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risk

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An uncertainty concerning the occurrence of a loss

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loss exposure

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Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

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Objective Risk

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the relative variation of actual loss from expected loss: numbers factor

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Subjective Risk

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Uncertainty based on a person's mental condition or state of mind

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Law of Large Numbers

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As the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience. Applied more easily to pure rather than speculative risks

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Chance of loss

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The probability that an event will occur

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Objective probability

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long- run frequency of an event

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Subjective Probability

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individuals personal estimate of the chance of loss

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peril

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the cause of loss

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Hazard

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condition that increases or creates frequency or severity of loss

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Physical Hazard

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physical condition that increases the frequency or severity of loss EX: Icy road that increase the chance of an auto accident

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Moral Hazard

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Dishonesty or character defects in an individual that increase the frequency or severity of loss EX:faking an accident to collect from an insurer

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Additutional/Morale Hazard

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carelessness or indifference to a loss which increases the frequency or severity of a loss EX: leaving keys in an unlocked car increases chance of theft

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Legal Hazard

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characteristics of the legal system or regulatory environment that increase the frequency or severity of losses. EX:adverse jury verdicts

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Pure Risk

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situation in which there is only the possibility of loss or no loss EX: premature death

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Speculative Risk

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situation in which either profit or loss is possible EX: betting on a horse race

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Diversifiable Risk

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affects only individuals or small groups not the entire economy

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non-diversifiable risk

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affects the entire economy or large numbers of persons

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Enterprise Risk

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a term that encompasses all major risks faced by a business firm

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Strategic risk

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Uncertainty regarding the firm's financial goals and objectives

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operational risk

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results from the firm;s business operations

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financial risk

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uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and he value of money

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enterprise risk management

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combines into a single unified treatment program all major risks faced by the firm

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Personal Risks

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risks that directly affect an individual or family

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premature death

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the death of a family head with unfulfilled financial obligations

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human life value

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the present value of the family's share of the deceased breadwinners future earnings

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direct loss

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financial loss from physical damage, destruction or theft

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indirect/consequential loss

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financial loss that results indirectly from the occurrence of a direct physical damage or theft loss

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liability risk

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1.no maximum upper limit with respect to the amount of the loss 2.lien can be placed on your income and financial assets to satisfy a legal judgement 3.legal defense can be enoromous

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Commercial risks

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1.property 2.liability 3.loss of business income

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Burden of risk on society

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1.larger emergency fund 2.loss of certain goods and services 3.worry and fear

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risk control

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refers to techniques that reduce the frequency or severity of loss Avoidance loss prevention loss reduction

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risk financing

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techniques hat provide for the funding of losses retention-Active and passive non insurance transfers insurance

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non-insurance transfers

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another name for managing risk

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self assurance

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special form of planned retention by which part or al of a given loss exposure is retained by the firm

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hold-harmless clasue

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transfer of contracts

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hedging

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transferring risk by selling and purchasing contracts on an organized exchange

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Incorporatin

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liability of the stockholders is limited and risk is shifted to the creditors

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insurance

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pooling of fortuitous losses by transfer of such risks to insurers who agree to indemnify insurers for such losses

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pooling

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spreading of losses incurred by the few over the entire group, so that in the process average loss is substituted for actual loss

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primary purpose of pooling

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reduce the variation in possible outcomes as measured b the standard deviation or some other measure of dispersion which reduces risk

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law of large numbers

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the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures

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fortuitous loss

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unforeseen or expected loss unexpected by the insured

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risk transfer

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pure risk is transferred from the insured to the insurer who typically is in a stronger financial position to pay the loss than the insured

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indemnification

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insured is restored to his or her approximate financial position prior to the occurrence of the loss

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insurable risk

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1.large number of exposure units 2.accidental and unintentional 3.determinable and measurable 4.not catastrophic 5.calculable 6.economically feasable

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adverse selection

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tendency of a person with a higher than average chance of loss to seek insurance as standard rates

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underwriting

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process of selecting and classifying applicants for insurance

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private insurance

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life insurance health insurance property insurance casualty insurance personal lines commercial lines

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government insurance

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social insurance

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Benefits of insurance to society

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indemnification for loss reduction of worry and fear source of investment funds loss prevention enhancement of credits

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Costs of insurance to society

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cost of doing business fraudulent claims inflated claims

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expense loading

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amount needed to pay all expenses

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