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rmin 4000 unit 1 test|104 complete Q’s and A’s
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rmin 4000 unit 1 test|104complete Q’s and A’s
exposures - -things of value (assets) that could be lost
- perils - -things that could happen to these assets
- risk management - -what do you want to do to protect these assets and/or
prevent/reduce losses
- risk of driving a car - -exposure: car
peril: car accident
risk management: drive safely
- risk - -a calculated possibility of a negative outcome
- calculated possibility - -a probabilistic outcome that is known/established
ranges from 0 to 1 (0%-100%)
0/0% = impossible.. no risk
.5/50% = highest risk.. most uncertainty
1/100% = certain event.. no risk
- negative outcome - -loss, must be quantifiable ($$$)
- negative outcome example - -Your house burns down. Your house, clothes,
appliances, and furniture are quantifiable (you can approximate how much
they are worth). Pictures (memories) are not quantifiable
- frequency - -how often a loss occurs
the number of losses that occur within a specific time period
probability of a loss
- severity - -how much it costs when a loss occurs
the dollar amount of loss for a specific peril
- frequency formula - -number of losses / number of exposures
- severity formula - -total losses ($) / number of losses
- peril - -cause of loss
ex: fire, tornado, burglary
, - hazard - -condition that creates or increases the frequency/severity of a
loss
does NOT cause a loss
- types of hazards - -physical, moral, morale (attitudinal), legal
- physical hazard - -a physical condition that increases the
frequency/severity of loss
- moral hazard - -the presence of insurance changes the behavior of the
insured
ex: using a hammer to create "hail" damage to a roof
- morale hazard - -carelessness or indifference to a loss, which increases
the frequency or severity of a loss
ex: leaving car keys in an unlocked car
- legal hazard - -characteristics of legal system or regulatory environment
that increases the frequency/severity of a loss
- pure vs speculative risk - -pure risk has two future states: loss and no loss
ex: fire, cancer, dog bites visitor
speculative risk has 3 future states: loss, no loss/no gain, gain
ex: investment, gambling, drinking
- can you buy insurance for pure risks - -yes
- can you buy insurance for speculative risks - -no
- diversifiable risk - -affects only individuals or small groups, not the entire
economy
can be reduced/eliminated thru diversification
risks are not correlated (fire, theft, collision)
- nondiversifiable risk - -affects the entire economy or a large number of
people within the economy
cannot be reduced/eliminated through diversification
government assistance may be needed to insure
risks are correlated (inflation, unemployment)
- enterprise risk - -encompasses all major risks faced by a business firm,
which include: pure risk, speculative risk, strategic risk, operational risk, and
financial risk
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