Risk Management Principles Flashcards
What is Risk?
Uncertainty regarding the likelihood or severity of an event
What are the 2 types of Risk?
Pure & Speculative Risk
What is Pure Risk?
Risk that only has neutral or negative outcomes. Often compatible with insurance.
What is Speculative Risk?
Risk that has a positive, neutral, or negative outcome. Not compatible with insurance. (ex. gambling, investments)
What is an accident?
A loss that occurs either at an unpredictable time or in an unpredictable amount.
What is the difference between direct loss and indirect loss
Direct loss is tangible damage to people or property. Indirect loss is additional loss that occurs as a result of the unavailable damaged property from a direct loss.
What’s the difference between exposure and occurrence?
Exposure is the possibility of loss. Occurrence is the event during which loss occurs. (Can be sudden or a set of circumstances that continue over time)
What is Peril?
Cause of Loss. (ex. fire, flood, theft, etc.)
What’s the difference between Named Peril & Open Peril?
Named peril provides no coverage for losses unless the specific type of loss is listed. Open peril provides coverage for losses unless peril is specifically excluded.
What is proximate cause of loss?
Peril that logically results in a loss.
What is Hazard?
Something that increases the likelihood or exposure of a loss.
What is a physical hazard?
An environmental factor that contributes ones exposure to loss. Accidental (ex. wet floor)
What is a moral hazard?
A condition that increases the temptation to cause a loss on purpose. Intentional (ex. insurance fraud)
What is a morale hazard?
The risk of being lazy and non preventative about loss. Neglectful Loss (ex. reckless driving)
What is principle of indemnity?
The principle that insurance should make people whole again after a loss. Not better or worse off.
What is a deductible?
The amount that must be paid by the consumer before the insurer provides benefits.
What is risk transfer?
Consequences of a potential loss are taken from one party and given to another. (ex. getting insurance transfers risk from insured to insurer)
What’s the difference between the Law of Large Numbers and the pooling of risks?
Law of Large Numbers states the more data and insurer has the more accurately they can predict losses. Pooling of risks is spreading risk across a large group to minimize the impact of a loss.
