AFC Module 24 - Financial Risk

Question 1

What is Risk?

Answer 1

The state of uncertainty about (a) the possibility that a financial loss will be incurred and

b) the potential size of the financial loss.

Question 2

Sources of Risk are called?

Answer 2

Exposures - are sources of risk including things owned and activities engaged in.

examples - objects such as cars

or activities in which you participate (vacation)

Question 3

Peril

Answer 3

an event that causes damage and leads to a financial loss

(Examples - accidents, illness, death, fires, tornadoes, hurricanes, etc)

Question 4

Hazard

Answer 4

Any condition that creates or increases the probability that a peril will occur.

Example - owning and driving a car exposes you to the risk of financial loss due to damages to the car or others. If you drove drunk, you have created a hazard while driving.

Question 5

Risk Management Steps

Answer 5

1. Identifying risks
2. Evaluating potential financial losses
3. Determining the best way to manage risks
4. Selecting the best risk management strategy or strategies
5. Implementing a risk management plan
6. Periodically reviewing the risk management plan

Question 6

Risk Management Strategies

Answer 6

1. Avoid - eliminate cause of risk
2. Mitigate - reduce probability or impact of risk - example heavy duty locks on your doors potentially reduces theft
3. Accept - contingency plans for risk
4. Transfer - have third party to take on responsibility for risk (insurance)
5. Risk retention - example is a deductible clause

Question 7

Common Types of Insurance that almost everyone should have

Answer 7

1. Health and disability insurance
2. Homeowner’s or renter’s insurance
3. Auto insurance
4. Life insurance

Question 8

GAP Insurance

Answer 8

Guaranteed Auto Protection

covers the monetary gap between the amount a vehicle is worth and the amount a client owes on it.

Question 9

Whole Life Insurance

Answer 9

Special type of life insurance that coves the client over their entire life and can also be borrowed against.

Question 10

Large -Loss Principle

Answer 10

“Insure the risks that you cannot afford and retain the risks that you can reasonably afford.”

Question 11

Insurance Policy

Answer 11

A contract between the person buying the insurance (the insured) and the insurance company (the insurer).

Question 12

Loss Control

Answer 12

Designing specific mechanisms to reduce loss frequency and loss severity

Question 13

Risk Management

Answer 13

The process of identifying and evaluating purely risky situations to determine and implement appropriate management.

Question 14

Risk Reduction

Answer 14

Includes mechanisms that reduce the overall uncertainty about the magnitude of loss.

Question 15

Risk Retention

Answer 15

Accepting that some risks simply arise in the course of one’s life and consciously retaining the risk.

Question 16

Supplemental Insurance

Answer 16

A type of policy that can protect against loss by bridging shortfalls from traditional insurance plans.

Question 17

Pure Risk

Answer 17

Is the possibility of a financial loss, without the possibility of a gain.

Question 18

Choosing not to have collision and comprehensive insurance on an old car is using what risk management strategy?

Answer 18

Risk Retention

Question 19

Which type of risk is designed to reduce loss frequency and loss severity?

Answer 19

Risk Reduction

Question 20

Speculative Risk

Answer 20

Potential for gain as well as potential for loss

Question 21

Risk Management

Answer 21

Process of identifying and evaluating situations involving pure risk to determine and implement means for its management.

Question 22

Property Insurance

Answer 22

protects you from financial losses resulting from the damage to or destruction of your property or possessions

Question 23

Liability Insurance

Answer 23

protects you from financial losses suffered by others for which you are held responsible (legally liable).

Question 24

Frequency of Loss

Answer 24

the likely number of times that a loss might occur over a period of time

Question 25

Severity of Loss

Answer 25

the potential magnitude of a loss

Question 26

Principle of Indemnity

Answer 26

States that insurance will pay no more than the actual financial loss suffered

Question 27

Actual Cash Value

Answer 27

Replacement Value less the value of depreciation

Question 28

Policy limits

Answer 28

Specify the maximum dollar amounts that will be paid under the insurance policy

Question 29

Deductible

Answer 29

an initial portion of any loss that must be paid before insurance company will provide coverage

Question 30

Coinsurance

Answer 30

Method by which the insured and the insurer share proportionally in the payment for the loss

Question 31

Law of large numbers

Answer 31

as the numbers of members in a group increases, predictions about the group’s behavior become increasingly accurate

Question 32

Appurtenant structures

Answer 32

other structures on a property

Question 33

Subrogation rights

Answer 33

allow an insurer to take action against a a negligent third party (and that party’s insurance company) to obtain reimbursement for payments made to an insured