Solutions for Principles of Risk Management and Insurance, 14th Edition Rejda (All Chapters included)
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Module
Certified Risk Manager
Institution
Certified Risk Manager
Complete Solutions Manual for Principles of Risk Management and Insurance, 14th Edition by George E. Rejda, Michael McNamara ; ISBN13: 9780135641293...(Full Chapters included Chapter 1 to 27)...1. Risk and Its Treatment
2. Insurance and Risk
3. Introduction to Risk Management
4. Enterprise Risk ...
Principles of Risk
Management and
Insurance
Fourteenth Edition
George E. Rejda
Michael J. MCnamara
William H. Rabel
** Immediate Download
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** All Chapters included
,Chapter 1
Risk and Its Treatment
Teaching Note
Welcome to Principles of Risk Management and Insurance! As you start the course, you may want to
emphasize to your students the practical nature of the material that will be covered. Individuals and
families face real-world risks—premature death, poor health, property damage, liability claims, and other
loss exposures.
In presenting the material in this chapter, keep in mind that students must master a certain amount of new
insurance terminology. Studying insurance is similar to becoming fluent in a foreign language. The student
starts by building upon a basic vocabulary when learning a new language. The same is true for insurance.
Insurance is a technical subject that requires a basic vocabulary.
It is also worthwhile to point out that there is no single definition of risk. However, risk has been
traditionally defined as uncertainty concerning the occurrence of a loss. Because the term “risk” is
ambiguous, many risk managers use the term “loss exposure.”
Take some time to discuss the major types of pure risks that can result in great financial insecurity. Pure
risks can result in loss or no loss. Speculative risks may produce a loss or a gain. This chapter summarizes
the important points concerning the different types of risk and methods of handling risk.
In discussing the major methods of handling risk, several points should also be stressed. First, explain that
these concepts are discussed in greater detail in Chapter 3. Second, stress the idea that insurance is only
one of several methods for handling risk. Finally, explain that in many cases other methods for handling
risk may be more effective and that several risk treatment measures may be used together.
Outline
I. Definitions of Risk
A. Different definitions of risk; risk historically has been defined as uncertainty.
B. Objective Risk
1. Defined as the relative variation of actual loss from expected loss
2. Declines as the number of exposure units increases
3. Can be measured by using the standard deviation or coefficient of variation
C. Subjective (Perceived) Risk
1. Defined as uncertainty based on one’s mental condition or state of mind
2. Difficult to measure
II. Chance of Loss
A. Objective Probability
, 1. A priori—by logical deduction such as in games of chance
2. Empirically—by induction, through analysis of data
B. Subjective Probability—a personal estimate of the chance of loss. It need not coincide with
objective probability and is influenced by a variety of factors including age, sex, intelligence,
education, and personality.
C. Chance of Loss Versus Objective Risk—although chance of loss may be the same for two
groups, the relative variation of actual loss from expected loss may be quite different. The
expected prices of two stocks might each be $60 one year from today, and the distribution of
expected prices might symmetric, meaning a fifty percent chance the price will be greater than
$60 and a fifty percent change the price will be less than $60.
III. Peril and Hazard
A. Peril—defined as the cause of loss
B. Hazard
1. Physical hazard—physical condition that increases the chance of loss. Examples are icy
streets, poorly designed intersections, and dimly lit stairways.
2. Moral hazard—dishonesty or characteristics of an individual that increase the chance of loss
3. Attitudinal (Morale) hazard—carelessness or indifference to a loss, which increases the
frequency or severity of loss
4. Legal hazard—characteristics of the legal system or regulatory environment that increase the
frequency or severity of losses
IV. Classifications of Risk
A. Pure and Speculative Risk
1. Pure risk—a situation where there are only the possibilities of loss or no loss
2. Speculative risk—a situation where either profit or loss is possible
B. Diversifiable Risk and Nondiversifiable Risk. Diversifiable risk affects only individuals or small
groups and not the entire economy; it can be reduced or eliminated by diversification.
Nondiversifiable risk affects large numbers of persons or groups in the economy and cannot be
eliminated or reduced by diversification.
C. Enterprise Risk. This is a term that encompasses all major risks faced by a business firm,
including pure risk, speculative risk, strategic risk, operational risk, and financial risk.
D. Systemic Risk. This is the 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.
V. Major Personal Risks and Commercial Risks
A. Personal Risks
1. Risk of premature death
2. Risk of insufficient income during retirement
3. Risk of poor health
4. Risk of unemployment
5. Alcohol and drug addiction
B. Property Risks
1. Direct loss
, 2. Indirect or consequential loss
C. Liability Risks
D. Commercial Risks
1. Property risks
2. Liability risks
3. Loss of business income
4. Cybersecurity and identity theft
5. Other risks—crime exposures, human resources exposures, foreign loss exposures, intangible
property exposures, government exposures
VI. Burden of Risk on Society
A. Need for a Larger Emergency Fund
B. Loss of Needed Goods and Services
C. Worry and Fear
VII. Techniques for Managing Risk
A. Risk Control
1. Avoidance
2. Loss prevention
3. Loss reduction
4. Duplication
5. Separation
6. Diversification
B. Risk Financing
1. Retention
2. Noninsurance transfers
3. Insurance
Answers to Case Application
a. Retention. Because the car is old and has a limited market value, collision insurance should not be
purchased. Retention can be used to deal with the exposure.
b. Liability insurance. Because the exposure has the potential for causing a catastrophic loss, auto
liability insurance should be purchased.
c. Insurance. Property insurance could be purchased to deal with the property exposure of $10,000. The
policy should contain a deductible.
d. Retention. The dollar value of the loss of a disposable contact lens is small.
e. Loss control. The waterbed should be carefully checked for possible leaks to reduce the possibility of
damage to the apartment. As an alternative, an endorsement can be added to a homeowners policy to
cover the liability exposure.
f. Avoidance. Michael should pick a new running route.
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