risk

Question 1

what is the definition of risk?

Answer 1

no universal definition
generally accepted definition: uncertainty, something that is unknown
another option: dispersion of actual loss from expected loss

Question 2

what is objective risk?

Answer 2

the relative variation of actual loss from expected loss

Question 3

what causes objective risk to decline

Answer 3

increase in exposure units

Question 4

how is objective risk measured

Answer 4

using the standard deviation or coefficient of variation

Question 5

what is subjective risk

Answer 5

uncertainty based on one’s mental condition or state of mind
difficult to measure

Question 6

what does objective probability do

Answer 6

allows you to find trends through empirical data

Question 7

a priori

Answer 7

by logical deduction such as in games of chance

Question 8

empirically

Answer 8

by induction, through analysis of data

Question 9

expected loss formula

Answer 9

(chance/percentage of loss) * (dollar amount of loss)

then add all values together

Question 10

objective risk formula

Answer 10

(actual loss - expected loss) / (expected loss)

Question 11

subjective probability

Answer 11

a personal estimate of chance of loss

Question 12

influences on subjective probability

Answer 12

age, sex, intelligence, education, and personality

Question 13

chance of loss distinguished from risk

Answer 13

even with the same chance of loss, relative variation of actual loss from expected loss may be different due to volatility

Question 14

peril

Answer 14

cause of loss (outside of a party’s control)

ex: hurricane, tornadoes, earthquakes

Question 15

hazard

Answer 15

condition arising from a giving peril

can create or increase the chance of loss

Question 16

three types of hazards

Answer 16

physical, moral, and morale

Question 17

physical hazard examples

Answer 17

icy streets, poorly designed intersections, dimly lit stairwells

Question 18

moral hazard definition

Answer 18

dishonesty or characteristics of an individual that increase the chance of loss

Question 19

morale hazard definition

Answer 19

carelessness or indifference to a loss because of the existence of insurance

Question 20

basic categories of risk

Answer 20

pure/speculative
diversifiable/nondiversifiable
enterprise
dynamic/static

Question 21

pure risk

Answer 21

a situation where there are only possibilities of loss or no loss

Question 22

speculative risk

Answer 22

possibility of profit or loss

Question 23

distinction between pure/speculative

Answer 23

• concerned with uncertainty as a loss
• assumption that those who participate in speculative risk are responsible for themselves
• law of large numbers applies best to pure risk

Question 24

diversifiable risk

Answer 24

an individual or one party can affect the level of risk, you can diversify your risk

Question 25

nondiversifiable risk

Answer 25

cannot be affected by a single entity

applies to larger groups

Question 26

types of diversifiable risk

Answer 26

reputation, brand, product liability, legal liability, innovation

Question 27

enterprise risks

Answer 27

a function of any action that relates to a business

relates to all aspects of business

Question 28

dynamic risk

Answer 28

tied to the economy (inflation, interest)

Question 29

static risk

Answer 29

occur regardless of what happens in the economy (natural disasters)

Question 30

types of pure risk

Answer 30

personal, property, liability, commercial

Question 31

personal risk examples and types of loss

Answer 31

examples: premature death, old age, poor health, unemployment
types of loss: earned income, extra expenses, and depletion of financial assets

Question 32

property risk types of losses and perils

Answer 32

types: direct physical damage losses, theft losses, indirect/consequential losses, and extra expenses
perils: dishonesty, failure of others

Question 33

liability risk losses and perils

Answer 33

types: legal liability for damages arising out of bodily injury or property damage to another party
perils: negligence, breach of warranty, and absolute liability

Question 34

other miscellaneous types of pure risk

Answer 34

crime, human resources, foreign loss exposure, intangible property exposures, government exposures

Question 35

burden of risk on society

Answer 35

need for larger emergency funds
loss of needed goods and services
fear and worry

Question 36

five methods of handling risk

Answer 36

avoidance
retention
noninsurance transfers
loss control
insurance

Question 37

two types of retention

Answer 37

active (desirable, deliberate)

passive (dangerous, unintentional)

Question 38

three types of non insurance transfers

Answer 38

contracts
hedging
incorporation

Question 39

two types of loss control

Answer 39

loss prevention

loss reduction