R.M. Ch. 1

Question 1

Objective Risk

Answer 1

the relative variation of the actual outcome from expected outcome

Question 2

Subjective Risk

Answer 2

an individual’s perception of a risk

Question 3

Subjective Probability

Answer 3

is the individual’s personal estimate of the chance of loss

Question 4

Physical Hazards

Answer 4

physical conditions that increase the chance of loss

ex: icy roads, defective wiring in a building

Question 5

Moral Hazard

Answer 5

dishonesty or character defects in an individual that increases frequency or severity of loss because of the existence of insurance

ex: faking an accident to collect from an insurer

Question 6

Morale Hazard

Answer 6

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

ex: leaving car keys in an unlocked car

Question 7

Expected Value

Answer 7

Average outcome repeated over and over again

LossProbability = EV
Probability(loss-ev)^2 = variance
Variance Square root = standard deviation

Question 7

Methods of Handling Risk

Answer 7

a) Avoidance
b) Loss Control
c) retention
d) noninsurance transfers
e) insurance

Question 8

Risk Adverse

Answer 8

willing to pay more than expected value to get rid of risk