Chapter 1 Flashcards
Loss
A decline in value, usually unexpected or relatively unpredictable manner
Risk
Possibility of loss
Loss exposure
Losses that might occur
Direct loss
First or immediate loss that arises from an event
Indirect loss
Occurs only as a secondary result
Living expenses from being out of a home from Fire
Uncertainty
State of mind, typified by lack of sureness about something
Someone may fear an elevator, that’s uncertainty. But the risk is the same for any individual who steps on the elevator.
Peril
A cause of loss.
Unemployment, old age, death, forgery, theft, fire
Hazard
Act or condition that increases the likelihood of the occurrence of a loss and /or the severity.
Types of hazards?
Physical-conditions relating to location, structure, occupancy.
Moral- dishonest tendencies
Attitudinal- evidenced by carelessness or indifference towards loss.
Measurement of risks
Deductive reasoning: with a priori reasoning, risk is measured by physical examination before any losses occur
Inductive reasoning: by statistical analysis of past loss experience.
Classification of risks
Financial versus non financial
Particular versus fundamental
Static versus dynamic
Pure versus speculative
Insurance versus uninsurable
Pure vs. Speculative risk
Pure- possibility of loss or no loss
Speculative- possibility of loss/no loss gain/no gain.
Costs of pure risk
Actual losses that occur
Worry and fear about possible losses
Less than optimal use of resources
Costs of managing the risks.
Costs of insurance
Operating costs Profits Opportunity costs Increased losses Adverse selection
