Chapter 1 Vocab (Text) Flashcards
Attitudinal (Morale) Hazard
Carelessness or indifference to a loss, which increases the frequency or severity of a loss
Avoidance
A risk control technique in which a certain loss exposure is never acquired, or an existing loss exposure is abandoned
Chance of Loss
The probability that an event will occur
Direct Loss
Financial loss that results directly from an insured peril
Diversifiable Risk
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.
Enterprise Risk
A term that encompasses all major risks faced by a business, including pure risk, speculative risk, strategic risk, operation risk, and financial risk
Enterprise Risk Management
Comprehensive risk management program that considers an organization’s pure risks, speculative risks, strategic risks, and operational risks
Financial Risk
A risk that business firms face because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money
Hazard
Condition that creates or increases the chance of loss
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.
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
Human Life Value
For purposes of life insurance, the present value of the family’s share of the deceased breadwinner’s future earnings
Indirect/Consequential Loss
Financial loss occurring as the consequence of some other loss.
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
Legal Hazard
Characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
Loss Exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
Loss Prevention
Aims at reducing the probability of loss so that the frequency of losses is reduced
Moral Hazard
Dishonesty or character defects in an individual that increase the chance of loss
Nondiversifiable 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.
Noninsurable 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
Objective Probability
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
Objective Risk
Relative variation of actual loss from expected loss, which varies inversely with the square root of the number of cases under observation
Peril
Cause or source of loss
Personal Risks
Risks that directly affect an individual or family
Physical Hazard
Physical condition that increases the chance of loss
Premature Death
the death of a family head with unfulfilled financial obligations
Property Risks
The risk of having property damaged or lost from numerous causes
Pure Risk
Situation in which there are only the possibilities of loss or no loss
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
Risk
defined as uncertainty concerning the occurrence of a loss
Risk Control
Risk management techniques that reduce the frequency or severity of losses, such as avoidance, loss prevention, and loss reduction
Risk Financing
Risk management technique that provide for the funding of losses after they occur, such as retention, noninsurance transfers, and commercial insurance
Self-Insurance
Retention program in which the employer self-funds or pays part or all of the losses
Speculative Risk
Situation in which either profit or loss are clear possibilities
Subjective Probability
the individual’s personal estimate of the chance of loss
Subjective Risk
Uncertainty based on one’s mental condition or state of mind
