Mid Term Flashcards
Loss Exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
e. g
- Manufacturing plants that may be damaged by an earthquake or flood
- Possible theft or company property due to inadequate security
- potential injury to employees because unsafe working conditions
Objective Risk ( degree of risk)
the relative varriation of actual loss form expected loss
e.g - in some yearsas few as 90 houses may burn in other years maybe up to 110 housrs may burn
Loss Exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
for instance,
Subjective risk - uncertainty based on a person’s mental condition or state of mind
mental uncertainty is called subjective risk
High subjective risk
High subjective risk often results in conservative and prudent behavior while low subjective risk may result in less conservative behavior
Chance of loss = the probability that an event will occur
objective probability VS subjective Probability
- Objeictive probability refers to the long-run relative frequency of an event based on the assumptions of an infinitie number of observations and of no change in the underlying conditions
- Subjective probability is the individual’s personal estimate of the chance of loss
Peri
a Peril is defined as the cause of the loss
e.g in an auto accident the collision is the peril.
Risk
Uncertainty concerning the occurence of a loss
e. g - the risk of lung cancer for smoker is present, because uncertainty is present
- The risk of being hit by a car in a zebra crossing is present, becauseuncertainty ispresent
Loss Exposure
- Any situation or circumstances which a loss is possible, regardless of if loss occurs .
- e.g possible theft of company property
Subjective Risk
- Uncertainty based on persons mental condition or state of mind
e. g Drunk driving
High subjective risk
High Subjective risk often results in conservative prudent behavior such astaking a tax, while low objective risk may result in less conservative behavior driving home.
Chance of Loss
- The probability that an event will occur
Objective Probability
- refers to the LONG-RUn relative frequency of an event, based on the assumption of an infinite number of obersevations
Subjective probability
- Is the individual’s person estimate of the chances of loss
e. g green card lottery
Objective risk and chance of loss
- Objective risk is the relative variation of actual loss from expected loss
Peril and Hazard
Peril - is defined as the cause of the loss
e.g perils that cause loss to property, fire flood, tornado etc
Hazard
- is a condition that increases the chance of loss
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Physical hazard
is a physical condition that increases the frequency or severity of loss
e.g ice road that increase the chance of an accident
Moral Hazard
- is dishonesty or character defects in an individual that increase the frequency or severity of loss
- Faking an accident to collect from an auto insurer
Attitudinal Hazard * moral*
0 is carelessness or indifference to a loss, which increases the frequency or severity of a loss
e.g leaving car keys in an unlocked car, which increases the chance of car theft
Legal Hazzard
- refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of loss
e. g Laws that requires insurers to include coverage for certina benefits in health insurance plans
Pure and Speculative risk
- Pure risk is a situation in which there are ONLY the possibilties of loss orno loss and no potential benefit from it. e.g damage to proerpty from fire
Speculative Risk
- Speculative risk is a situation in which either profit or loss is possible.
e. g investing in stock market, gabmbling
- diversifiable risk
- affects only individuals or small groups and not the tire economy ! also known as
]Non systematic or particular risk.
it is a risk that can be reduced or eliminated by diversification ..
- Non-diversifiable risk
- affects the large numbers entire economy of persons or groups within the economy
also known as systematic risk or fundamental risk.
- it is the risk that cannot be eliminated or reduced
e. g includes flood, war, unemployment floods etc
Enterprise Risk
- All major risks faced by a business firm
Enterprise risk type
- Strategic risk
Uncertainty regarding the firm;s financial goals and objectives 9 e.g new line of business may not be profitable. - Operational Risk - results from the firm’s business operations e.g online banking service may incur losses if hackers breaks into it
- Financial risk - uncertainty of loss due to adverse changes in commodity prices, interest rates, foreign exchange rates and the value of money
Enterprise Risk Management
- combines into a bible unified treatment program all major risks faced by the firm:
- pure risk
- speculative risk
- strategic risk
- Operational Risk
- Financial Risk
As long as all risk are not perfectly correlated, the firm can offset one risk against another, thus reducing the firm;s overall risk
- Treatement of financial risk requires the use of Hedging techniques
Personal Risk
- Are risk that directly affect and individual of family or family head.
- it involves in the possibilities of loss or reduction in income, extra expenses due to
1 Premature death of family head
2 Insufficient income during retirement
3 Poor health
4 unemployment
Premature death of family head
- the death of a family head with unfulfilled financial obligations
- these obligations include dependents to support, a mortgage to be paid off, educations and etc
4 costs that result from the premature death of a family head:
1 Human life value- the present value of the family share of the deceased breadwinners fututre earnings
2 Additional expenses
3 insufficient income
4 certain noneconomic cost
Insufficient income during retirement
- the major risk associated with retire meant is insufficient income
- vast majority workers experience a substantial reduction in income. which results in a reduced standard of living.
- In addition, most retired have not saved enough for comfortable living standard,
- some required are economically insecure.
Poor heath-
- another major personal risk that au cause great economic insecurity
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