LESSON 1

Question 1

is defined as the as uncertainty concerning the occurrence of a loss

Answer 1

Risk

Question 2

Any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs.

Ex. Manufacturing plant at risk from earthquake or flood

Answer 2

Loss Exposure

TYPES:
- Property Loss
- Personnel Loss
- Liability
- Net Loss Exposure

Question 3

These are the probabilities that cannot be accurately estimated

Answer 3

Uncertainty

Question 4

Probability that an event will occur.

This is the number, expressed in percentage.

Types of it:
- Objective Probability
- Subjective Probability

Answer 4

Chance of loss

Question 5

This is the cause of loss

Ex. Fire, lightning, earthquake, burglary, etc.

Answer 5

Peril

Question 6

This is the condition that creates or increases the frequency or severity of the loss

Answer 6

Hazards

4 Major Types of Hazards:
1. Physical Hazard - physical condition
2. Moral Hazard - dishonesty or character defects in an individual
3. Attitudinal Hazard - carelessness or indifference to a loss
4. Legal Hazard - characteristics of the legal system or regulatory environment

Question 7

Classifications of Risk

Answer 7

• Pure and Speculative Risk
• Diversifiable and Non-diversifiable Risk
• Enterprise Risk
• Systemic Risk

Question 8

A type of risk that involves situation where the only possible outcomes are loss or no loss. There’s no opportunity for financial gain

Ex. Premature death, which leaves financial obligations and unmet

Answer 8

Pure Risk

Question 9

A type of risk where it includes scenarios where either profit or loss is possible. This risk are often tied to financial decisions and business ventures such as;

Ex. Buying stock, where prices may rise (profit) or fall (loss)

Answer 9

Speculative Risk

Question 10

Also called an systemic risk. It affects only individuals or small groups, meaning it does not impact the entire economy. These risk can be reducer even eliminated through diversification.

For example: a company experiencing a loss due to a factory fire is an individual risk, not an economy wide issue

Answer 10

Diversifiable Risk

Question 11

Also called fundamental risk. It affects the broader economy or large groups of people. This rest cannot be avoided through diversification and often require external intervention, such as government assistance

Ex. Economic recessions, which impact businesses and individuals across various sectors

Natural disasters, such as hurricanes and earthquakes, which can devastate entire regions

Answer 11

Non-diversifiable Risk

Question 12

This is the risk that refers to all major risk that a business firm faces. It includes multiple types of risk that impact different aspects of business operations

• Pure and speculative risk: impact the companies potential for loss or gain
• Strategic Risk: the uncertainty regarding a company’s financial goals and business decision. Example: expanding into a new market may be an profitable

-Operational Risk: risk arising from day to day business activities, such a supply chain disruptions or equipment failures.

• Financial Risk: the possibility of financial loss due to factors such as changes in commodity prices, fluctuations and interest rates and currency exchanges

Answer 12

Enterprise Risk

Question 13

This risk refers to the risk of total breakdown in an entire system or market due to the failure of a single entity or group. This type of risk is particularly concerning and financial markets, with a collapse of major banks or financial institutions can lead to a chain reactions of failure across the economy

Answer 13

Systemic Risk

Question 14

Types of Personal Risk:

Personal Risk are the kind of risk that directly affect an individual or family leading to potential financial hardship.

Answer 14

1. Premature Death
2. Inadequate Retirement Income
3. Poor Health
4. Unemployment

Question 15

This is the risk of having property damage or destroyed from numerous causes. Homes and other real estate and property can be damaged or destroyed because of fire, lightning, tornado, windstorm and other numerous other causes

Answer 15

Property Risk

Question 16

The two main types of losses related to property risk:

Answer 16

1. Direct Loss: refers to the physical damage, destruction, or theft of property. Ex. A house that catches fire and suffers structural damage incurs a direct loss
2. Indirect or Consequential Loss: occurs as a result of a direct loss, often leading to additional financial burdens.

Ex. If a home is damaged by a fire the owner may need to ren temporary housing or eat at the restaurant leading to extra expenses

Question 17

These are the kind of risk that includes personal injury claims, property damage lawsuits, and legal disputes over contractual agreements.

These are critical because they can result in severe financial consequences.

Answer 17

Liability Risk

Question 18

Types of Commercial Risk:

Answer 18

1. Property Risk: the valuable assets that are vulnerable to disasters.
2. Liability Risk: the risk of being sued.
3. Loss of Business Income: the loss of revenue due to operational disruptions like natural disaster or other catastrophe, loss of sales and profits.
4. Cyber Security and Identity Theft: the risk of being hacked

Question 19

The Burden of Risk on Society:

• the presence of risk result in uncertain undesirable social and economic effects. Risk entails three major burdens on society

Answer 19

1. Larger Emergency Funds
2. Loss of Goods and Services
3. Worry and Fear

Question 20

These include job related injuries and diseases of workers; death or disability of key employees; group life in health retirement plans exposure; in violation of federal and state laws and regulation

Answer 20

Human Resources Exposures

Question 21

This include acts of terrorism, political risk, kidnapping of key personnel, damage to foreign plants and properties and foreign currency risk

Answer 21

Foreign Loss Exposures

Question 22

This include damage to the market reputation and public image of the company, the loss of goodwill, the loss of intellectual property. For many companies, the value of intangible property is greater than the value of tangible property

Answer 22

Intangible Property Exposures

Question 23

Federal and state government may pass laws and regulations that have a significant financial impact on the company

Answer 23

Government Exposures

Question 24

The broad term used to describe techniques aimed at reducing the frequency or severity of losses

Answer 24

Risk Control

Question 25

Types of Risk Control

Answer 25

1. **Avoidance:** a technique for managing risk by **completely avoiding situations** that could lead to a loss. 2. **Loss prevention:** focuses on **reducing the probability of loss** thus reducing the frequency of losses. 3. **Lost reduction**: focuses on **minimizing the severity** of a loss after it occurs. 4. **Duplication:** involves having **backups or copies** of important documents or assets. 5. **Separation: divides asset** to minimize financial loss from a single event. 6. **Diversification: spread risk** across different parties, reducing the chance of a total loss.

Question 26

Involves an **individual or business retaining part of all the losses that may result from a given risk**. Types of it are: Active Retention & Passive Retention

Answer 26

Retention

Question 27

It means that the **individual or firm is consciously aware of the risk** and deliberately decides to retain all parts of it. This is usually done for two main reasons. 1). To save cost 2). Unavailability or high cost of insurance

Answer 27

Active Retention

Question 28

A type of Retention This occur when risk are **unknowingly retained due to ignorance, indifference, laziness or failure to identify an important risk**. This is a dangerous form of retention, especially when the risk has the potential for financial ruin

Answer 28

Passive Retention

Question 29

A **specific form of planned retention, where a company or individual decides to fund all of their losses.** This approach is also called to a self funding, emphasizing that the firm or individual is directly responsible for paying for the losses

Answer 29

Self Insurance

Question 30

Refers to the **techniques that provide for the payment of losses after they occur**. It has three major techniques 1. Retention 2. Non insurance transfer 3. Insurance

Answer 30

Risk Financing

Question 31

Methods of **transferring risk** to a party **other than the insurance company**

Answer 31

Non Insurance Transfer

Question 32

____________ is the **pooling of fruititious losses by the transfer of such risk to ensurers,** who agree to identify and short for such losses, provide other pecunary benefits on the occurrence, or render services connected with the risk

Answer 32

Insurance

Question 33

Characteristics of an Ideally Insurable Risk

Answer 33

1. There must be a large number of exposure units 2. The loss must be accidental and unintentional 3. The loss must be determinable and measurable 4. The loss should not be catastrophic 5. The chance of loss must be calculatable 6. The premium must be economically feasible.

Question 34

This is the **tendency of individuals with higher than average chance** of experiencing a loss to seek insurance at the standard (average) rates.

Answer 34

Adverse Selection

Question 35

This is the **process** where insurance **assess and classify applicants based on their risk levels**

Answer 35

Underwriting

Question 36

Basic Characteristics of Insurance

Answer 36

1. Pooling of Losses 2. Payment of Fortuitous Losses 3. Risk Transfers 4. Indemnification

Question 37

1. Refers to the **sharing of losses** by a large group. 2. The **losses of the few are spread** over the entire group. This allows the average loss to be substitute for the actual loss, magic get more manageable for individuals and businesses

Answer 37

1. Pooling of losses 2. Pooling

Question 38

Another essential characteristics of insurance. It involves **moving the risk** from the individual or businesses (the insured) to the insurer, who is generally in better financial position to absorb the loss.

Answer 38

Risk Transfer

Question 39

Refers to the principle of **restoring the ensured to their financial position before the loss occur**.

Answer 39

Indemnification

Question 40

Types of Government Insurance

Answer 40

1. Social Insurance: funded primarily through mandatory contributions from employers, employee or both. Ex. SSS

Question 41

Benefits of Insurance to Society

Answer 41

1. Indemnification for loss 2. Reduction of worry and fear 3. Source of investment funds 4. Loss prevention 5. Enhancement of credit

Question 42

Involves **identifying and addressing the risk and individual or family faces**. It helps to prevent financial hardships resulting from this like accidents, health issues, all property damage

Answer 42

Personal Risk Management

Question 43

STEPS IN THE RISK MANAGEMENT PROCESS

Answer 43

1. Identify loss exposure 2. Measure and analyze the loss exposures 3. Select the appropriate combination of techniques for treating the loss exposure 4. Implement and monitor the risk management program

Question 44

Cost of Insurance to Society

Answer 44

1. Cost of doing business 2. Fraudulent Claims 3. Inflated Claims

Question 45

A generic term used to describe **techniques for reducing the frequency or severity of potential losses**

Answer 45

Risk Control

Question 46

These are **special form of group captive that allows various organizations** (employees, trade groups, governmental units) **to come together** to right liability insurance, excluding specific coverage like workers compensation

Answer 46

Risk Retention Groups (RRGs)

Question 47

It is also called **Degree of Risk**. It is defined as the **relative variation of actual loss from expected loss**. **Statistically calculated**

Answer 47

Objective Risk

Question 48

It is also called **Perceived Risk**. It is defined as **uncertainty based on a person’s mental condition or state of mind**.

Answer 48

Subjective Risk

Question 49

It refers to the **long-run relative frequency of an event**.

Answer 49

Objective Probability

Question 50

It is the **individual’s personal estimate of the chance of loss**.

Answer 50

Subjective Probability