Chapter 1 Vocab (Notes) Flashcards
Risk
Uncertainty concerning the occurrence of a loss
Loss Exposure
any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
Objective Risk
Defined as the relative variation of actual loss from expected loss
Subjective Risk
Defined as uncertainty based on a person’s mental condition or state of mind
Chance of Loss
The probability that an event will occur
Objective Probability
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
Subjective Probability
individual’s personal estimate of the chance of loss
Chance of Loss
the probability that an event that causes a loss will occur
Objective Risk
the relative variation of actual loss from expected loss
Peril
cause of the loss
Hazard
condition that increases the chance of loss
Physical Hazard
physical condition that increases the frequency or severity of loss
Moral Hazard
dishonesty or character defects in an individual that increases the frequency or severity of loss
Attitudinal Hazard
also called a morale hazard; is carelessness or indifference to a loss, which increases the frequency or severity of a loss
Legal Hazard
refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of loss
Pure Risk
situation in which there are only the possiblities of loss or no loss
Speculative Risk
Situation in which either profit or loss is possible
Diversifiable Risk
affects only individuals or small groups; also called nonsystematic or particular risk
Nondiversifiable Risk
affects entire economy or large numbers of persons or groups within the economy; also called systematic or fundamental risk
Enterprise Risk
encompasses all major risks faced by a business firm, which include: pure, speculative, strategic, operational, and financial risk
Strategic Risk
refers to uncertainty regarding firm’s financial goals and objectives
Operational Risk
results from the firm’s business operations
Financial Risk
refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of the dollar
Enterprise Risk Management:
Combines pure, speculative, strategic, operational, and financial risk into a single unified treatment program all major risks faced by the firm
Personal Risk
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
Property Risks
involve the possibility of losses associated with the destruction of theft or property
Direct Loss
financial loss that results from the physical damage, destruction, or theft of property, such as fire damage to a home
Indirect/Consequential Loss
Financial loss that results from the occurrence of the physical damage or theft loss
Liability Risks
involve the possibility of being held legally liable for bodily injury or property damage to someone else
Property Risks
damage to buildings, furniture, office equipment
Loss of Business Income
firm must shut down after physical loss
Risk Control
techniques that reduce the frequency or severity of losses
Avoidance
risk control technique in which a certain loss exposure is never acquired, or an existing one is abandoned
Loss Prevention
activities to reduce the frequency of losses
Loss Reduction
activities to reduce the severity of losses
Risk Financing
techniques that provide for payment of losses after they occur
Retention
individual or firm retains part or all of losses
Active Retention
individual is aware of risk and deliberately plans to retain all or part of it
Passive Retention
risks may be unknowingly retained because of ignorance, indifference, or laziness
Self Insurance
planned retention by which part or all of a given loss exposure is retained by a firm
Noninsurance Transfer
transfers risk to another party
Hold Harmless Clause
one party agrees to hold another party from all legal liability
Hedging
Transferring risk of unfavorable price fluctuations to a speculator by buying/selling futures
Incorporation
firm transfers risk to creditors
