Chapter 1 - Risk and Its Treatment Flashcards
Define Attitudinal (morale) Hazard
Carelessness or indifference to loss, which increases the frequency or severity of a loss.
Define Avoidance
A risk control technique in which a certain loss exposure is never acquired, or an existing loss exposure is abandoned.
Define Chance of Loss
The probability that an event will occur.
Define Direct Loss
Financial loss that results directly from an insured peril.
Define Diversifiable/Nonsystematic/Particular Risk
A risk that affects only individuals or small groups and not the entire economy, which can be reduced or eliminated by diversification.
Define Enterprise Risk
A term that encompasses all major risks faced by a business, including pure risk, speculative risk, strategic risks, and operational risks.
Define Enterprise Risk Management
Comprehensive risk management program that considers an organization’s pure risk, speculative risk, strategic risks, and operational risks.
Define Financial Risk
A risk that a business firms face because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.
Define Hazard
Condition that creates or increases the chance of loss.
Define Hedging
Technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling options and futures contracts on an organized exchange.
Define Hold-harmless Clause
Clause written into a contract by which one party agrees to release another party from all legal liability, such as a retailer who agrees to release the manufacturer from legal liability if the product injures someone.
Define Human Life Value
For purposes of life insurance, the present value of the family’s share of the deceased breadwinner’s future earnings.
Define Incorporation
A risk transfer technique that limits the liability of the business owner to the extent of the businesses assets so their personal assets are protected.
Define Indirect/Consequential Loss
Financial loss occurring as the consequence or some other loss.
Define Law of Large Numbers
Concept that the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures.
Define Legal Hazard
Characteristics of the legal system or regulatory environment that increases the frequency or severity of losses.
Define Liability Risk
When you are held legally liable if you do something that results in bodily injury or property damage to someone else.
Define Loss Exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
Define Loss Prevention
Risk management techniques aimed at reducing the probability of loss so that the frequency of losses is reduced. e.g. - defensive driving course
Define Moral Hazard
Dishonesty or character defects in an individual that increases the chance of loss.
Define Nondiversifiable/Systematic/Fundamental Risk
A risk that affects the entire economy or large numbers of persons or groups within the economy, which cannot be reduced or eliminated by diversification.
Define Noninsurance Transfers
Various methods other than insurance by which a pure risk and its potential financial consequences can be transferred to another party, for example, contracts, leases, and hold-harmless agreements.
Define Objective Probability
Long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no chance in the underlying conditions.
Define Peril
Cause or source of loss. The thing that does the damage: fire, collision.
Define Personal Risks
Risks that directly affect an individual or family.
Define Physical Hazard
Physical condition that increases the chance of loss.
Define Premature Death
The death of a family head with unfulfilled financial obligations.
Define Property Risks
Risk of valuable business property being damaged or destroyed that could financially harm a business.
Define Pure Risk
Situation in which there are only the possibilities of loss or no loss.
Define Retention
Risk management technique in which an individual or a firm retains part or all of the losses resulting from a given loss exposure. Used when no other method is available, the worst possible loss is not serious, and losses are highly predictable.
Define Risk
Based on the historical definition, risk is defined as uncertainty concerning the occurrence of a loss. Numerous definitions or risk exist in the professional literature. Because of ambiguity, the term “loss exposure” is often used instead of “risk”.
Define Risk Control
Risk management techniques that reduce the frequency or severity of losses, such as avoidance, loss prevention, and loss reduction.
Define Risk Financing
Risk management techniques that provide for the funding of losses after they occur, such as retention, noninsurance transfers, and commercial insurance.
Define Self-Insurance
Retention program in which the employer self-funds and pays part or all of the losses.
Define Speculative Risk
Situation in which either profit or loss are clear possibilities.
Define Subjective Probability
An individual’s personal estimate of the chance of loss.
Define Subjective Risk
Uncertainty based on one’s mental condition or state of mind.
_________ ___________ may be necessary to insure nondiversifiable risks.
Government assistance.
Personal risks are risks that directly affect and individual or family. They involve the possibility of a loss or reduction in income, extra expenses or depletion of financial assets, due to: (4 items)
- Premature death of family head
- Insufficient income during retirement
- Poor health (medical bills and loss of earned income)
- Involuntary unemployment
What three major burdens on society come from the presence of risk?
- In the absence of insurance, individuals and business firms would have to maintain large emergency funds to pay for unexpected losses
- The risk of a liability lawsuit may discourage innovation, depriving society of certain goods and services.
- Risk causes worry and fear
Names three major risk control techniques.
- Avoidance
- Loss prevention
- Loss reduction
What are three techniques of risk financing that are used to provide payment of losses after they occur?
- Retention (Active, Passive, Self Insurance)
- Noninsurance Transfers
- Insurance
What are three ways risk can be transferred? (Noninsurance transfer)
- Transfer of risk by contracts (Hold-harmless clause)
- Hedging
- Incorporation
What are three reasons that make insurance the most practical method for handling major risks?
- Risk transfer is used because a pure risk is transferred to the insurer.
- The pooling technique is used to spread the losses of a few over the entire group.
- The risk may be reduced by application of the law of large numbers.
What is Objective Risk?
The relative variation of actual loss from expected loss
What are the four major types of hazard?
- Physical hazard
- Moral Hazard
- Attitudinal hazard
- Legal hazard
Names three classes of risk?
- Pure and speculative risk
- Diversifiable risk and nondiversifiable risk
- Enterprise risk
Why are liability risks important?
- There is no upper limit with respect to the amount of loss
- A lien can be placed on your income and financial assets to satisfy a legal judgement
- Legal defense costs can be enormous
