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RMIN 4000 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is Risk?

A

a calculated possibility of a negative outcome

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2
Q

what is calculated possibility?

A

a probabilistic outcome that is known or estimated

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3
Q

what does a calculated possibility range from?

A

0 to 1 (0% to 100%)

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4
Q

what is negative outcome?

A

loss

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5
Q

what must be quantifiable (in $)?

A

negative outcome

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6
Q

what is frequency?

A

the number of losses that occur within a specified time period

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7
Q

what question do you ask for frequency?

A

how often does a loss occur?

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8
Q

what is the formula for frequency?

A

number of losses / number of exposures

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9
Q

what is severity ?

A

the dollar amount of loss for a specific peril

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10
Q

what question do you ask for severity ?

A

how much does it cost when a loss does occur?

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11
Q

what is the formula for severity ?

A

total losses ($) / number of losses

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12
Q

what is peril?

A

cause of loss

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13
Q

what are examples of peril?

A

fire, windstorm, flood, collision, burglary

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14
Q

what is hazard?

A

condition that creates or increases the frequency and/or severity of a loss

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15
Q

what does not cause a loss?

A

hazard

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16
Q

what are the 4 types of hazards?

A

physical
moral
morale (attitudinal)
legal

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17
Q

what is a physical hazard?

A

a physical condition that increases the frequency and/or severity of a loss

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18
Q

what is a moral hazard?

A

the presence of insurance changes the behavior of the insured

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19
Q

what is an example of a moral hazard?

A

using a hammer to create “hail” damage to the roof

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20
Q

what is morale hazard?

A

carelessness or indifference to a loss, which increases the frequency and/or severity of a loss

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21
Q

what is an example of morale hazard?

A

leaving car keys in an unlocked car

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22
Q

what is legal hazard?

A

characteristics of legal system or regulatory environment that increases the frequency and/or severity of a loss

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23
Q

what is an example of legal hazard?

A

juries in some jurisdictions are more sympathetic than other areas

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24
Q

what is under pure risk?

A
  1. loss
  2. no loss
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25
Q

what are some examples of pure risk?

A

auto accident, fire, flood, cancer, slip and fall

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26
Q

what is under speculative risk?

A
  1. loss
  2. no loss/ no gain
  3. gain
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27
Q

what is an example of speculative risk?

A

investment and gambling

28
Q

what type of risk only affects individuals or small groups, not entire economy?

A

diversifiable risk

29
Q

how can diversifiable risk be reduced/ eliminated?

A

through diversification (have multiple facilities, cloud/ back up data centers)

30
Q

for diversifiable risks, risk are not correlated. TRUE OR FALSE

A

true

31
Q

what type of risk affects the entire economy or large numbers of groups/ persons within the economy ?

A

non-diversifiable risk

32
Q

what cannot reduce/ eliminate non-diversifiable risk?

A

diversification

33
Q

what may be need to endure a non-diversifiable risk?

A

government assistance

34
Q

are risks correlated for non-diversifiable risks?

A

yes !

35
Q

what is an enterprise risk?

A

encompasses all major risks faced by a business firm

36
Q

what are all the major risks faced by a business firm?

A

pure risk
speculative risk
strategic risk
operational risk
financial risk

37
Q

what is systematic risk ?

A

risk of collapse of an entire system/market due to the failure of a single entity/group that can result in the breakdown of the entire financial system

38
Q

what are the major types of pure risk?

A

personal
property
legal liability
loss of business income risk
cyber security

39
Q

what is personal risk ?

A

directly affects an individual or family; involves the possibility of income. extra expenses, depletion of financial assets

40
Q

what perils must be involved for personal risk?

A

premature death
unemployment
disability/ injury/ poor health
inadequate retirement income

41
Q

what is property risk?

A

the possibility of losses associate with the destruction or theft of property

42
Q

what is direct loss of property ?

A

cost to repair or replace property damaged by a peril

43
Q

what is indirect loss to property ?

A

financial loss resulting as a consequence of a direct loss

44
Q

what is an example of indirect loss of property ?

A

fire damages your home, you have to pay to live elsewhere while its repaired

45
Q

what is legal liability risk?

A

(financial consequences) resulting from injuries or damages you caused to someone else

46
Q

is there a cap on losses for a legal liability risk?

A

no (in most situations)

47
Q

what can be placed on income and assets seized for a legal liability risk?

A

liens

48
Q

what is loss of business income risk?

A

if a business has to shut down for a period of time due to a direct physical damage loss, it is unable to generate income

49
Q

is loss of business income risk direct or indirect?

A

indirect

50
Q

what are the burdens of risk on society ?

A

larger emergency fund
loss of certain goods and services
worry and fear

51
Q

what are the techniques on managing risks?

A

risk control
risk financing

52
Q

what is under risk control?

A

loss prevention
loss reduction
duplication, separation, diversification
avoidance

53
Q

what does loss prevention do?

A

reduces frequency

54
Q

what does loss reduction do?

A

reduces severity

55
Q

when can loss reduction occur?

A

pre loss and post loss

56
Q

what is proactive avoidance?

A

a technique in which a certain loss exposure is never acquired

57
Q

what is reactive avoidance?

A

a technique in which an existing loss exposure is abandoned

58
Q

why might avoidance be a bad technique?

A

do not have any business opportunities

59
Q

what is under risk financing?

A

retention
non insurance risk transfer
insurance

60
Q

what is retention?

A

retaining part or all losses that can occur from a given risk

61
Q

what is active retention?

A

deliberately retaining risk (choosing a high deductible)

62
Q

what is passive retention?

A

unknowingly retaining risk (not purchasing disability insurance)

63
Q

what is non insurance risk transfer by?

A

contractual agreement (hold harmless, indemnification)

64
Q

what is non insurance risk transfer helping?

A

derivatives such as options, futures, etc.

65
Q

what is insurance?

A

transfer to insurer in exchange for paying a premium

66
Q

when might risk transfer retention be a good strategy?

A

not your fault and sufficient

67
Q

when might risk transfer retention be a bad strategy?

A

push liability on an entity that cannot absorb that risk

RMIN 4000 (15 decks)

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