Risk Management - Drive safely, wear seatbelts, insurance, lock vehicle, driver's Ed,
obey laws, car alarm, park in safe areas
Exposure - answer Things of Value (Assets) That Could be Lost
Perils - answer Things That Could Happen to These Assets
Risk Management - answer What do you to protect these assets and/or prevent/reduce
losses?
calculated possibility - answer A probabilistic outcome (chance of loss, likelihood of
loss) that is known or estimated
• Ranges from 0 to 1 (0% to 100%)
0- impossible
0.5 - Highest Risk
1 - Certain Event
Negative outcomes - answerLoss
Must be quantifiable in $$$
Frequency - answerHow often does a loss occur?
,• The number of losses (such as fire, theft, collision) that occur within a specified time
period.• Probability of a loss.
• Ex: Probability of a fire is 0.0071 per loss exposure per year.
severity - answer• How much does it cost when a loss does occur?
• The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
Peril vs. Hazard - answerPeril is the CAUSE of loss.
Like fire storm flood
Hazard is a condition that increases LIKELIHOOD of loss but doesn't cause it
four types - Physical, moral, morale(attitude), legal
1. Physical Hazard - answerA physical condition that increases the frequency and/or
severity of a loss.
is a hazard that arises from the condition, occupancy, or use of the property itself.
An example of a physical hazard is a skateboard left on the porch steps.
Moral Hazard - answerBook definition
Dishonesty or character defects in an individual that increase the frequency and/or
severity of a loss.
Better definition
The presence of insurance changes the behavior of the insured.
Examples
• Using a hammer to create "hail" damage to a roof.
• Exaggerating the value of insured property
3. Morale (Attitudinal) Hazard - answerCarelessness or indifference to a loss, which
increases the frequency and/or severity of a loss.
Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
4. Legal Hazard - answerCharacteristics of legal system or regulatory environment that
increase the frequency and/or severity of a loss.
Examples:
• Juries in some jurisdictions are more sympathetic than other areas (meaning larger
damage awards in liability lawsuits).
• Georgia now requires Diminution in Value to be paid on property losses
(meaning increased severity in Georgia).
Pure vs. Speculative Risk - answer-A pure risk is a situation in which there are only the
possibilities of loss or no loss (earthquake, fire accident)
-A speculative risk is a situation in which either profit or loss is possible (gambling,
investment)
can you buy insurance for pure risks? - answerYes, typically but some types can be
hard to insure
Can you buy insurance for speculative risks? - answergenerally no
Diversifiable Risk - answer• Affects only individuals or small groups, not entire economy.
• Can be reduced/eliminated through diversification. (Have multiple facilities, cloud /
backup data centers)
• Risks are not correlated (For example: fire at multiple locations, theft, vehicle collision).
Nondiversifiable Risk - answer• Affects the entire economy or large numbers of
groups/persons within the economy.
• Cannot be reduced/eliminated through diversification.
• Government assistance may be needed to insure.
• Risks are correlated (inflation, unemployment).
Enterprise Risk - answerEncompasses all major risks faced by a business firm:
• Pure Risk
• Speculative Risk
• Strategic Risk*
• Operational Risk*
• Financial Risk*
Systemic Risk - answer• Risk of collapse of an entire system or entire market due to the
failure of a single entity or group of entities that can result in the breakdown of the entire
financial system.
• Instability in the financial system due to the interdependency between the players in
the market
Major Types of Pure Risks - answer• Personal Risk
• Property Risk
• Legal Liability Risk
• Loss of Business Income
• Cyber-security
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller julianah420. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $18.49. You're not tied to anything after your purchase.