Chapter 8 - Risk Management and Life Insurance

Question 1

What is the definition of risk?

Answer 1

Uncertainty concerning losses

Question 2

What are the sub-categories of risk?

Answer 2

1. Pure risk - only the possibility of loss
2. Speculative risk - either a profit or loss is possible
3. Subjective risk - amount of pure risk that an individual/company may assume
4. Objective risk - variance between anticipated losses and actual losses

Question 3

What is the difference between a peril and a hazard?

Answer 3

Peril is the cause of the loss.

Hazard is the condition that creates or increases the chance of occurrence or severity of loss when it occurs.

Peril = fire
Hazard = improper storage of combustables

Question 4

When is a loss unsupportable?

Answer 4

If it does seriously affect an individual’s standard of living or financial assets

Question 5

What is risk severity?

Answer 5

The dollar cost of a loss

Question 6

What is risk frequency?

Answer 6

Probability of a loss occurring

Question 7

Which type of risk (frequency and severity) is best managed by insurance?

Answer 7

Low-frequency, high severity risks. Example: total disability.

Question 8

What are the 3 methods for managing risk?

Answer 8

Loss control
Risk transfer
Risk (loss) financing

Question 9

What are the 3 basic categories of loss control?

Answer 9

1. Loss avoidance (do not expose yourself to the risk)
2. Loss prevention (reduce frequency of loss while continuing to engage in the activity)
3. Loss reduction (reduce severity of a loss once it has been incurred)

Question 10

What are the methods of risk transfer?

Answer 10

Insurance or non-insurance (through contracts/warranties)

Question 11

What is risk (loss) financing?

Answer 11

Individuals/companies retain all or part of a risk by accepting the cost of it or planning to fund the costs in advance.

Question 12

How does active risk retention differ from passive?

Answer 12

Active risk retention involves an individual who is aware of a risk and deliberately plans to retain all or part of it. Passive involves an individual who retains risk because of ignorance, indifference, or carelessness.

Question 13

What are the 3 major types of personal risks?

Answer 13

1. Premature death
2. Aging and retirement (insufficient income)
3. Health

Question 14

How do indirect losses differ from direct losses?

Answer 14

Direct losses result from physical damage, destruction, or theft of a property. Indirect losses result from the consequence of the direct loss (also called business interruption losses).