Mid Term

Question 1

Loss Exposure

Answer 1

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

Question 2

Objective Risk ( degree of risk)

Answer 2

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

Question 3

Loss Exposure

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

Answer 3

for instance,

Question 4

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

Answer 4

mental uncertainty is called subjective risk

Question 5

High subjective risk

Answer 5

High subjective risk often results in conservative and prudent behavior while low subjective risk may result in less conservative behavior

Question 6

Chance of loss = the probability that an event will occur

Answer 6

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

Question 7

Peri

Answer 7

a Peril is defined as the cause of the loss

e.g in an auto accident the collision is the peril.

Question 8

Risk

Answer 8

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

Question 9

Loss Exposure

Answer 9

• Any situation or circumstances which a loss is possible, regardless of if loss occurs .
• e.g possible theft of company property

Question 10

Subjective Risk

Answer 10

• Uncertainty based on persons mental condition or state of mind
  e. g Drunk driving

Question 11

High subjective risk

Answer 11

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.

Question 12

Chance of Loss

Answer 12

• The probability that an event will occur

Question 13

Objective Probability

Answer 13

• refers to the LONG-RUn relative frequency of an event, based on the assumption of an infinite number of obersevations

Question 14

Subjective probability

Answer 14

• Is the individual’s person estimate of the chances of loss
  e. g green card lottery

Question 15

Objective risk and chance of loss

Answer 15

• Objective risk is the relative variation of actual loss from expected loss

Question 16

Peril and Hazard

Answer 16

Peril - is defined as the cause of the loss

e.g perils that cause loss to property, fire flood, tornado etc

Question 17

Hazard

Answer 17

• is a condition that increases the chance of loss

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Question 18

Physical hazard

Answer 18

is a physical condition that increases the frequency or severity of loss

e.g ice road that increase the chance of an accident

Question 19

Moral Hazard

Answer 19

• 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

Question 20

Attitudinal Hazard * moral*

Answer 20

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

Question 21

Legal Hazzard

Answer 21

• 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

Question 22

Pure and Speculative risk

Answer 22

• 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

Question 23

Speculative Risk

Answer 23

• Speculative risk is a situation in which either profit or loss is possible.
  e. g investing in stock market, gabmbling

Question 24

• diversifiable risk

Answer 24

• 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 ..

Question 25

• Non-diversifiable risk

Answer 25

• 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

Question 26

Enterprise Risk

Answer 26

• All major risks faced by a business firm

Question 27

Enterprise risk type

Answer 27

• 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

Question 28

Enterprise Risk Management

Answer 28

• 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

Question 29

Personal Risk

Answer 29

• 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

Question 30

Premature death of family head

Answer 30

• 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

Question 31

4 costs that result from the premature death of a family head:

Answer 31

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

Question 32

Insufficient income during retirement

Answer 32

• 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.

Question 33

Poor heath-

Answer 33

• another major personal risk that au cause great economic insecurity

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