Risk Management Principles

Question 1

What is Risk?

Answer 1

Uncertainty regarding the likelihood or severity of an event

Question 2

What are the 2 types of Risk?

Answer 2

Pure & Speculative Risk

Question 3

What is Pure Risk?

Answer 3

Risk that only has neutral or negative outcomes. Often compatible with insurance.

Question 4

What is Speculative Risk?

Answer 4

Risk that has a positive, neutral, or negative outcome. Not compatible with insurance. (ex. gambling, investments)

Question 5

What is an accident?

Answer 5

A loss that occurs either at an unpredictable time or in an unpredictable amount.

Question 6

What is the difference between direct loss and indirect loss

Answer 6

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.

Question 7

What’s the difference between exposure and occurrence?

Answer 7

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)

Question 8

What is Peril?

Answer 8

Cause of Loss. (ex. fire, flood, theft, etc.)

Question 9

What’s the difference between Named Peril & Open Peril?

Answer 9

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.

Question 10

What is proximate cause of loss?

Answer 10

Peril that logically results in a loss.

Question 11

What is Hazard?

Answer 11

Something that increases the likelihood or exposure of a loss.

Question 12

What is a physical hazard?

Answer 12

An environmental factor that contributes ones exposure to loss. Accidental (ex. wet floor)

Question 13

What is a moral hazard?

Answer 13

A condition that increases the temptation to cause a loss on purpose. Intentional (ex. insurance fraud)

Question 14

What is a morale hazard?

Answer 14

The risk of being lazy and non preventative about loss. Neglectful Loss (ex. reckless driving)

Question 15

What is principle of indemnity?

Answer 15

The principle that insurance should make people whole again after a loss. Not better or worse off.

Question 16

What is a deductible?

Answer 16

The amount that must be paid by the consumer before the insurer provides benefits.

Question 17

What is risk transfer?

Answer 17

Consequences of a potential loss are taken from one party and given to another. (ex. getting insurance transfers risk from insured to insurer)

Question 18

What’s the difference between the Law of Large Numbers and the pooling of risks?

Answer 18

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.