RMI 211 MSU Exam 1 Complete Answers

RMI 211 MSU Exam 1 Complete Answers Peril: Cause of a potential loss. Hazard: A condition that increases the frequency or severity of potential losses. Chance of Loss: The likelihood that a specific event will take place. Pure Risk: A scenario where only the outcomes of either loss or no loss exist. Objective Probability: The relative frequency of an event occurring over the long term, based on the assumption that there are infinitely many observations and that the underlying conditions remain unchanged. Subjective Probability: An individual's personal assessment of the likelihood of loss occurring. Speculative Risk: A situation where there is a possibility of either gaining profit or experiencing a loss. Objective Risk (Degree of Risk): The measure of the variation between actual losses and expected losses. Subjective Risk: The uncertainty that arises from an individual’s mental state or condition. Diversifiable Risk: A risk affecting only specific individuals or small groups (e.g., car theft). It is often referred to as nonsystematic or particular risk. Enterprise Risk: This term encompasses all significant risks a business may face, including pure risk, speculative risk, strategic risk, operational risk, and financial risk. Nondiversifiable Risk: A risk that impacts a large population or the entire economy. Direct Loss: A financial loss that directly results from the physical damage, destruction, or theft of property. Indirect Loss: A financial loss that occurs as a secondary result of direct physical damage. Retention: When an individual or business accepts part or all of the losses that may arise from a specific risk. - Active Retention: When they are aware of the risk. - Passive Retention: When they are unaware of the risk. Risk Control: (Definition still needed to complete) Risk Transfer: The process whereby a pure risk is shifted from the insured to the insurer, who generally has better financial stability. Law of Large Numbers: A principle that states as the number of exposure units increases, the actual loss experience will more closely align with the expected loss experience. Fortuitous Loss: An unforeseen and unexpected loss that happens by chance. Adverse Selection: The phenomenon where individuals with a higher-than-average risk of loss seek insurance at standard rates. Indemnity: Insurance that aims to restore individuals to their previous financial state after a loss. Expense Loading: The total amount required to cover expenses, which includes commissions, administrative costs, state premium taxes, acquisition expenses, and allowances for contingencies and profit. Risk Management: The process of identifying potential loss exposures that an organization faces and selecting the most effective strategies to manage them. Loss Exposure: Any circumstance where there is potential for a loss to occur, regardless of whether it actually happens (e.g., manufacturing facilities susceptible to damage from earthquakes or floods). Pre-Loss Risk Management Objective: To prepare for financial losses, minimize anxiety, and fulfill legal obligations. Post-Loss Risk Management Objective: To ensure the firm’s survival, maintain operations, achieve stability and continued growth, and reduce societal impacts. Loss Severity: The expected magnitude of potential losses that may arise. Loss Frequency ️refers to the probable number of losses that may occur during some given time period Maximum Possible Loss ️the worst loss that could happen to the firm during its lifetime Maximum Probable Loss ️the worst loss that is likely to happen Captive Insurer ️insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures Insurance ️protection against possible financial loss Manuscript Policy ️an insurance policy that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer High Frequency ️Many insurance claims Low Frequency ️Few insurance claims High Exposure ️high probability of loss Hard Markets ️high premiums Soft Markets ️low premiums, easy to get insurance Underwriting Cycle ️cyclical pattern in underwriting stringency, premium levels, and profitability Surplus ️difference between insurer's assets and its liabilities