RMI test 1

Flashcard maker : Lily Taylor
risk
An uncertainty concerning the occurrence of a loss
loss exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
Objective Risk
the relative variation of actual loss from expected loss: numbers factor
Subjective Risk
Uncertainty based on a person’s mental condition or state of mind
Law of Large Numbers
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

Chance of loss
The probability that an event will occur
Objective probability
long- run frequency of an event
Subjective Probability
individuals personal estimate of the chance of loss
peril
the cause of loss
Hazard
condition that increases or creates frequency or severity of loss
Physical Hazard
physical condition that increases the frequency or severity of loss

EX: Icy road that increase the chance of an auto accident

Moral Hazard
Dishonesty or character defects in an individual that increase the frequency or severity of loss

EX:faking an accident to collect from an insurer

Additutional/Morale Hazard
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

Legal Hazard
characteristics of the legal system or regulatory environment that increase the frequency or severity of losses.

EX:adverse jury verdicts

Pure Risk
situation in which there is only the possibility of loss or no loss

EX: premature death

Speculative Risk
situation in which either profit or loss is possible

EX: betting on a horse race

Diversifiable Risk
affects only individuals or small groups not the entire economy
non-diversifiable risk
affects the entire economy or large numbers of persons
Enterprise Risk
a term that encompasses all major risks faced by a business firm
Strategic risk
Uncertainty regarding the firm’s financial goals and objectives
operational risk
results from the firm;s business operations
financial risk
uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and he value of money
enterprise risk management
combines into a single unified treatment program all major risks faced by the firm
Personal Risks
risks that directly affect an individual or family
premature death
the death of a family head with unfulfilled financial obligations
human life value
the present value of the family’s share of the deceased breadwinners future earnings
direct loss
financial loss from physical damage, destruction or theft
indirect/consequential loss
financial loss that results indirectly from the occurrence of a direct physical damage or theft loss
liability risk
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
Commercial risks
1.property
2.liability
3.loss of business income
Burden of risk on society
1.larger emergency fund
2.loss of certain goods and services
3.worry and fear
risk control
refers to techniques that reduce the frequency or severity of loss

Avoidance
loss prevention
loss reduction

risk financing
techniques hat provide for the funding of losses

retention-Active and passive
non insurance transfers
insurance

non-insurance transfers
another name for managing risk
self assurance
special form of planned retention by which part or al of a given loss exposure is retained by the firm
hold-harmless clasue
transfer of contracts
hedging
transferring risk by selling and purchasing contracts on an organized exchange
Incorporatin
liability of the stockholders is limited and risk is shifted to the creditors
insurance
pooling of fortuitous losses by transfer of such risks to insurers who agree to indemnify insurers for such losses
pooling
spreading of losses incurred by the few over the entire group, so that in the process average loss is substituted for actual loss
primary purpose of pooling
reduce the variation in possible outcomes as measured b the standard deviation or some other measure of dispersion which reduces risk
law of large numbers
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
fortuitous loss
unforeseen or expected loss unexpected by the insured
risk transfer
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
indemnification
insured is restored to his or her approximate financial position prior to the occurrence of the loss
insurable risk
1.large number of exposure units
2.accidental and unintentional
3.determinable and measurable
4.not catastrophic
5.calculable
6.economically feasable
adverse selection
tendency of a person with a higher than average chance of loss to seek insurance as standard rates
underwriting
process of selecting and classifying applicants for insurance
private insurance
life insurance
health insurance
property insurance
casualty insurance
personal lines
commercial lines
government insurance
social insurance
Benefits of insurance to society
indemnification for loss
reduction of worry and fear
source of investment funds
loss prevention
enhancement of credits
Costs of insurance to society
cost of doing business
fraudulent claims
inflated claims
expense loading
amount needed to pay all expenses

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