Chapter 10 Property & Liability Risk Flashcards
Define Risk
Uncertainty about the outcome of a situation or event. It arises out of the possibility that the outcome will differ from what is expected.
In the area of financial losses, risk consist of uncertainty about both whether the financial loss will occur, and how large it might be.
Name 2 types of risk
Speculative risk
Pure risk
Define Speculative risk & give an example
Situations where there is potential for gain, as well as for loss.
Example: Investments, such as those made in the stock market involved speculative risk
Define Pure risk & give an example
When there is no potential for gain only possibility of loss.
Ex:  fires, automobile, accidents, illness and theft are examples of events involving pure risk.
Insurance only addresses pure risk
Process of identifying and evaluating, purely risky situations to determine an implement appropriate management
Risk Management
Any event that can cause a financial loss
Perils
Ex:  fire, wind, theft, vehicle collision, illness, and death are examples of perils
Name 5 steps of the Risk Management process
- Identify Identify your risk exposures.
- Estimate your risk and potential for losses.
- Choose how to handle your risk loss.
- Implement your risk management program.
- Evaluate and adjust your program.
Large Loss Principle
Ensure the risk that you cannot afford, and retain the risk that you can reasonably afford.
Pay for small losses out of your own pocket and purchase as much insurance as necessary to cover large, catastrophic losses that might ruin you financially
Likely number of times that a loss might occur over a period of time
Frequency of loss
Is the loss highly likely, not very likely to happen, or will it hardly ever happen?
Severity of loss
Potential magnitude of a loss
Will the loss be enough to bankrupt you, use up a substantial amount of your own resources, or is it an expense you can handle in your budget?
MOST Important “How much might I lose?”
Risk loss handled in 5 ways
- Risk of avoidance
- Risk retention
- Lost control
- Risk transfer
- Risk reduction
Loss control is designed to do what
Reduce
1. loss frequency &
2. loss severity
Reduce the overall uncertainty about the magnitude of loss
Risk Reduction = reduce it to acceptable levels (through insurance)
A mechanism for transferring and reducing pure risk through which a large number of individuals share in the financial losses suffered by members of the group as a whole.
Insurance
4 components of Insurance Premiums
- The individual share of the groups losses.
- A share of the companies expenses for administering the insurance plan.
- Insurance company reserves set aside to pay future losses.
- profit when the plan is administered by a profit seeking company.
