Midterm 1 Flashcards
Risk
any situation where there’s uncertianty about what outcome will occur
What is the goal of risk management?
reduce the cost of risk not eliminate risk
Pure (Hazard) Risk
- everyone involved faces potential for loss, there is no opportunity for profit
- involve events out of individuals and organizations control -> natural disasters, accidents
Speculative Risk
- possibility for both gain and loss
- ex: foreign exchange, stock market investments
Pure Loss
accidents and unexpected natural disasters producing net loss to society, can be mitigated with insurance
Fundamental (Systematic) Risk
risk that affects entire markets or economies, and is beyond control of individual entities -> requires broader risk management and economic considerations
Particular (Unsystematic) Risk
risk specific to individual companies or investments that arise from factors internal to those entities -> diversification used to manage
Static Risk
- risk that remian relatively constant or don’t change significantly over time, and are stable and predictable
- losses brough by acts of nature or malicious and criminal acts of others
Dynamic Risk
- risks that change and evolve over time, can result in gain or loss
Subjective Risk
how a person or group of ppl personally feel about the level of risk in a situation
- based on individual perceptions, emotions, and opinions about the potential for something bad to happen
Objective Risk
the level of risk in a situation that can be measured or calculated using, facts, data, and statistics
Property Risk
potential for financial loss or damage to physical assets
Liability Risk
tyope of operational risk, risk of being held liable or responsible for an action or lack of action that results in injury, harm or damages to others or their property
Personal Risk
risks faced by individuals or families -> earnings, medical expenses, liability, physical asset, financial asset, longevity
Financial Risk
uncertainty over magnitutde of cash flows due to possible changes in prices, asset values, exhange rates, and credit risk
Hazard Risk
poses threat to life, health, property, or evironment
Strategic Risk
risks associated with org’s ability to achieve their business strategy
Price Risk
possible changes in output/input prices -> commodity price risk. exchange rate risk, interest rate risk
Credit Risk
risks that firms customers or parties they lent money too will delay or fail to make promised payments
Output Price Risk
risk of changes in prices a firm can demand for goods/services
Input Price Risk
risk of changes in prices firm pays for labour and materials
Operational Risk
emcompasses risk of direct or indirect loss resulting from inadequate or failed internal processes
P.E.A.R
People, Environment, Assets, Reputation
Insurance Deductable
amount insured required and obligated to pay by the insurance policy
Cyber Risk
any risk of disruption or damage to the reputation of an org resulting from failure to protect data of an org, often resulting in financial loss
ex ante
before the fact
ex post
after the fact
Risk Adverse
when deciding between 2 risky alternatives with same outcome, will choose alternative w/ less variability
Cost of Risk
Value Without Risk - Value With Risk
Exposure
opportunity for loss
Loss Exposure
set of circumstances that creates a probability of loss
Peril
a specific cause of loss or damage. an event or situation that can lead to harm or damage to property, people, or interests
Physical Hazard
something you can see or touch that can cause harm or damage
Moral Hazard
when someone takes a risk bc they know someone else will pay for it
Property Loss
damage, destruction, or disappearance of property (tangible and intangible) -> can occur bc of natural disasters, human actions, accidents or technological issues
Physical Damage
direct harm to tangible property
Theft or Burglary
loss due to someone stealing your property
Natural Disaster Damage
loss resulting from natural events
Data Loss
loss of digital information from cyber attacks, hardware failures or accidental deletion
Loss of Use
situations where property can’t be used bc of damages
Liability Insurance Contracts
agreements that provide financial protection to individuals or businesses if they’re held responsible for causing harm or damages to others
Civil Law
disputes between ppl or orgs usually involving compensation or an order to do or not to do something
Criminal Law
crime against community as a whole
Torts
act or omission that gives rise to injury or harm to another, giving rise to legal liability
Libility
legal responsibility or obligation of person or entity to compensate another party for harm, injury, or damage that they have caused
Vicarious Liability
type of strict liability where one person or entity is held responsible for the actions of another, usually employer-employee relationship
Product Liability
involves holding manufacturers, sellers, or distributors responsible for damages caused by defective or unsafe products
Strict Liability
legal principle where defendant is liable for damages irrespective of fault or negligence
Premise Liability
responsibility of property owners for accidents or injuries that occur on their premises due to unsafe conditions
What are the 4 elements that must be established to prove negligence?
- Duty
- Breech of Duty
- Causation
- Damages
Contributory Negligence
personal injury case where plaintiff must prove defendant didn’t behave reasonably in the circumstance, caused injury and should be financially responsible for injury
Assumed Risk
the assumption that there is some inherent risk in everyday activities
Res Ipsa Loquitur
the circumstances surrounding the case make it obvious that negligence occured -> incident that caused harm speaks for itself, there’s no need to look more into whether a reasonably competent defendant would have made the same errors
Joint and Several Liability
liability is shared
Contractual Liability
when libaility is passed from one party to another through a contract
Employer-Employee Liability
employers are responsible for keeping their employees safe and can be liable if they don’t
Property Owner-Tenant Liability
owners and tenents of properties have different levels of responsibility for ppl who enter their property
Assumption of Liability by Tenant
when renting a property, tenants might take on some responsibility for injuries that happen there
Attractive Nuisance Doctrine
property owners are liable for injuries to trespassing children if something on the property attracts the children
Consumption or Use of Products
manufacterers and sellers are responsible for ensuring their products are safe
Breach of Warranty
- if product doesn’t meet promised standards, seller can be sued
- if product is defective and hurts someone, the manufacturer is responsible
Professional Acts (Professional Liability)
professionals like doctors, lawyers, architects must perform their services with a high standard of care, if they don’t they can be sued for professional negligence or malpractice
Principal Agent Liability (Responseat Superior)
employers can be held responsible for their employees’ actions while on the job, even if the employee does something against instructions
Ownership and Operation of Automobile
car owners and drivers have specific responsibilities and can be held liable for accidents
Owners’ Liability
car owners can sometimes be sued for accidents caused by others driving their car, especially if the driver is a family member or employee
Risk Appetite
amount of risk organization is willing to accept in pursuit of its objectives
Frequency
measures number of losses in a given time period
Severity
measures the magnitude of the concequences of each loss
Risk Identification
determining where, when, why, and how events could prevent, degrade, delay or enhance the achievement objectives
Risk Analysis
Quantifying the likelihood and concequences of the risks, usually based on the controls put in place to reduce risk
Risk Evaluation
comparing existing level of risk to risk criteria established in activity; if the existing level of risk id considered unacceptable, then risk treatment is necessary
Risk Control
decisions to invest (or forego investing) rescources to reduce expected losses
Loss Control
actions that reduce the expected cost of losses by reducing frequency and/or severity of losses
Loss Prevention
actions that affect the frequency of losses
Loss Reduction
actions that primarly influence the severity of losses
What are the 2 approaches to loss control?
1) reducing the level of risky activity
2) increasing precautions against loss for activities that are undertaken
Risk Avoidance
completely eliminating exposure to losses by reducing level of activity to zero
Risk Financing
decisions about how to pay for losses if they occur
Loss Financing
methods used to obtain funds to pay for or offset losses
What are the 4 broad methods of loss financing?
1) retention
2) insurance
3) hedging
4) other contractual risk transfers
Retention
business or individual retains the obligations to pay for part or all of the losses
Insurance
purchase of insurance contracts requiring insurer to provide funds to pay for losses
Hedging
forwards, futures, options, and swaps used to extensively manage vaious types of risk
