Principles of Risk Management and Insurance – Exam 1, 2026 – Study
Material and Practice Questions
Objective or degree risk - ANS✔✔ defined as relative variation of actual loss from expected loss.
law of large numbers - ANS✔✔ number of exposure units increase, the close the actual loss
experience will approach the expected loss experience. permits insurer to estimate future
losses with some accuracy.
Subjective risk - ANS✔✔ uncertainty based on a person's mental condition or state of mind.
Chance of loss - ANS✔✔ defined as probability that event will occur.
Objective probability - ANS✔✔ long run relative frequency of event based on assume of infinite
number of observe and no change in underlying condition.
Two way to determine Objective probability: - ANS✔✔ First by deductive reasoning: call a priori
probabilities
second inductive reasoning
Subjective probability - ANS✔✔ individual's personal estimate of the chance of loss.
chance of Loss Versus Objective Risk. - ANS✔✔ Chance of loss is the probability that an event
that causes a loss will occur.
Objective risk is the relative variation of actual loss from expected loss.
Peril - ANS✔✔ defined as the cause of loss
, hazard - ANS✔✔ condition that creates or increases the frequency or severity of loss.
Physical hazard - ANS✔✔ physical condition that increases the frequency or severity of loss
Moral hazard - ANS✔✔ dishonesty defects individual
increase loss
Attitudinal hazard or Morale Hazard - ANS✔✔ carelessness to loss increase chance of loss
Legal hazard - ANS✔✔ characteristics of the legal system or regulatory environment increase of
losses
Pure risk - ANS✔✔ situation in which there are only the possibilities of loss or no loss.
Speculative risk - ANS✔✔ situation in which either profit or loss is possible.
Diversifiable risk - ANS✔✔ affects only individuals or small groups and not the entire economy
Nondiversifiable risk - ANS✔✔ affects the entire economy or large numbers of persons or
groups within the economy
Enterprise risk - ANS✔✔ encompasses all major risks faced by a business firm.
Financial risk - ANS✔✔ uncertainty of loss because of adverse changes in commodity prices,
interest rates, foreign exchange rates, and the value of money
Material and Practice Questions
Objective or degree risk - ANS✔✔ defined as relative variation of actual loss from expected loss.
law of large numbers - ANS✔✔ number of exposure units increase, the close the actual loss
experience will approach the expected loss experience. permits insurer to estimate future
losses with some accuracy.
Subjective risk - ANS✔✔ uncertainty based on a person's mental condition or state of mind.
Chance of loss - ANS✔✔ defined as probability that event will occur.
Objective probability - ANS✔✔ long run relative frequency of event based on assume of infinite
number of observe and no change in underlying condition.
Two way to determine Objective probability: - ANS✔✔ First by deductive reasoning: call a priori
probabilities
second inductive reasoning
Subjective probability - ANS✔✔ individual's personal estimate of the chance of loss.
chance of Loss Versus Objective Risk. - ANS✔✔ Chance of loss is the probability that an event
that causes a loss will occur.
Objective risk is the relative variation of actual loss from expected loss.
Peril - ANS✔✔ defined as the cause of loss
, hazard - ANS✔✔ condition that creates or increases the frequency or severity of loss.
Physical hazard - ANS✔✔ physical condition that increases the frequency or severity of loss
Moral hazard - ANS✔✔ dishonesty defects individual
increase loss
Attitudinal hazard or Morale Hazard - ANS✔✔ carelessness to loss increase chance of loss
Legal hazard - ANS✔✔ characteristics of the legal system or regulatory environment increase of
losses
Pure risk - ANS✔✔ situation in which there are only the possibilities of loss or no loss.
Speculative risk - ANS✔✔ situation in which either profit or loss is possible.
Diversifiable risk - ANS✔✔ affects only individuals or small groups and not the entire economy
Nondiversifiable risk - ANS✔✔ affects the entire economy or large numbers of persons or
groups within the economy
Enterprise risk - ANS✔✔ encompasses all major risks faced by a business firm.
Financial risk - ANS✔✔ uncertainty of loss because of adverse changes in commodity prices,
interest rates, foreign exchange rates, and the value of money
