stock, you would profit if the price of stock increases or lose if the price declines.

Answer 22

speculative risk

Question 23

risk that affects only individuals or small groups and not the entire economy. risk that can be reduced or eliminated by diversification. example includes a diversified portfolio of stocks and bonds is less risky than a portfolio that is 100% invested in common stocks.

Answer 23

diversifiable risk.

Question 24

because diversifiable risk affects only specific individuals or small groups, it is also called

Answer 24

nonsystematic or particular risk.

Question 25

risk that affects the entire economy or large numbers of persons or groups within the economy. is also called fundamental risk. examples include rapid inflation, cyclical unemployment, war or natural disasters.

Answer 25

nondiversifiable risk.

Question 26

social insurance and government insurance programs, as well as government guarantees or subsidies, may be necessary to insure certain _____ risks in the U.S.

Answer 26

nondiversifiable

Question 27

combines into a single unified treatment program all major risks faced by the firm. packaging major risks into single program can offset one risk against another.

Answer 27

enterprise risk management.

Question 28

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

Answer 28

systemic risk

Question 29

risks that directly affect an individual or family.

Answer 29

personal risks

Question 30

major personal risks that can cause great economic insecurity include the following: - premature death - ____ _____ - poor health - _______ - alcohol and drug addiction

Answer 30

retirement risks, unemployment

Question 31

the death of a family head with unfulfilled financial obligations.

Answer 31

premature death

Question 32

the major personal risk during retirement is

Answer 32

inadequate income

Question 33

median income for a householder over age of 65 is __% less than the income for a householder under the age of 65.

Answer 33

40

Question 34

__% of householders have savings and investments less than 25,000

Answer 34

47

Question 35

the risk of ___ ____ includes both the payment of medical bills and the loss of earned income

Answer 35

poor health

Question 36

major cause of economic insecurity in the U.S. can result from business cycle downswings, changes in the economy.

Answer 36

unemployment

Question 37

in 2017, about 1 in 13 workers in the U.S. are either ______ or ________

Answer 37

unemployed or underemployed

Question 38

1 in every 12 adults suffers from ___ ____ or dependence

Answer 38

alcohol abuse

Question 39

______ deaths annually from alcohol-related diseases.

Answer 39

88000

Question 40

estimated 20 million americans ages 12 or older used an illicit drug in the past 30 days, which represents __% of the population.

Answer 40

8

Question 41

addiction to alcohol or drugs can cause severe economic insecurity in 5 ways: - loss or reduction of earned income - serious health problems - loss of a job or inability to work at a steady job - increase in dysfunctional or broken families - increase in ________

Answer 41

crime and overall deterioration in the quality of life in many neighborhoods.

Question 42

two major types of loss associated with the destruction or theft of property:

Answer 42

direct loss and indirect or inconsequential loss

Question 43

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

Answer 43

direct loss

Question 44

financial loss that results indirectly from the occurrence of a direct physical damage or theft loss. for example, as a result from fire to your home, you may incur additional living expenses to maintain normal standard of living.

Answer 44

indirect loss

Question 45

additional expenses that resulted from damage would be a

Answer 45

consequential loss

Question 46

liability risks are of great importance for several reasons; first, you can be sued for __ ___. second, a __ can be place on your income and financial assets to satisfy a legal judgement. third, __ ___ costs can be enormous.

Answer 46

any amount; lien, legal defense

Question 47

risk entails three major burdens on society: - the size of an emergency fund must be increased - society is deprived of certain goods and services - ______________

Answer 47

worry and fear are present.

Question 48

refers to techniques that reduce the frequency or severity of losses.

Answer 48

risk control

Question 49

refers to techniques that provide for the funding of losses.

Answer 49

risk financing

Question 50

``` major risk control techniques: avoidance loss prevention loss reduction -duplication -separation -_______ ```

Answer 50

diversification

Question 51

example of this includes staying away from high crime areas or not marrying to stay away from divorce.

Answer 51

avoidance

Question 52

technique that reduces the probability of loss so that the frequency of losses is reduced.

Answer 52

loss prevention

Question 53

some losses will inevitably occur. thus, another objective of loss control is to reduce the severity of loss.

Answer 53

loss reduction

Question 54

technique refers to having backups or copies of important documents available in case a loss occurs.

Answer 54

duplication

Question 55

assets exposed to loss are separated or divided to minimize financial loss from a single event.

Answer 55

separation

Question 56

technique reduces the chance of loss by spreading the loss exposure across different parties.

Answer 56

diversification

Question 57

from the viewpoint of society, loss control is highly desirable for two reasons; indirect cost of losses may be large, and in some instances, can easily exceed the direct costs. second, the __ costs of losses are reduced.

Answer 57

social

Question 58

major risk financing techniques include the following: retention ____ _____ insurance

Answer 58

noninsurance transfers

Question 59

an individual or business firm retains part of all of these losses that can result from a given risk.

Answer 59

risk retention

Question 60

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

Answer 60

active retention

Question 61

certain risks unknowingly retained because of ignorance, or failure to identify an important risk.

Answer 61

passive retention.

Question 62

special form of planned retention by which part or all of a given loss exposure is retained by the firm.

Answer 62

self-insurance

Question 63

risk is transferred to a party other than an insurance company.

Answer 63

noninsurance transfers