BUSFIN 3300 Exam 1 with Accurate
Solutions
Traditional definition of risk - ANSWER-uncertainty concerning the occurrence of a loss
Insurance definition of risk - ANSWER-used to identify the property or life that is being
considered for insurance
uncertainty - ANSWER-used in situations where such probabilities cannot be estimated
Loss Exposure - ANSWER-any situation or circumstance in which a loss is possible,
regardless of whether a loss occurs
Objective Risk - ANSWER-the relative variation of actual loss from expected loss
- it can be statistically calculated by some measure of dispersion, such as the standard
deviation
Subjective (perceived) risk - ANSWER-uncertainty based on a person's mental
condition or state of mind
Chance of Loss - ANSWER-the probability that an event that causes a loss will occur
Objective Probability - ANSWER-refers to the long-run relative frequency of an event
based on the assumptions of an infinite number of observations and of no change in the
underlying conditions
subjective probability - ANSWER-the individual's personal estimate of the chance of
loss
peril - ANSWER-The cause of a loss (Fire, windstorm, lightning, or damage to your car
because of a collision)
Hazard - ANSWER-A condition that increases the frequency or severity of a loss.
Physical Hazard - ANSWER-a physical condition that increases the frequency or
severity of loss
Moral Hazard - ANSWER-is dishonesty or character defects in an individual that
increase the frequency or severity of loss
, Attitudinal Hazard (Morale Hazard) - ANSWER-carelessness or indifference to a loss,
which increases the frequency or severity of a loss
Legal Hazard - ANSWER-characteristics of the legal system or regulatory environment
that increase the frequency or severity of losses
Pure Risk - ANSWER-A situation in which there are only the possibilities of loss or no
loss (earthquake)
Speculative Risk - ANSWER-a situation in which either profit or loss is possible
(gambling)
diversifiable risk - ANSWER-A risk that affects only some individuals, businesses, or
small groups (car theft). It can be reduced or eliminated by diversification
nondiversifiable risk - ANSWER-a risk that affects the entire economy or large numbers
of persons or groups within the economy (hurricane). It is also called fundamental risk
-government assistance may be necessary to insure nondiversifiable risks
Enterprise Risk - ANSWER-encompasses all major risks faced by a business firm,
which include: pure risk, speculative risk, strategic risk, operational risk, and financial
risk
Strategic Risk - ANSWER-uncertainty regarding the firm's financial goals and objectives
Operational Risk - ANSWER-results from the firm's business operations
financial risk - ANSWER-uncertainty of loss because of adverse changes in commodity
prices, interest rates, foreign exchange rates, and the value of money
Disadvantages of non-insurance transfers - ANSWER-Contract language may be
ambiguous, so transfer may fail
If the other party fails to pay, firm is still responsible for the loss
Insurers may not give credit for transfers
Deductible - ANSWER-a specified amount of money that the insured must pay before
an insurance company will pay a claim
excess insurance policy - ANSWER-the insurer pays only if the actual loss exceeds the
amount a firm has decided to retain
Manuscript policy - ANSWER-a policy specially tailored for the firm
Hard Market - ANSWER-profitability is declining, underwriting standards are tightened,
premiums increase, and insurance is hard to obtain
Solutions
Traditional definition of risk - ANSWER-uncertainty concerning the occurrence of a loss
Insurance definition of risk - ANSWER-used to identify the property or life that is being
considered for insurance
uncertainty - ANSWER-used in situations where such probabilities cannot be estimated
Loss Exposure - ANSWER-any situation or circumstance in which a loss is possible,
regardless of whether a loss occurs
Objective Risk - ANSWER-the relative variation of actual loss from expected loss
- it can be statistically calculated by some measure of dispersion, such as the standard
deviation
Subjective (perceived) risk - ANSWER-uncertainty based on a person's mental
condition or state of mind
Chance of Loss - ANSWER-the probability that an event that causes a loss will occur
Objective Probability - ANSWER-refers to the long-run relative frequency of an event
based on the assumptions of an infinite number of observations and of no change in the
underlying conditions
subjective probability - ANSWER-the individual's personal estimate of the chance of
loss
peril - ANSWER-The cause of a loss (Fire, windstorm, lightning, or damage to your car
because of a collision)
Hazard - ANSWER-A condition that increases the frequency or severity of a loss.
Physical Hazard - ANSWER-a physical condition that increases the frequency or
severity of loss
Moral Hazard - ANSWER-is dishonesty or character defects in an individual that
increase the frequency or severity of loss
, Attitudinal Hazard (Morale Hazard) - ANSWER-carelessness or indifference to a loss,
which increases the frequency or severity of a loss
Legal Hazard - ANSWER-characteristics of the legal system or regulatory environment
that increase the frequency or severity of losses
Pure Risk - ANSWER-A situation in which there are only the possibilities of loss or no
loss (earthquake)
Speculative Risk - ANSWER-a situation in which either profit or loss is possible
(gambling)
diversifiable risk - ANSWER-A risk that affects only some individuals, businesses, or
small groups (car theft). It can be reduced or eliminated by diversification
nondiversifiable risk - ANSWER-a risk that affects the entire economy or large numbers
of persons or groups within the economy (hurricane). It is also called fundamental risk
-government assistance may be necessary to insure nondiversifiable risks
Enterprise Risk - ANSWER-encompasses all major risks faced by a business firm,
which include: pure risk, speculative risk, strategic risk, operational risk, and financial
risk
Strategic Risk - ANSWER-uncertainty regarding the firm's financial goals and objectives
Operational Risk - ANSWER-results from the firm's business operations
financial risk - ANSWER-uncertainty of loss because of adverse changes in commodity
prices, interest rates, foreign exchange rates, and the value of money
Disadvantages of non-insurance transfers - ANSWER-Contract language may be
ambiguous, so transfer may fail
If the other party fails to pay, firm is still responsible for the loss
Insurers may not give credit for transfers
Deductible - ANSWER-a specified amount of money that the insured must pay before
an insurance company will pay a claim
excess insurance policy - ANSWER-the insurer pays only if the actual loss exceeds the
amount a firm has decided to retain
Manuscript policy - ANSWER-a policy specially tailored for the firm
Hard Market - ANSWER-profitability is declining, underwriting standards are tightened,
premiums increase, and insurance is hard to obtain
