RMI 3011 Schriefer (Exam 1) UPDATED ACTUAL Questions And Correct Answers
Terms in this set (75)
Risk Uncertainty concerning the occurrence of a loss
What risk is in economics/ finance? Risk = probabilities known
Uncertainty = probabilities unknown
Loss exposure Any situation or circumstance in which a loss is possible, regardless of whether a
loss occurs
Objective Risk measurable variation from expected loss (standard deviation).
Subjective Risk based on personal perception or mental state.
Chance of Loss Probability a loss‑causing event will occur.
Objective probability = long‑run frequency (chance of house fire, zip code)
Subjective probability = personal estimate (influenced by experience or bias, such
as thinking your home is safe because it's new)
Peril The cause of the loss." Examples: fire, theft, windstorm, collision
Types of Hazards Physical, Moral, Attitudinal/Morale, Legal
Physical Hazard physical condition (icy roads and leak of gas line)
Moral Hazard dishonesty, fraud
Attitudinal/ Morale Hazard carelessness such as leaving candles unattended
Legal Hazard legal environment increasing loss likelihood.
Classification of Risk Pure v. Speculative
Diversifiable v. Non-diversifiable
Enterprise
Systemic
Pure Risk only loss or no loss (earthquake and other natural disasters)
Speculative Risk loss or gain (gambling and investing)
Diversifiable Risk affects individuals; can be reduced by diversification (car theft)
Non-diversifiable Risk affects large groups/economy and often require gov involvement (hurricanes)
, Enterprise Risk Includes pure, speculative, strategic, operational, and financial risks
Systemic Risk Risk of collapse of an entire system or market due to failure of a single entity.”
(such as a banking collapse leading to a financial crisis- 2008) gov gets involved
Major Personal & Commercial Risks Personal
Property
Liability
Business
Personal Risks Premature death, poor health, unemployment, retirement, addiction
Property Risks Direct loss: physical damage.
Indirect loss: consequences (e.g., additional living expenses).
Liability Risks No upper limit
Income/assets can be seized
Legal defense costs high
Business Risks Property, liability, business income, cyber, HR, foreign, intangible, government
exposures.
Burden of Risk on Society Need for emergency funds
Discourages innovation
Causes worry and fear
Techniques for Managing Risk Avoidance
Loss prevention
Loss reduction
Duplication
Separation
Diversification
Risk Financing Retention (active or passive)
Self‑insurance
Non-insurance transfers (contracts, hedging, incorporation)
Insurance (risk transfer + pooling)
Insurance Pooling of fortuitous losses by transfer of such risks to insurer who agree to
indemnify insurers or provide procurinary benefits upon occurrence of certain
events
Characteristics of Insurance Pooling (losses experienced by a few are spread against many stabilizing costs
for all)
Payment of fortuitous losses
Risk transfer
Indemnification (restores the insurer to their pre loss financial position rather than
allowing them to profit, insuring fairness and social productivity)
Law of Large Numbers More exposures → actual results approach expected results.
Terms in this set (75)
Risk Uncertainty concerning the occurrence of a loss
What risk is in economics/ finance? Risk = probabilities known
Uncertainty = probabilities unknown
Loss exposure Any situation or circumstance in which a loss is possible, regardless of whether a
loss occurs
Objective Risk measurable variation from expected loss (standard deviation).
Subjective Risk based on personal perception or mental state.
Chance of Loss Probability a loss‑causing event will occur.
Objective probability = long‑run frequency (chance of house fire, zip code)
Subjective probability = personal estimate (influenced by experience or bias, such
as thinking your home is safe because it's new)
Peril The cause of the loss." Examples: fire, theft, windstorm, collision
Types of Hazards Physical, Moral, Attitudinal/Morale, Legal
Physical Hazard physical condition (icy roads and leak of gas line)
Moral Hazard dishonesty, fraud
Attitudinal/ Morale Hazard carelessness such as leaving candles unattended
Legal Hazard legal environment increasing loss likelihood.
Classification of Risk Pure v. Speculative
Diversifiable v. Non-diversifiable
Enterprise
Systemic
Pure Risk only loss or no loss (earthquake and other natural disasters)
Speculative Risk loss or gain (gambling and investing)
Diversifiable Risk affects individuals; can be reduced by diversification (car theft)
Non-diversifiable Risk affects large groups/economy and often require gov involvement (hurricanes)
, Enterprise Risk Includes pure, speculative, strategic, operational, and financial risks
Systemic Risk Risk of collapse of an entire system or market due to failure of a single entity.”
(such as a banking collapse leading to a financial crisis- 2008) gov gets involved
Major Personal & Commercial Risks Personal
Property
Liability
Business
Personal Risks Premature death, poor health, unemployment, retirement, addiction
Property Risks Direct loss: physical damage.
Indirect loss: consequences (e.g., additional living expenses).
Liability Risks No upper limit
Income/assets can be seized
Legal defense costs high
Business Risks Property, liability, business income, cyber, HR, foreign, intangible, government
exposures.
Burden of Risk on Society Need for emergency funds
Discourages innovation
Causes worry and fear
Techniques for Managing Risk Avoidance
Loss prevention
Loss reduction
Duplication
Separation
Diversification
Risk Financing Retention (active or passive)
Self‑insurance
Non-insurance transfers (contracts, hedging, incorporation)
Insurance (risk transfer + pooling)
Insurance Pooling of fortuitous losses by transfer of such risks to insurer who agree to
indemnify insurers or provide procurinary benefits upon occurrence of certain
events
Characteristics of Insurance Pooling (losses experienced by a few are spread against many stabilizing costs
for all)
Payment of fortuitous losses
Risk transfer
Indemnification (restores the insurer to their pre loss financial position rather than
allowing them to profit, insuring fairness and social productivity)
Law of Large Numbers More exposures → actual results approach expected results.
