CH. 3: Hazard Risk

Question 1

What does Hazard Risk include?

Answer 1

1. Fire and other property damages,
2. Windstorm and other natural perils,
3. Theft and other crimes,
4. Business interruption (income loss),
5. Disease and disability,
6. Liab. claims.

Question 2

List and define the 2 measures of Hazard Risk.

Answer 2

1. Frequency: number of losses.

2. Severity: the size of loss.

Question 3

List and define the techniques used to prevent losses.

Answer 3

1. Avoidance: involves ceasing or never undertaking an activity so that the possibility of gain or loss is eliminated.
2. Separation: technique that isolates loss exposures from one another to minimize the adverse effect of a single loss.
3. Duplication: technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve.
4. Diversification: technique that spreads loss exposures over numerous projects, products, markets, and regions.
5. Prevention: to reduce the frequency of losses.
6. Reduction: to reduce the severity of losses

Question 4

What is Insurance?

Answer 4

A Risk Management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer.

Question 5

What is loss exposure, and what are its elements?

Answer 5

Loss Exposure: any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
Elements:
1. the asset exposed to loss (tangible and intangible)
2. the cause of loss
3. the consequences of loss

Question 6

Loss exposure and causes of loss that effects them can be influenced by Hazards. What is hazard, and what are hazard’s classifications?

Answer 6

Hazard: a condition that increases the frequency and severity of a loss.
Classified as:
1. Moral hazard: loss caused or aggregated by intentional actions of humans (who lack moral),
2. Morale hazard: loss’s frequency and severity increased due to carelessness or indifference of humans,
3. Physical hazard: frequency and severity of loss increased by tangibles characteristics of property, persons, or operations,
4. Legal hazard.

Question 7

What are the types of loss exposure?

Answer 7

1. property loss exposure: A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or org. has a financial interest.
2. Liability loss exposure: A condition or situation that presents the possibility of a claim alleging legal responsibility of a person or org. for injury or damage suffered by another person.
3. Personnel loss exposure: a condition where a person dies, get disabled, retire, or resign, which deprives the org. of his special skill or knowledge that the org. can’t readily replace.
4. Net income loss exposure: a condition that presents the possibility of loss caused by a reduction in net income.

Question 8

The consequences of which of the following can be relatively measured?

a. Property loss exposure
b. Liability loss exposure
c. Personnel loss exposure
d. Net income loss exposure

Answer 8

a

Question 9

What is property-casualty insurance?

Answer 9

One of the two main sectors of the insurance industry (the second is to be life insurance), encompassing numerous types of insurance, most of which cover the financial consequences of damage to one’s own property or legal liability to others.

Question 10

Under property insurance, define the following:

a. mono-line and package policy
b. Bailees’ customers policy
c. Actual cash value
d. Insurance-to-value-provision

Answer 10

a. Mono-line policy: covers only one line of business,
Package: policy that covers >=2 lines of business
b. Bailees’ customers policy: policy that covers damages to customers’ goods while in the possession of the insured, regardless of whether the insured is legally liable for the damage.
c. actual cash value: a method in valuing property that is calculated as the cost to replace or repair property minus depreciation, the fair market value, or a valuation determined by the broad evidence rule.
d. Insurance-to-value- provision: a provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to that value of the covered property.

Question 11

Define fidelity and crime insurance.

Answer 11

Commercial crime insurance covers money, securities, and other property against a wide range of criminal acts committed by persons other than the insured.
E.g: 1. Employee dishonesty, 2. computer fraud, 3. theft and robbery.

Question 12

What is surety bonds?

Answer 12

three-party agreements involving principal, surety, and obligee (usually used for construction projects):

Principal: the party whose obligation or performance the surety guarantees.

Surety: the party (insurer) that guarantees to the obligee that the principal will fulfill an obligation as required.

Obligee: the party that receives the surety’s guarantee that the principal will fulfill an obligation.