1/9 Flashcards
How is the pure premium calculated?
Frequency x Severity
The ___ is the bias of the human mind toward that which has occurred recently.
recency bias
___ is the process that identifies loss exposures faced by an organization and selects the most appropriate technique for treating loss exposure.
risk management
Name the five Enterprise Risks faced by a business firm.
- Pure risk
- Speculative risk
- Strategic risk
- Operational risk
- Financial risk
___ refers to uncertainty regarding the firm’s financial goals and objectives.
Strategic risk
___ are risks that result from the firm’s business operations.
Operational risks
___ refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.
financial risk
What is the biggest enterprise risk faced by a business firm?
Operational
___ refers to the collapse of an entire system or market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system.
systemic risk
___ are risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expenses, or depletion of financial assets.
personal risks
Name the four main causes of personal risks.
- Premature death
- Inadequate retirement income
- Poor health
- Unemployment
Name the four main personal risks.
- Property risk
- Direct loss
- Indirect/Consequential loss
- Liability risks
A(n) ___ is a financial loss that results from the physical damage, destruction or theft of property.
Ex: fire damage to a home.
direct loss
A(n) ___ refers to the possibility of losses associated with the destruction of theft or property.
property risk
A(n) ___ is a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss.
Ex: additional living expenses after a fire.
indirect loss
___ involve the possibility of being held legally liable for bodily injury or property damage to someone else. There’s no upper limit to the amount of the loss and legal defense costs can be enormous.
liability risks
___ refer to a variety of pure risks that firms face when a risk occurs.
commercial risks
Name the 8 main commercial risks.
- Property risks
- Liability risks
- Loss of business income
- Cybersecurity & identity theft
- Human resources exposures
- Foreign loss exposures
- Intangible property exposures
- Government exposures
Which commercial risk would the following example be classified as?
Damage to buildings, furniture, and office equipment.
property risk
Which commercial risk would the following example be classified as?
Suits for defective products, pollution, and sexual harassment.
liability risk
Which commercial risk would the following example be classified as?
When the firm must shut down for some time after a physical damage loss.
Loss of business income
Which commercial risk would the following example be classified as?
Thieves breaking into a firm’s computer system.
cybersecurity and identity theft
Which commercial risk would the following example be classified as?
Job-related injuries.
human resources exposures
Which commercial risk would the following example be classified as?
Acts of terrorism.
foreign loss exposures
Which commercial risk would the following example be classified as?
Damage to the market reputation and public image of the company.
intangible property exposures
Which commercial risk would the following example be classified as?
Violation of safety standards.
government exposures
What are the two main types of risk control?
- Avoidance
- Loss prevention: activities to reduce the frequency of losses
What are the three main burdens of risk on society?
- Without insurance, individuals and business firms would have to maintain large emergency funds to pay for unexpected losses
- Risk of a liability lawsuit may discourage innovation
- Risk causes worry and fear
What are the three main methods of loss reduction?
- Duplication
- Separation
- Diversification
___ means that an individual or business firm retains part or all of the losses that can result from a given risk.
retention
___ means that an individual is aware of the risk and deliberately plans to retain all or part of it.
active retention
___ means risk may be unknowingly retained because of ignorance, indifference, or laziness.
Passive retention
___ is a special form of planned retention by which part or all of a given loss exposure is retained by the firm.
Self insurance
A(n) ___ transfers a risk to another party.
noninsurance transfer
What are the three main types of noninsurance transfer?
- Hedging
- Contract (hold-harmless clause)
- Incorporation
___ is a technique for transferring the risk of unfavorable price fluctuations to a speculator.
Hedging
___ of a business firm transfers to the creditors the risk of having insufficient assets.
Incorporation
The ___ technique is used to spread the losses of the few over the entire group.
pooling
