Exam 1 Flashcards
Pure risk
Something that will only generate a loss
Speculative risk
There can be either a gain or a loss (betting/stocks)
Static risk
Low change in the rate of the risk (cold/flu season)
Dynamic risk
High fluctuation in the rate of the risk (California fires)
Objective risk
Risk that can be quantified (Rebuilding of a house)
Subjective risk
Risk that cannot be quantified (Stress)
Fundamental risk
Risks that affect a large part of the population
Particular risk
Risks that affect an individual/organization (Car accident)
Peril
Something that may cause a loss (fire, wind, floods, etc . )
Hazard
Something that makes a peril more likely to occur (ice on the roads)
Moral hazard
A person who purposefully wishes to cause a loss through dishonesty (lighting a house on fire)
Morale hazard
A person who is indifferent about a loss or careless about a loss (driving like Andreas)
How do you manage risks?
Identify the risks then develop a risk management plan
Risk management plan steps
Step 1: Identifying risks (most important step) – Figuring out what risks there are
Step 2: Evaluating for loss – Figuring out loss likelihood and loss severity
Step 3: Develop a risk management plan – Assign specific actions to each risk
Step 4: Implement the risk management plan – Carry out risk management plan
Step 5: Administering the plan and revising as necessary – Make sure the steps are carried out correctly
Loss avoidance
Completely avoiding a loss (don’t go bungee jumping if you don’t want to die from bungee jumping)
Loss control/prevention/reduction
Prior to the loss - wearing seatbelts or driving safely
During the loss - During a disaster, how do you handle it best
After the loss - Making sure the property is preserved
Retaining the risk
Planned risk, unplanned risk, total risk, and partial risk
Planned risk
Understand and accept the risk (driving)
Unplanned risk
Liable for a risk, but don’t know you are incurring the risk (someone falling on ice on the sidewalk outside of your house)
Total risk
Take on all the risk
Partial risk
Take on part of the risk (having insurance with a deductible)
Transferring the risk
Taking something of risk and transferring it to someone else (Insurance, waivers, hold harmless agreements, and stop losses)
Implementing the plan
Carry out the plan
Administer the plan
Risks change, so you must adapt to the new risks that are presented
The law of large numbers
the principle holds that the average of a large number of independent identically distributed random variables tends to fall close to the expected value. This result can be used to show that the entry of additional risks to an insured pool tends to reduce the variation of the average loss per policyholder around the expected value.
Insurer
Company, policy issuer, or seller
Insured
Owner, policy holder, or the buyer
Intentional tort
Injury/wrong against another party. Must be on purpose (threat, assault, fraud, or trespassing)
Unintentional tort
Injury/wrong against another party. NOT on purpose (Someone falling on GVSU’s campus)
ORPMAN
What would an ordinary, responsible, and prudent person do in a situation
Subrogation
Allows insurance companies to sue to recover their damages (in a car accident, the at fault insurance company gets sued by the non-at fault insurance company)
Liability damages
Monetary, physical, emotional
Real property
Any land and anything permanently attached to the land (house)
Physical property
Anything that would not be real property (phone, car, watch)
Expenses at death
Direct (funeral costs, debts, or probate costs - mostly legal fees)
JTWROS - Joint Tenants With Rights of Survivorship
TIC - Tenants In Common
POD - Payable on Death
Most frequent causes of death
Heart disease and cancer
When does insurance work best?
When the potential losses are huge
Principle of indemnity
When you have a loss, you cannot collect more than what the loss is worth
Valued insurance - You get whatever the property is valued at (life insurance)
Utmost good faith
There is a higher degree of honesty in a life/health insurance contract than a regular business contract
Valued insurance policies
You get whatever the property is valued at (life insurance)
Aleatory contracts
Two parts of the contract are not equal (a $10 insurance policy paying out $1,000,000)
Unilateral contracts
Only the insurance company has to keep its promises, you don’t (you can back out of the contract whenever you want, they cannot)
Burdens of risk on society
Expenditures to reduce risk (flood insurance, higher retention walls)
Conforming to the government (following OSHA)
Lost opportunities (worry about risk)
Expenditures of future losses
Cost of the losses
How much of each paycheck goes to Social Security?
7.65% total
RMIS stands for
Risk Management Information Systems
Percent of pre-retirement income needed in retirement
80-85% of income
CSO mortality tables
Show when most people are going to die by, based on their habits and tendencies
Insurable losses
I can collect on the insured loss if I have insurance.
Someone steals my computer, I cannot collect on it because I don’t have insurance, but if I did, I could
When does an insurance application become valid?
When there is offer and acceptance, when money is paid, and the policy is returned to the insurer when it is postmarked
Common things in business contracts
Exchange of consideration
Uncertainty
The inability to make a defensible estimate of a future outcome. If the probability of a loss cannot be estimated, it is uncertain
Enterprise risk management
An integrated, uniform approach to risk management, Its purpose is to help ensure a uniform approach to identifying risks, measuring them, prioritizing them, and implementing them
Lifestyle in retirement
Most have two homes, want to travel more, eat out more, give away more, and have much higher medical expenses
Who does not have the legal capacity to enter into a contract
Cannot be minors, cannot be drunk or under the influence, cannot be mentally handicapped, and individuals who don’t have the authority to act on behalf of someone else
