What is moral hazard? - ANSWER Moral hazard is a behavior change due to insurance-like
benefits. An example of a moral hazard would be if a building owner burned a building. The
peril would be fire, frequency would be increased, and the crime would be Arson. Finally,
the moral hazard would be to collect property insurance.
What is pure risk? - ANSWER Pure risk is the focus of traditional risk management, where
all losses are recorded in financial terms. There is either a loss or no loss. When a loss is in-
curred, it is due to random events.
What are some examples of pure risk? - ANSWER Flood, fire, theft, sickness and death
are all examples of pure risk. These risks generally are insurable.
What happens if a loss is known with certainty? - ANSWER If a loss was known with cer-
tainty, there is no risk present because there is no uncertainty. However, there is still a loss.
What are the three ways to help prevent and brace for a loss? - ANSWER The three ways
to help prevent and brace for a loss are loss mitigation (reducing severity; e.g. safety pro-
grams) activities, budgeting for the loss, and avoiding the loss situation.
What is speculative risk? - ANSWER Speculative risk is a risk that provides either a gain,
loss, or no loss/gain. These risks are generally not insurable.
What are some examples of speculative risk? - ANSWER Gambling, investments, stocks,
owning a business and developing a new product are all examples of speculative risk.
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, What is the difference between static and dynamic risk? - ANSWER Static risk does not
change significantly over time and it is always present. Dynamic risk is a result of changing
circumstances, laws and conditions and is not always present.
What are some examples of static risks? - ANSWER Natural disasters, fire, theft and death
are all examples of static risks.
What are some examples of dynamic risks? - ANSWER Internet, privacy, exchange rates,
fuel prices, tax laws and terrorism are all examples of dynamic risks.
What is the cost/burden of risk? What are its components? - ANSWER The cost/burden
of risk is the cost of actual losses sustained. The components are 1.) financial losses, 2.) loss
of goodwill, 3.) loss mitigation tools, 4.) loss of goods and services that are too risky, and 5.)
loss of residual uncertainty. A primary example of this would be medical malpractice.
What are the three major types of pure risk? - ANSWER The three major types of pure
risk are personal, property and liability pure risk.
What are sources of personal pure risk? - ANSWER Injury, illness, sickness and death are
all sources of personal pure risk because they all damage human capital. Everyone faces per-
sonal pure risk because everyone has human capital.
What do loss of income and medical expenses equal? - ANSWER Loss of income and
medical expenses equal the an economic loss, which is a financial consequence of a loss ex-
posure to human capital.
What are the two components to the sources of property pure risk? - ANSWER The two
components are direct losses and indirect losses. Ultimately, these two create a net income
loss exposure. For example, if there is a fire in a building, the direct losses would be the cost
of replacing and repairing the building. On the other hand, in result of the loss occurring, the
indirect losses would be extra expenses and loss of income. Everybody faces property pure
risk because everybody owns something.
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benefits. An example of a moral hazard would be if a building owner burned a building. The
peril would be fire, frequency would be increased, and the crime would be Arson. Finally,
the moral hazard would be to collect property insurance.
What is pure risk? - ANSWER Pure risk is the focus of traditional risk management, where
all losses are recorded in financial terms. There is either a loss or no loss. When a loss is in-
curred, it is due to random events.
What are some examples of pure risk? - ANSWER Flood, fire, theft, sickness and death
are all examples of pure risk. These risks generally are insurable.
What happens if a loss is known with certainty? - ANSWER If a loss was known with cer-
tainty, there is no risk present because there is no uncertainty. However, there is still a loss.
What are the three ways to help prevent and brace for a loss? - ANSWER The three ways
to help prevent and brace for a loss are loss mitigation (reducing severity; e.g. safety pro-
grams) activities, budgeting for the loss, and avoiding the loss situation.
What is speculative risk? - ANSWER Speculative risk is a risk that provides either a gain,
loss, or no loss/gain. These risks are generally not insurable.
What are some examples of speculative risk? - ANSWER Gambling, investments, stocks,
owning a business and developing a new product are all examples of speculative risk.
1
, What is the difference between static and dynamic risk? - ANSWER Static risk does not
change significantly over time and it is always present. Dynamic risk is a result of changing
circumstances, laws and conditions and is not always present.
What are some examples of static risks? - ANSWER Natural disasters, fire, theft and death
are all examples of static risks.
What are some examples of dynamic risks? - ANSWER Internet, privacy, exchange rates,
fuel prices, tax laws and terrorism are all examples of dynamic risks.
What is the cost/burden of risk? What are its components? - ANSWER The cost/burden
of risk is the cost of actual losses sustained. The components are 1.) financial losses, 2.) loss
of goodwill, 3.) loss mitigation tools, 4.) loss of goods and services that are too risky, and 5.)
loss of residual uncertainty. A primary example of this would be medical malpractice.
What are the three major types of pure risk? - ANSWER The three major types of pure
risk are personal, property and liability pure risk.
What are sources of personal pure risk? - ANSWER Injury, illness, sickness and death are
all sources of personal pure risk because they all damage human capital. Everyone faces per-
sonal pure risk because everyone has human capital.
What do loss of income and medical expenses equal? - ANSWER Loss of income and
medical expenses equal the an economic loss, which is a financial consequence of a loss ex-
posure to human capital.
What are the two components to the sources of property pure risk? - ANSWER The two
components are direct losses and indirect losses. Ultimately, these two create a net income
loss exposure. For example, if there is a fire in a building, the direct losses would be the cost
of replacing and repairing the building. On the other hand, in result of the loss occurring, the
indirect losses would be extra expenses and loss of income. Everybody faces property pure
risk because everybody owns something.
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