Chapter 1 Flashcards
What is Risk?
a calculated possibility of a negative outcome
what is calculated possibility?
a probabilistic outcome that is known or estimated
what does a calculated possibility range from?
0 to 1 (0% to 100%)
what is negative outcome?
loss
what must be quantifiable (in $)?
negative outcome
what is frequency?
the number of losses that occur within a specified time period
what question do you ask for frequency?
how often does a loss occur?
what is the formula for frequency?
number of losses / number of exposures
what is severity ?
the dollar amount of loss for a specific peril
what question do you ask for severity ?
how much does it cost when a loss does occur?
what is the formula for severity ?
total losses ($) / number of losses
what is peril?
cause of loss
what are examples of peril?
fire, windstorm, flood, collision, burglary
what is hazard?
condition that creates or increases the frequency and/or severity of a loss
what does not cause a loss?
hazard
what are the 4 types of hazards?
physical
moral
morale (attitudinal)
legal
what is a physical hazard?
a physical condition that increases the frequency and/or severity of a loss
what is a moral hazard?
the presence of insurance changes the behavior of the insured
what is an example of a moral hazard?
using a hammer to create “hail” damage to the roof
what is morale hazard?
carelessness or indifference to a loss, which increases the frequency and/or severity of a loss
what is an example of morale hazard?
leaving car keys in an unlocked car
what is legal hazard?
characteristics of legal system or regulatory environment that increases the frequency and/or severity of a loss
what is an example of legal hazard?
juries in some jurisdictions are more sympathetic than other areas
what is under pure risk?
- loss
- no loss
what are some examples of pure risk?
auto accident, fire, flood, cancer, slip and fall
what is under speculative risk?
- loss
- no loss/ no gain
- gain
what is an example of speculative risk?
investment and gambling
what type of risk only affects individuals or small groups, not entire economy?
diversifiable risk
how can diversifiable risk be reduced/ eliminated?
through diversification (have multiple facilities, cloud/ back up data centers)
for diversifiable risks, risk are not correlated. TRUE OR FALSE
true
what type of risk affects the entire economy or large numbers of groups/ persons within the economy ?
non-diversifiable risk
what cannot reduce/ eliminate non-diversifiable risk?
diversification
what may be need to endure a non-diversifiable risk?
government assistance
are risks correlated for non-diversifiable risks?
yes !
what is an enterprise risk?
encompasses all major risks faced by a business firm
what are all the major risks faced by a business firm?
pure risk
speculative risk
strategic risk
operational risk
financial risk
what is systematic risk ?
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
what are the major types of pure risk?
personal
property
legal liability
loss of business income risk
cyber security
what is personal risk ?
directly affects an individual or family; involves the possibility of income. extra expenses, depletion of financial assets
what perils must be involved for personal risk?
premature death
unemployment
disability/ injury/ poor health
inadequate retirement income
what is property risk?
the possibility of losses associate with the destruction or theft of property
what is direct loss of property ?
cost to repair or replace property damaged by a peril
what is indirect loss to property ?
financial loss resulting as a consequence of a direct loss
what is an example of indirect loss of property ?
fire damages your home, you have to pay to live elsewhere while its repaired
what is legal liability risk?
(financial consequences) resulting from injuries or damages you caused to someone else
is there a cap on losses for a legal liability risk?
no (in most situations)
what can be placed on income and assets seized for a legal liability risk?
liens
what is loss of business income risk?
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
is loss of business income risk direct or indirect?
indirect
what are the burdens of risk on society ?
larger emergency fund
loss of certain goods and services
worry and fear
what are the techniques on managing risks?
risk control
risk financing
what is under risk control?
loss prevention
loss reduction
duplication, separation, diversification
avoidance
what does loss prevention do?
reduces frequency
what does loss reduction do?
reduces severity
when can loss reduction occur?
pre loss and post loss
what is proactive avoidance?
a technique in which a certain loss exposure is never acquired
what is reactive avoidance?
a technique in which an existing loss exposure is abandoned
why might avoidance be a bad technique?
do not have any business opportunities
what is under risk financing?
retention
non insurance risk transfer
insurance
what is retention?
retaining part or all losses that can occur from a given risk
what is active retention?
deliberately retaining risk (choosing a high deductible)
what is passive retention?
unknowingly retaining risk (not purchasing disability insurance)
what is non insurance risk transfer by?
contractual agreement (hold harmless, indemnification)
what is non insurance risk transfer helping?
derivatives such as options, futures, etc.
what is insurance?
transfer to insurer in exchange for paying a premium
when might risk transfer retention be a good strategy?
not your fault and sufficient
when might risk transfer retention be a bad strategy?
push liability on an entity that cannot absorb that risk
