Chapter 3

Question 2

What is risk?

Answer 2

Risk exists whenever there is uncertainty about outcome.

Question 3

What are the three essential elements to suffer a loss?

Answer 3

• An item can suffer loss
• A cause of the loss
• Financial impact of the loss

Question 4

What are the three possible outcomes when faced with a risk?

Answer 4

• Positive outcome (gain)
• Negative outcome (loss)
• Neutral outcome (neither positive nor negative)

Question 5

What type of risk is characterized by only two possible outcomes: loss or no loss?

Answer 5

Pure risk

Question 6

What type of risk involves a potential for gain?

Answer 6

Speculative risk

Question 7

What is the primary purpose of insurance?

Answer 7

To protect against loss.

Question 8

What is real property?

Answer 8

Land and anything that is attached to or growing on the land.

Question 9

What is personal property?

Answer 9

Property that is not affixed to land, such as clothing, furniture, and appliances.

Question 10

What is liability?

Answer 10

The legal responsibility to reimburse someone for damages due to carelessness.

Question 11

What is negligence?

Answer 11

Carelessness that breaches a duty to behave in a certain way.

Question 12

What are the three broad categories of loss causes?

Answer 12

• Natural
• Human
• Economic

Question 13

What is an indirect loss?

Answer 13

A consequence of a direct loss, such as temporary relocation expenses.

Question 14

What is risk avoidance?

Answer 14

Eliminating the loss exposure or never acquiring it.

Question 15

What is loss control?

Answer 15

Methods that reduce the number of losses or the cost of losses that do occur.

Question 16

What is the difference between loss prevention and loss reduction?

Answer 16

• Loss prevention reduces the number of losses
• Loss reduction reduces the cost of losses

Question 17

What does risk transfer involve?

Answer 17

Shifting the responsibility for a risk to someone else through contracts or agreements.

Question 18

What is risk retention?

Answer 18

Paying some or all of the losses that occur out of personal resources.

Question 19

Fill in the blank: An automobile is an item of _______.

Answer 19

personal property

Question 20

True or False: Speculative risks are typically covered by insurance.

Answer 20

False

Question 21

What might be a significant human loss exposure for individuals?

Answer 21

Risk of losing health and being unable to earn income.

Question 22

What is the financial impact of losing earning capacity due to injury?

Answer 22

Loss of potential future income.

Question 23

List examples of natural causes of loss.

Answer 23

• Wind
• Rain
• Earthquake
• Flood
• Fire
• Lightning

Question 24

List examples of human causes of loss.

Answer 24

• Theft
• Vandalism
• Negligence
• Fraud
• Murder

Question 25

List examples of economic causes of loss.

Answer 25

* Inflation * Depreciation * Recession * Obsolescence

Question 26

What is defined as the risk management method of retaining losses?

Answer 26

Paying some or all of the losses out of personal income or savings ## Footnote An example is the owner of a car retaining the cost of small damages like windshield cracks.

Question 27

What does insurance allow in the context of risk management?

Answer 27

Transfer of the cost of loss to an insurance company ## Footnote Understanding insurance is a primary focus of risk management education.

Question 28

Fill in the blank: _______ refers to eliminating an exposure or never acquiring one.

Answer 28

Avoidance

Question 29

What are the two possible outcomes of pure risks?

Answer 29

Loss or no loss

Question 30

What are speculative risks characterized by?

Answer 30

The potential for a third outcome, gain

Question 31

List three economic causes of loss.

Answer 31

* Inflation * Recession * Depreciation

Question 32

What type of costs can result from a loss?

Answer 32

* Direct costs * Indirect costs

Question 33

True or False: Loss control attempts to eliminate losses or reduce the amount of a loss.

Answer 33

True

Question 34

What is a deductible in an insurance policy an example of?

Answer 34

Partial retention

Question 35

What should be used when losses cannot be avoided?

Answer 35

Some type of loss control device

Question 36

Fill in the blank: Losses that happen often and cost a lot should be managed through _______.

Answer 36

Avoidance

Question 37

What is the best risk management technique for losses that occur seldom but are costly?

Answer 37

Insurance

Question 38

What are the two types of loss exposures faced by individuals?

Answer 38

* Property loss exposures * Liability loss exposures

Question 39

What are the main causes of loss?

Answer 39

* Natural causes (e.g., earthquakes, floods) * Human causes (e.g., theft, negligence, discrimination)

Question 40

What is the burden of loss in the context of retention?

Answer 40

Falls on the owner of the vehicle

Question 41

How can risks be categorized based on their frequency and severity?

Answer 41

* High Frequency / High Severity: Avoidance * High Frequency / Low Severity: Retention * Low Frequency / High Severity: Insurance * Low Frequency / Low Severity: Retention

Question 42

What is a key consideration when choosing among risk management techniques?

Answer 42

The potential severity and frequency of losses