Chapter 3 Flashcards
What is risk?
Risk exists whenever there is uncertainty about outcome.
What are the three essential elements to suffer a loss?
- An item can suffer loss
- A cause of the loss
- Financial impact of the loss
What are the three possible outcomes when faced with a risk?
- Positive outcome (gain)
- Negative outcome (loss)
- Neutral outcome (neither positive nor negative)
What type of risk is characterized by only two possible outcomes: loss or no loss?
Pure risk
What type of risk involves a potential for gain?
Speculative risk
What is the primary purpose of insurance?
To protect against loss.
What is real property?
Land and anything that is attached to or growing on the land.
What is personal property?
Property that is not affixed to land, such as clothing, furniture, and appliances.
What is liability?
The legal responsibility to reimburse someone for damages due to carelessness.
What is negligence?
Carelessness that breaches a duty to behave in a certain way.
What are the three broad categories of loss causes?
- Natural
- Human
- Economic
What is an indirect loss?
A consequence of a direct loss, such as temporary relocation expenses.
What is risk avoidance?
Eliminating the loss exposure or never acquiring it.
What is loss control?
Methods that reduce the number of losses or the cost of losses that do occur.
What is the difference between loss prevention and loss reduction?
- Loss prevention reduces the number of losses
- Loss reduction reduces the cost of losses
What does risk transfer involve?
Shifting the responsibility for a risk to someone else through contracts or agreements.
What is risk retention?
Paying some or all of the losses that occur out of personal resources.
Fill in the blank: An automobile is an item of _______.
personal property
True or False: Speculative risks are typically covered by insurance.
False
What might be a significant human loss exposure for individuals?
Risk of losing health and being unable to earn income.
What is the financial impact of losing earning capacity due to injury?
Loss of potential future income.
List examples of natural causes of loss.
- Wind
- Rain
- Earthquake
- Flood
- Fire
- Lightning
List examples of human causes of loss.
- Theft
- Vandalism
- Negligence
- Fraud
- Murder
List examples of economic causes of loss.
- Inflation
- Depreciation
- Recession
- Obsolescence
What is defined as the risk management method of retaining losses?
Paying some or all of the losses out of personal income or savings
An example is the owner of a car retaining the cost of small damages like windshield cracks.
What does insurance allow in the context of risk management?
Transfer of the cost of loss to an insurance company
Understanding insurance is a primary focus of risk management education.
Fill in the blank: _______ refers to eliminating an exposure or never acquiring one.
Avoidance
What are the two possible outcomes of pure risks?
Loss or no loss
What are speculative risks characterized by?
The potential for a third outcome, gain
List three economic causes of loss.
- Inflation
- Recession
- Depreciation
What type of costs can result from a loss?
- Direct costs
- Indirect costs
True or False: Loss control attempts to eliminate losses or reduce the amount of a loss.
True
What is a deductible in an insurance policy an example of?
Partial retention
What should be used when losses cannot be avoided?
Some type of loss control device
Fill in the blank: Losses that happen often and cost a lot should be managed through _______.
Avoidance
What is the best risk management technique for losses that occur seldom but are costly?
Insurance
What are the two types of loss exposures faced by individuals?
- Property loss exposures
- Liability loss exposures
What are the main causes of loss?
- Natural causes (e.g., earthquakes, floods)
- Human causes (e.g., theft, negligence, discrimination)
What is the burden of loss in the context of retention?
Falls on the owner of the vehicle
How can risks be categorized based on their frequency and severity?
- High Frequency / High Severity: Avoidance
- High Frequency / Low Severity: Retention
- Low Frequency / High Severity: Insurance
- Low Frequency / Low Severity: Retention
What is a key consideration when choosing among risk management techniques?
The potential severity and frequency of losses
