Chapter 1 - Risk and Its Treatment Flashcards Preview

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Flashcards in Chapter 1 - Risk and Its Treatment Deck (48)
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Define Attitudinal (morale) Hazard

Carelessness or indifference to loss, which increases the frequency or severity of a loss.


Define Avoidance

A risk control technique in which a certain loss exposure is never acquired, or an existing loss exposure is abandoned.


Define Chance of Loss

The probability that an event will occur.


Define Direct Loss

Financial loss that results directly from an insured peril.


Define Diversifiable/Nonsystematic/Particular Risk

A risk that affects only individuals or small groups and not the entire economy, which can be reduced or eliminated by diversification.


Define Enterprise Risk

A term that encompasses all major risks faced by a business, including pure risk, speculative risk, strategic risks, and operational risks.


Define Enterprise Risk Management

Comprehensive risk management program that considers an organization's pure risk, speculative risk, strategic risks, and operational risks.


Define Financial Risk

A risk that a business firms face because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.


Define Hazard

Condition that creates or increases the chance of loss.


Define Hedging

Technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling options and futures contracts on an organized exchange.


Define Hold-harmless Clause

Clause written into a contract by which one party agrees to release another party from all legal liability, such as a retailer who agrees to release the manufacturer from legal liability if the product injures someone.


Define Human Life Value

For purposes of life insurance, the present value of the family's share of the deceased breadwinner's future earnings.


Define Incorporation

A risk transfer technique that limits the liability of the business owner to the extent of the businesses assets so their personal assets are protected.


Define Indirect/Consequential Loss

Financial loss occurring as the consequence or some other loss.


Define Law of Large Numbers

Concept that the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures.


Define Legal Hazard

Characteristics of the legal system or regulatory environment that increases the frequency or severity of losses.


Define Liability Risk

When you are held legally liable if you do something that results in bodily injury or property damage to someone else.


Define Loss Exposure

Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.


Define Loss Prevention

Risk management techniques aimed at reducing the probability of loss so that the frequency of losses is reduced. e.g. - defensive driving course


Define Moral Hazard

Dishonesty or character defects in an individual that increases the chance of loss.


Define Nondiversifiable/Systematic/Fundamental Risk

A risk that affects the entire economy or large numbers of persons or groups within the economy, which cannot be reduced or eliminated by diversification.


Define Noninsurance Transfers

Various methods other than insurance by which a pure risk and its potential financial consequences can be transferred to another party, for example, contracts, leases, and hold-harmless agreements.


Define Objective Probability

Long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no chance in the underlying conditions.


Define Peril

Cause or source of loss. The thing that does the damage: fire, collision.


Define Personal Risks

Risks that directly affect an individual or family.


Define Physical Hazard

Physical condition that increases the chance of loss.


Define Premature Death

The death of a family head with unfulfilled financial obligations.


Define Property Risks

Risk of valuable business property being damaged or destroyed that could financially harm a business.


Define Pure Risk

Situation in which there are only the possibilities of loss or no loss.


Define Retention

Risk management technique in which an individual or a firm retains part or all of the losses resulting from a given loss exposure. Used when no other method is available, the worst possible loss is not serious, and losses are highly predictable.