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R M 357E > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Objective Risk

A

the relative variation of actual loss from expected loss

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2
Q

Speculative risk

A

uncertainty based on a person’s mental condition or state of mind

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3
Q

Objective Probability

A

refers to 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

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4
Q

a priori

A

by logical deduction such as in games of chance

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5
Q

subjective probability

A

is the individual’s personal estimate of the chance of loss

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6
Q

Chance of Loss Distinguished from Risk

A

although chance of loss may be the same for two groups, the relative variation of actual loss from expected loss may be quite different

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7
Q

risk premium

A

the excess return required from an investment in a risky asset over that required from a risk-free investment

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8
Q

peril

A

The cause of a loss: fire, accident, flood

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9
Q

hazard

A

a condition that increases the chance of loss

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10
Q

physical hazard

A

a physical condition that increases the frequency or severity of loss

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11
Q

Moral hazard

A

dishonesty or character defects in an individual that increase the frequency or severity of loss

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12
Q

Morale hazard

A

carelessness or indifference to a loss because of the existence of insurance

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13
Q

pure risk

A

A situation in which there are only the possibilities of loss or no loss

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14
Q

speculative risk

A

a situation in which either profit or loss is possible (sports betting gambling, etc.)

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15
Q

diversifiable risk

A

a risk that affects only individuals or small groups and not the entire economy (ex: reputational risk, product liability risk, legal liability risk)

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16
Q

non-diversifiable risk

A

A risk that affects a large segment of society or markets at the same time. (ex: inflation, tariffs, political risk)

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17
Q

dynamic risk

A

risk related to the economy and subject to economic pressures

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18
Q

static risk

A

risks that are not impacted by the economy and that don’t change over time

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19
Q

personal risk

A

a risk that can result in personal losses such as health and personal well-being. types of losses are loss of earned income, extra expenses, and depletion of financial assets

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20
Q

property risk

A

types of losses include direct physical damages, theft losses, indirect or consequential losses, and extra expenses

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21
Q

liability risk

A

the loss is legal liability for damages from bodily injury or property damage to another party. perils include negligence, breach of warranty, and absolute liability.

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22
Q

commercial risk

A

Firm’s potential loss or failure from poorly conceived or executed business strategies, tactics, or procedures.

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23
Q

reinsurance

A

an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance

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24
Q

avoidance

A

A risk-response strategy that involves choosing not to do something that is considered risky

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25
retention
an organization or individual chooses to accept and bear the financial responsibility for a specific risk, rather than transferring it to an insurance company through purchasing a policy
26
incorporation
legally separating a business owner's personal assets from the business's liabilities, meaning that if the business faces legal issues or financial losses, the owner's personal property is generally protected from being seized to cover those debts
27
loss prevention
A risk control technique that reduces the frequency of a particular loss.
28
loss reduction
A risk control technique that reduces the severity of a particular loss.
29
insurance
most prevalent way to mitigate risk
30
risk management
a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures
31
insurance management
A sub-set of risk management
32
reactive risk management
Responding to risks after they occur.
33
proactive risk management
Anticipating risks before they occur.
34
primary objective of risk management
minimize pure risks
35
non-insurance risk transfer
a risk financing technique in which one party transfers the potential financial consequences of a particular loss exposure to another party that is not an insurer
36
objectives of risk management
-Pre-loss objectives: -Prepare for potential losses in the most economical way -Reduce anxiety -Meet any legal obligations -Post-loss objectives: -Survival of the firm -Continue operating -Stability of earnings -Continued growth of the firm -Minimize the effects that a loss will have on other persons and on society
37
risk management process
1. Identification of possible risks 2. Analysis (measurement) 3. Selection of risk management techniques 4. Implementation 5. Continual evaluation
38
cost of risk
a risk management tool that measures certain costs in a risk management program, including insurance premiums paid, retained losses, outside risk management services, financial guarantees, internal administrative costs, taxes and fees, and certain other expenses
39
line of credit
the maximum amount of money a creditor will allow a credit user to borrow
40
residual uncertainty
the level of risk that remains after individuals or organizations implement their risk management plans
41
internal risk reduction
-Diversification (Ex. companies opening more factories in case one burns down) -Investments in Information
42
cost trade-offs
risks to not necessarily operate independently - hence enterprise risk. 1. Expected Losses/Loss Control- typically more spent in loss control - less risk - but not always. 2. Loss Financing of Expected Indirect Loss-installing fire door minimizes risk of fire spreading to other operations. 3.Loss Financing of Residual Uncertainty-pay more to avoid residual uncertainty - pay higher premium for financial stronger insurance company
43
types of potential losses
1) Physical damage to property 2) Loss of income 3) Liability lawsuits 4) Death or disability of key persons 5) Losses from job-related injuries or disease 6) Losses from fraud, criminal acts, and employee dishonesty 7) Employee benefits loss exposures 8) International loss exposures (political risk)
44
general rule for losses
businesses suffer $4 additional cost for every $1 direct loss - so if you lost $500,000 the total lost would be $2,500,000
45
tools for recognizing loss exposure
1) Physical Inspection 2) Survey form 3) Flow chart 4) Financial Statements 5) Past loss experience
46
loss severity
refers to the probable size of the losses that may occur
47
maximum possible loss
the worst loss that could happen to the firm during its lifetime
48
maximum probable loss
the likely amount of loss that might result
49
4 basic characteristics of insurance
1. Pooling of losses 2. Payment of fortuitous losses 3. Risk transfer 4. Indemnification
50
Indemnification
The insured is restored to his or her approximate financial position prior to the occurrence of the loss
51
Ideal Requirements for an Insurance Risk
1. Large number of exposure units 2. Accidental and unintentional loss 3. Determinable and measurable loss 4. No catastrophic loss 5. Calculable chance of loss 6. Economically feasible premium
52
Generally Uninsurable Risks
1. Market 2. Financial 3. Production 4. Political
53
benefits of insurance to society
1. indemnification for loss 2. reduction of worry and fear 3. source of investment funds 4. loss prevention 5. enhancement of credit
54
underwriting
the process of evaluating and reducing the risk of an insurance policy. It involves assessing the likelihood of a policyholder making a claim, and then setting premiums to cover the cost of that risk.
55
cost of insurance to society
1. Cost of doing business 2. Fraudulent claims 3. Inflated claims
56
Financial Risk Management
focuses specifically on managing risks related to an organization's financial stability, like market, credit, and liquidity risks
57
Enterprise Risk Management
takes a broader approach, considering all types of risks across the entire organization, including financial, operational, strategic, and reputational risks, with the goal of aligning risk management with the overall business strategy
58
Capital Budgeting Process
the process by which investors determine the value of a potential investment project.
59
legal liability
A liability under the law that occurs when a person is responsible for injuries or damages to another due to negligence.
60
statutory law
law established by an act of the legislature that is signed by the executive.
61
common law
a system of law based on precedent and customs
62
legal wrong
failure to preform a legal duty owed to another party or entity
63
Types of Torts
intentional, negligence, strict liability
64
negligence
the failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm
65
elements of negligence
legal duty to exercise "due care", failure to perform that duty, damages to other parties (3 types), and proximate casual relationship between negligent act and damages (often the most difficult to prove)
66
special damages
actual determinable losses such as medical bills, lost wages, or repair costs
67
general damages
subjective losses such as pain and suffering or mental anguish
68
punitive damages
amounts intended to punish the wrongdoer and discourage continued similar activity
69
"hard" insurance market
insurer profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain
70
"soft" insurance market
profitability is improving, standards are loosened, premiums decline, and insurance become easier to obtain
71
Defenses against negligence
contributory negligence, comparative negligence, last clear chance doctrine, assumption of risk
72
Contributory Negligence
if the plaintiff is even slightly negligent, they recover nothing
73
Comparative Negligence
legal principle that determines how much fault each party in an accident bears
74
Pure Comparative Negligence
the court determines the percentage of fault of the defendant
75
49% rule
in a comparative negligence jurisdiction, recovery may be made by the plaintiff only if the percentage of fault is less than that of the defendant (in a 50/50 case neither party recovers)
76
50% rule
in a comparative negligence jurisdiction, recovery may be made by the plaintiff only if the percentage of fault is not more than that of the defendant (in a 50/50 case both parties can recover)
77
Last Clear Chance Doctrine
if a party can safely avoid the injury, then the party much take such action to avoid the harm
78
Imputed Negligence
occurs when the negligence of 1 party is transferred to a 2nd party
79
Vicarious Liability
Legal doctrine under which a party can be held liable for the wrongful actions of another party.
80
Dram Shop liability
Business and individuals may be liable for injuries caused by intoxicated person to whom they provide liquor
81
Res Ipsa Loquitur
A Latin term meaning "the thing speaks for itself". effect: "flips" the concepts of innocent until proven guilty
82
Res Ipsa Loquitur elements
1. event must be one that would not have occurred but for the negligence of another party 2. other party has superior knowledge or control over the cause of harm 3. the cause of harm must have been in the exclusive control of the other party 4. the injured party must not have meaningfully contributed to the harm or injury
83
trespasser
no duty to warn, barricade, or fix.... but no traps
84
licensee
duty to warn or barricade... no duty to fix
85
invitee
duty to inspect, warn, fix (or barricade)... the greatest degree of care required for a property owner
86
Attractive Nuisance Doctrine
where one creates an environment that attracts other who may not appreciate the true potential harm
87
defective product manufacturing
when a product is made with flaws or errors during the manufacturing process
88
defective product design
a flaw in a product's design that makes it unsafe for consumers
89
Defective Notice/Warning to Consumers
even if a product is not unreasonably unsafe, there are undisclosed dangers that the consumer should have been warned about
90
product liability exposure
- defective product manufacturing - defective product design - defective notice/warning to consumers
91
Defenses to Product Liability Claims
state of the art, compliance with applicable laws and regulations, alteration of the product
92
How to deal with hazards
1. prevent the creation of the hazard 2. prevent the release of an existing hazard/ separate the hazard from what you are protecting by a physical barrier 3. reduce the hazard 4. modify the rate of release of existing hazard 5. separate hazard from what you're protecting by time and space 6. modify hazard 7. modify what you're protecting 8. initiate countermeasures 9. stabilize and repair
93
Defective Tort Liability System
1. Rising tort liability costs 2. Inefficiency in compensating injured victims 3. Uncertainty of outcomes 4. High jury awards 5. Long delays in settlement
94
tort reform
proposed changes in the civil justice system that aim to reduce the ability of victims to bring tort litigation or to reduce damages they can receive
95
Alternative Dispute Resolution
Any other formal or informal process used to settle disputes without resorting to a trial
96
Tort Liability
The legal requirement that a person responsible, or at fault, shall pay for the damages and injuries caused

R M 357E (1 decks)

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