AFC Module 24 - Financial Risk Flashcards
What is Risk?
The state of uncertainty about (a) the possibility that a financial loss will be incurred and
b) the potential size of the financial loss.
Sources of Risk are called?
Exposures - are sources of risk including things owned and activities engaged in.
examples - objects such as cars
or activities in which you participate (vacation)
Peril
an event that causes damage and leads to a financial loss
(Examples - accidents, illness, death, fires, tornadoes, hurricanes, etc)
Hazard
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.
Risk Management Steps
- Identifying risks
- Evaluating potential financial losses
- Determining the best way to manage risks
- Selecting the best risk management strategy or strategies
- Implementing a risk management plan
- Periodically reviewing the risk management plan
Risk Management Strategies
- Avoid - eliminate cause of risk
- Mitigate - reduce probability or impact of risk - example heavy duty locks on your doors potentially reduces theft
- Accept - contingency plans for risk
- Transfer - have third party to take on responsibility for risk (insurance)
- Risk retention - example is a deductible clause
Common Types of Insurance that almost everyone should have
- Health and disability insurance
- Homeowner’s or renter’s insurance
- Auto insurance
- Life insurance
GAP Insurance
Guaranteed Auto Protection
covers the monetary gap between the amount a vehicle is worth and the amount a client owes on it.
Whole Life Insurance
Special type of life insurance that coves the client over their entire life and can also be borrowed against.
Large -Loss Principle
“Insure the risks that you cannot afford and retain the risks that you can reasonably afford.”
Insurance Policy
A contract between the person buying the insurance (the insured) and the insurance company (the insurer).
Loss Control
Designing specific mechanisms to reduce loss frequency and loss severity
Risk Management
The process of identifying and evaluating purely risky situations to determine and implement appropriate management.
Risk Reduction
Includes mechanisms that reduce the overall uncertainty about the magnitude of loss.
Risk Retention
Accepting that some risks simply arise in the course of one’s life and consciously retaining the risk.
Supplemental Insurance
A type of policy that can protect against loss by bridging shortfalls from traditional insurance plans.
Pure Risk
Is the possibility of a financial loss, without the possibility of a gain.
Choosing not to have collision and comprehensive insurance on an old car is using what risk management strategy?
Risk Retention
Which type of risk is designed to reduce loss frequency and loss severity?
Risk Reduction
Speculative Risk
Potential for gain as well as potential for loss
Risk Management
Process of identifying and evaluating situations involving pure risk to determine and implement means for its management.
Property Insurance
protects you from financial losses resulting from the damage to or destruction of your property or possessions
Liability Insurance
protects you from financial losses suffered by others for which you are held responsible (legally liable).
Frequency of Loss
the likely number of times that a loss might occur over a period of time
Severity of Loss
the potential magnitude of a loss
Principle of Indemnity
States that insurance will pay no more than the actual financial loss suffered
Actual Cash Value
Replacement Value less the value of depreciation
Policy limits
Specify the maximum dollar amounts that will be paid under the insurance policy
Deductible
an initial portion of any loss that must be paid before insurance company will provide coverage
Coinsurance
Method by which the insured and the insurer share proportionally in the payment for the loss
Law of large numbers
as the numbers of members in a group increases, predictions about the group’s behavior become increasingly accurate
Appurtenant structures
other structures on a property
Subrogation rights
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
