risk Flashcards

1
Q

what is the definition of risk?

A

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

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2
Q

what is objective risk?

A

the relative variation of actual loss from expected loss

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3
Q

what causes objective risk to decline

A

increase in exposure units

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4
Q

how is objective risk measured

A

using the standard deviation or coefficient of variation

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5
Q

what is subjective risk

A

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

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6
Q

what does objective probability do

A

allows you to find trends through empirical data

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7
Q

a priori

A

by logical deduction such as in games of chance

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8
Q

empirically

A

by induction, through analysis of data

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9
Q

expected loss formula

A

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

then add all values together

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10
Q

objective risk formula

A

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

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11
Q

subjective probability

A

a personal estimate of chance of loss

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12
Q

influences on subjective probability

A

age, sex, intelligence, education, and personality

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13
Q

chance of loss distinguished from risk

A

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

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14
Q

peril

A

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

ex: hurricane, tornadoes, earthquakes

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15
Q

hazard

A

condition arising from a giving peril

can create or increase the chance of loss

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16
Q

three types of hazards

A

physical, moral, and morale

17
Q

physical hazard examples

A

icy streets, poorly designed intersections, dimly lit stairwells

18
Q

moral hazard definition

A

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

19
Q

morale hazard definition

A

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

20
Q

basic categories of risk

A

pure/speculative
diversifiable/nondiversifiable
enterprise
dynamic/static

21
Q

pure risk

A

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

22
Q

speculative risk

A

possibility of profit or loss

23
Q

distinction between pure/speculative

A
  • 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
24
Q

diversifiable risk

A

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

25
nondiversifiable risk
cannot be affected by a single entity | applies to larger groups
26
types of diversifiable risk
reputation, brand, product liability, legal liability, innovation
27
enterprise risks
a function of any action that relates to a business | relates to all aspects of business
28
dynamic risk
tied to the economy (inflation, interest)
29
static risk
occur regardless of what happens in the economy (natural disasters)
30
types of pure risk
personal, property, liability, commercial
31
personal risk examples and types of loss
examples: premature death, old age, poor health, unemployment types of loss: earned income, extra expenses, and depletion of financial assets
32
property risk types of losses and perils
types: direct physical damage losses, theft losses, indirect/consequential losses, and extra expenses perils: dishonesty, failure of others
33
liability risk losses and perils
types: legal liability for damages arising out of bodily injury or property damage to another party perils: negligence, breach of warranty, and absolute liability
34
other miscellaneous types of pure risk
crime, human resources, foreign loss exposure, intangible property exposures, government exposures
35
burden of risk on society
need for larger emergency funds loss of needed goods and services fear and worry
36
five methods of handling risk
``` avoidance retention noninsurance transfers loss control insurance ```
37
two types of retention
active (desirable, deliberate) | passive (dangerous, unintentional)
38
three types of non insurance transfers
contracts hedging incorporation
39
two types of loss control
loss prevention | loss reduction