Chapter 1 Vocab (Notes) Flashcards Preview

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Flashcards in Chapter 1 Vocab (Notes) Deck (44):
1

Risk

Uncertainty concerning the occurrence of a loss

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Loss Exposure

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

3

Objective Risk

Defined as the relative variation of actual loss from expected loss

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Subjective Risk

Defined as uncertainty based on a person's mental condition or state of mind

5

Chance of Loss

The probability that an event will occur

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Objective Probability

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

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Subjective Probability

individual's personal estimate of the chance of loss

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Chance of Loss

the probability that an event that causes a loss will occur

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Objective Risk

the relative variation of actual loss from expected loss

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Peril

cause of the loss

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Hazard

condition that increases the chance of loss

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Physical Hazard

physical condition that increases the frequency or severity of loss

13

Moral Hazard

dishonesty or character defects in an individual that increases the frequency or severity of loss

14

Attitudinal Hazard

also called a morale hazard; is carelessness or indifference to a loss, which increases the frequency or severity of a loss

15

Legal Hazard

refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of loss

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Pure Risk

situation in which there are only the possiblities of loss or no loss

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Speculative Risk

Situation in which either profit or loss is possible

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Diversifiable Risk

affects only individuals or small groups; also called nonsystematic or particular risk

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Nondiversifiable Risk

affects entire economy or large numbers of persons or groups within the economy; also called systematic or fundamental risk

20

Enterprise Risk

encompasses all major risks faced by a business firm, which include: pure, speculative, strategic, operational, and financial risk

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Strategic Risk

refers to uncertainty regarding firm's financial goals and objectives

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Operational Risk

results from the firm's business operations

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Financial Risk

refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of the dollar

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Enterprise Risk Management:

Combines pure, speculative, strategic, operational, and financial risk into a single unified treatment program all major risks faced by the firm

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Personal Risk

risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expense, or depiction of financial assets due to premature death of family head, insufficient income during retirement, poor health, or involuntary unemployment

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Property Risks

involve the possibility of losses associated with the destruction of theft or property

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Direct Loss

financial loss that results from the physical damage, destruction, or theft of property, such as fire damage to a home

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Indirect/Consequential Loss

Financial loss that results from the occurrence of the physical damage or theft loss

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Liability Risks

involve the possibility of being held legally liable for bodily injury or property damage to someone else

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Property Risks

damage to buildings, furniture, office equipment

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Loss of Business Income

firm must shut down after physical loss

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Risk Control

techniques that reduce the frequency or severity of losses

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Avoidance

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

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Loss Prevention

activities to reduce the frequency of losses

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Loss Reduction

activities to reduce the severity of losses

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Risk Financing

techniques that provide for payment of losses after they occur

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Retention

individual or firm retains part or all of losses

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Active Retention

individual is aware of risk and deliberately plans to retain all or part of it

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Passive Retention

risks may be unknowingly retained because of ignorance, indifference, or laziness

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Self Insurance

planned retention by which part or all of a given loss exposure is retained by a firm

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Noninsurance Transfer

transfers risk to another party

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Hold Harmless Clause

one party agrees to hold another party from all legal liability

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Hedging

Transferring risk of unfavorable price fluctuations to a speculator by buying/selling futures

44

Incorporation

firm transfers risk to creditors