risk Flashcards
what is the definition of risk?
no universal definition
generally accepted definition: uncertainty, something that is unknown
another option: dispersion of actual loss from expected loss
what is objective risk?
the relative variation of actual loss from expected loss
what causes objective risk to decline
increase in exposure units
how is objective risk measured
using the standard deviation or coefficient of variation
what is subjective risk
uncertainty based on one’s mental condition or state of mind
difficult to measure
what does objective probability do
allows you to find trends through empirical data
a priori
by logical deduction such as in games of chance
empirically
by induction, through analysis of data
expected loss formula
(chance/percentage of loss) * (dollar amount of loss)
then add all values together
objective risk formula
(actual loss - expected loss) / (expected loss)
subjective probability
a personal estimate of chance of loss
influences on subjective probability
age, sex, intelligence, education, and personality
chance of loss distinguished from risk
even with the same chance of loss, relative variation of actual loss from expected loss may be different due to volatility
peril
cause of loss (outside of a party’s control)
ex: hurricane, tornadoes, earthquakes
hazard
condition arising from a giving peril
can create or increase the chance of loss
three types of hazards
physical, moral, and morale
physical hazard examples
icy streets, poorly designed intersections, dimly lit stairwells
moral hazard definition
dishonesty or characteristics of an individual that increase the chance of loss
morale hazard definition
carelessness or indifference to a loss because of the existence of insurance
basic categories of risk
pure/speculative
diversifiable/nondiversifiable
enterprise
dynamic/static
pure risk
a situation where there are only possibilities of loss or no loss
speculative risk
possibility of profit or loss
distinction between pure/speculative
- 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
diversifiable risk
an individual or one party can affect the level of risk, you can diversify your risk
nondiversifiable risk
cannot be affected by a single entity
applies to larger groups
types of diversifiable risk
reputation, brand, product liability, legal liability, innovation
enterprise risks
a function of any action that relates to a business
relates to all aspects of business
dynamic risk
tied to the economy (inflation, interest)
static risk
occur regardless of what happens in the economy (natural disasters)
types of pure risk
personal, property, liability, commercial
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
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
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
other miscellaneous types of pure risk
crime, human resources, foreign loss exposure, intangible property exposures, government exposures
burden of risk on society
need for larger emergency funds
loss of needed goods and services
fear and worry
five methods of handling risk
avoidance retention noninsurance transfers loss control insurance
two types of retention
active (desirable, deliberate)
passive (dangerous, unintentional)
three types of non insurance transfers
contracts
hedging
incorporation
two types of loss control
loss prevention
loss reduction
