Chapter 1 Vocab (Text)

Question 1

Attitudinal (Morale) Hazard

Answer 1

Carelessness or indifference to a loss, which increases the frequency or severity of a loss

Question 2

Avoidance

Answer 2

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

Question 3

Chance of Loss

Answer 3

The probability that an event will occur

Question 4

Direct Loss

Answer 4

Financial loss that results directly from an insured peril

Question 5

Diversifiable Risk

Answer 5

A risk that affects only individuals of small groups and not the entire economy, which can be reduced or eliminated by diversification. Also called nonsystematic risk or particular risk.

Question 6

Enterprise Risk

Answer 6

A term that encompasses all major risks faced by a business, including pure risk, speculative risk, strategic risk, operation risk, and financial risk

Question 7

Enterprise Risk Management

Answer 7

Comprehensive risk management program that considers an organization’s pure risks, speculative risks, strategic risks, and operational risks

Question 8

Financial Risk

Answer 8

A risk that business firms face because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money

Question 9

Hazard

Answer 9

Condition that creates or increases the chance of loss

Question 10

Hedging

Answer 10

Technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling options and futures contracts on an organized exchange.

Question 11

Hold-Harmless Clause

Answer 11

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

Question 12

Human Life Value

Answer 12

For purposes of life insurance, the present value of the family’s share of the deceased breadwinner’s future earnings

Question 13

Indirect/Consequential Loss

Answer 13

Financial loss occurring as the consequence of some other loss.

Question 14

Law of Large Numbers

Answer 14

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

Question 15

Legal Hazard

Answer 15

Characteristics of the legal system or regulatory environment that increase the frequency or severity of losses

Question 16

Loss Exposure

Answer 16

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

Question 17

Loss Prevention

Answer 17

Aims at reducing the probability of loss so that the frequency of losses is reduced

Question 18

Moral Hazard

Answer 18

Dishonesty or character defects in an individual that increase the chance of loss

Question 19

Nondiversifiable Risk

Answer 19

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.

Question 20

Noninsurable Transfers

Answer 20

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

Question 21

Objective Probability

Answer 21

The 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 22

Objective Risk

Answer 22

Relative variation of actual loss from expected loss, which varies inversely with the square root of the number of cases under observation

Question 23

Peril

Answer 23

Cause or source of loss

Question 24

Personal Risks

Answer 24

Risks that directly affect an individual or family

Question 25

Physical Hazard

Answer 25

Physical condition that increases the chance of loss

Question 26

Premature Death

Answer 26

the death of a family head with unfulfilled financial obligations

Question 27

Property Risks

Answer 27

The risk of having property damaged or lost from numerous causes

Question 28

Pure Risk

Answer 28

Situation in which there are only the possibilities of loss or no loss

Question 29

Retention

Answer 29

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

Question 30

Risk

Answer 30

defined as uncertainty concerning the occurrence of a loss

Question 31

Risk Control

Answer 31

Risk management techniques that reduce the frequency or severity of losses, such as avoidance, loss prevention, and loss reduction

Question 32

Risk Financing

Answer 32

Risk management technique that provide for the funding of losses after they occur, such as retention, noninsurance transfers, and commercial insurance

Question 33

Self-Insurance

Answer 33

Retention program in which the employer self-funds or pays part or all of the losses

Question 34

Speculative Risk

Answer 34

Situation in which either profit or loss are clear possibilities

Question 35

Subjective Probability

Answer 35

the individual’s personal estimate of the chance of loss

Question 36

Subjective Risk

Answer 36

Uncertainty based on one’s mental condition or state of mind