FBLA Insurance & Risk Management

Uncertainty of something, concerns a loss

Risk refers to ___ and ___ being injured
Property & Life

Objective Risk
Defined as relative variation of actual loss from expected loss

Objective Risk varies inversely with
square root of # of cases under observation
EX: 10,000 houses were insured
Objective Risk is 10/100 or 10%

The Law of Large Numbers
states that if the # of exposure units increases, the more closely the actual loss experience will approach the expected loss experience

Subjective Risk
defined as uncertainty based on a person’s mental condition or state of mind

Chance of Loss
probability that an event will occur

Probability has both ___ and ___ aspects
objective and subjective

Objective Probability
refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in underlying conditions

defined as the cause of loss

condition that creates or increases chance of loss

Four Types of Hazards
physical, legal, moral, morale

Subjective Probability
A probability derived from an individual’s personal judgment about whether a specific outcome is likely to occur. Subjective probabilities contain no formal calculations and only reflect the subject’s opinions and past experience.

Physical Hazard
a physical condition that increases the chance of loss
EX: icy roads, chance of fire, defective lock on a door

Moral Hazard
dishonesty or character defects in an individual that increases severity of loss
EX: faking an accident to collect money from insurer, fraudulent claims, murdering insured to collect life insurance

Morale Hazard
carelessness or indifference to a loss because of the existence of insurance
EX: leaving doors unlocked, leaving car keys in unlocked car

Legal Hazard
refers to the characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
EX: large jury verdicts, large damage awards in liability lawsuits, coverage for alcoholism, etc.

Risk Categories
Pure and Speculative
Fundamental Risk and Partial Risk
Enterprise Risk

Pure Risk
situation where there are only possiblities of loss or no loss
EX: premature death, job accidents, medical expenses, damage to property from fire, lightning, flood, or earthquake

Speculative Risk
only profit or loss possible

Fundamental Risk
affects entire economy or large numbers of people
EX: war, inflation, terrorist attack

Particular Risk
affects only individuals and not entire community
EX: car theft, bank robbery, house fire

Enterprise Risk
encompasses all major risks faced by business firms
EX: pure risk, speculative risk, strategic risk, operation risk, financial risk

Strategic Risk
uncertainty regarding the firm’s financial goals and objectives

Operational Risk
results from firm’s business operations
EX: if hackers hack an online bank

Financial Risk
refers to unceratinty of loss because of adverse changes in commoditity prices, interest rates, foreign exhance rates, value of money
EX: if food prices raise, school can lose money in lunch department

Enterprise Risk Management
single treatment program that has all major risks faced by firm

Major Types of Pure Risk
personal risks, property risks, liability risks

Premature Death
death of a family head with unfulfilled financial obligations, surviving members have to deal with

Life Value
present value of the family’s share of deceased breadwinner’s future earnings

Other things that need tended to after premature death
funeral expenses, medical bills, estate settlement costs, taxes on large estates

Non-Monetary Things that come with Premature Death
grief, loss of role model, counseling and guidance for children

Risk of Insufficient Income During Retirement
major risk associated with old age is not enough money during retirement, US citizens retire before 65 usually

money goes down when someone retires unless people save enough money for retirement

Risk of Poor Health
includes both payment of medical bills and loss of earned income, major surgery, etc.
Health insurance helps, planning for future

Risk of Unemployment
major threat to financial security, comes from business cycle downswings, structural changes in economy, seasonal factos, imperfections in labor market

a way to hold down labor costs, reducing # of workers

Property Risks
risk of having property damaged or lost from numerous cases
EX: tornadoes, windstorms, theft

Direct Loss
financial loss from the physical damage, destruction, theft of property

Indirect Loss
financial loss from the occurrence of direct physical damage or theft loss

Consequential Loss
loss of profits
EX: loss of rents, loss of use of building, loss of a local market

Liability Risks
important type of pure risk that most people face, there is no limit of $ that can be asked for, can be very costly
EX: vehicle accidents

Methods of Handling Risk
avoidance, loss control, retention, non insurance transfers, insurance

avoiding the risk
ex: stay out of high crime areas, avoid driving, etc.

Loss Control
reduces frequency and severity of losses

Loss Prevention
aims to reduce probability of loss
EX: not smoking, safe driving

Loss Reducation
reduce frequency of loss
EX: sprinklers so that business doesn’t stay on fire as long

business firm or individual retains all or part of a given risk

Active Retntion
individual is consciously aware of the risk and plans to retain all or part of it, it can save money

Passive Retention
certain risks are unkowningly retained because of ignorance, indifference, laziness, very dangerous

Tagged In :

Get help with your homework

Haven't found the Essay You Want? Get your custom essay sample For Only $13.90/page

Sarah from studyhippoHi there, would you like to get such a paper? How about receiving a customized one?

Check it out