Chapter 1 Vocab (Notes)

Question 1

Risk

Answer 1

Uncertainty concerning the occurrence of a loss

Question 2

Loss Exposure

Answer 2

any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

Question 3

Objective Risk

Answer 3

Defined as the relative variation of actual loss from expected loss

Question 4

Subjective Risk

Answer 4

Defined as uncertainty based on a person’s mental condition or state of mind

Question 5

Chance of Loss

Answer 5

The probability that an event will occur

Question 6

Objective Probability

Answer 6

long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions

Question 7

Subjective Probability

Answer 7

individual’s personal estimate of the chance of loss

Question 8

Chance of Loss

Answer 8

the probability that an event that causes a loss will occur

Question 9

Objective Risk

Answer 9

the relative variation of actual loss from expected loss

Question 10

Peril

Answer 10

cause of the loss

Question 11

Hazard

Answer 11

condition that increases the chance of loss

Question 12

Physical Hazard

Answer 12

physical condition that increases the frequency or severity of loss

Question 13

Moral Hazard

Answer 13

dishonesty or character defects in an individual that increases the frequency or severity of loss

Question 14

Attitudinal Hazard

Answer 14

also called a morale hazard; is carelessness or indifference to a loss, which increases the frequency or severity of a loss

Question 15

Legal Hazard

Answer 15

refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of loss

Question 16

Pure Risk

Answer 16

situation in which there are only the possiblities of loss or no loss

Question 17

Speculative Risk

Answer 17

Situation in which either profit or loss is possible

Question 18

Diversifiable Risk

Answer 18

affects only individuals or small groups; also called nonsystematic or particular risk

Question 19

Nondiversifiable Risk

Answer 19

affects entire economy or large numbers of persons or groups within the economy; also called systematic or fundamental risk

Question 20

Enterprise Risk

Answer 20

encompasses all major risks faced by a business firm, which include: pure, speculative, strategic, operational, and financial risk

Question 21

Strategic Risk

Answer 21

refers to uncertainty regarding firm’s financial goals and objectives

Question 22

Operational Risk

Answer 22

results from the firm’s business operations

Question 23

Financial Risk

Answer 23

refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of the dollar

Question 24

Enterprise Risk Management:

Answer 24

Combines pure, speculative, strategic, operational, and financial risk into a single unified treatment program all major risks faced by the firm

Question 25

Personal Risk

Answer 25

risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expense, or depiction of financial assets due to premature death of family head, insufficient income during retirement, poor health, or involuntary unemployment

Question 26

Property Risks

Answer 26

involve the possibility of losses associated with the destruction of theft or property

Question 27

Direct Loss

Answer 27

financial loss that results from the physical damage, destruction, or theft of property, such as fire damage to a home

Question 28

Indirect/Consequential Loss

Answer 28

Financial loss that results from the occurrence of the physical damage or theft loss

Question 29

Liability Risks

Answer 29

involve the possibility of being held legally liable for bodily injury or property damage to someone else

Question 30

Property Risks

Answer 30

damage to buildings, furniture, office equipment

Question 31

Loss of Business Income

Answer 31

firm must shut down after physical loss

Question 32

Risk Control

Answer 32

techniques that reduce the frequency or severity of losses

Question 33

Avoidance

Answer 33

risk control technique in which a certain loss exposure is never acquired, or an existing one is abandoned

Question 34

Loss Prevention

Answer 34

activities to reduce the frequency of losses

Question 35

Loss Reduction

Answer 35

activities to reduce the severity of losses

Question 36

Risk Financing

Answer 36

techniques that provide for payment of losses after they occur

Question 37

Retention

Answer 37

individual or firm retains part or all of losses

Question 38

Active Retention

Answer 38

individual is aware of risk and deliberately plans to retain all or part of it

Question 39

Passive Retention

Answer 39

risks may be unknowingly retained because of ignorance, indifference, or laziness

Question 40

Self Insurance

Answer 40

planned retention by which part or all of a given loss exposure is retained by a firm

Question 41

Noninsurance Transfer

Answer 41

transfers risk to another party

Question 42

Hold Harmless Clause

Answer 42

one party agrees to hold another party from all legal liability

Question 43

Hedging

Answer 43

Transferring risk of unfavorable price fluctuations to a speculator by buying/selling futures

Question 44

Incorporation

Answer 44

firm transfers risk to creditors