RMIN 4000 Test 1 Brown UGA UPDATED ACTUAL QUESTIONS AND CORRECT
ANSWERS
Exposures things of value (assets) that could be lost
Perils things that cause injury or loss
risk a calculated possibility of a negative outcome
Frequency the number of losses (such as fire or theft) that occur within a specified time
period. aka the probability of a loss
Severity the dollar amount of a loss for a specific peril (fire, theft, collision) aka How much
does it cost when the loss does occur?
Hazard a condition that creates or increases the frequency or severity of loss but does
NOT cause the loss.
Physical Hazard a physical condition that increases the frequency or severity of loss
Moral Hazard the presence of insurance changes the behavior of the insured. ex: making hail
damage to get a check
Morale hazard (attitudinal hazard) A condition of carelessness or indifference that increases the frequency or
severity of loss.
Legal Hazard characteristics of the legal system or regulatory environment that increase the
frequency or severity of losses
Georgia's Diminution in value is an example of a legal hazard because it increases the severity on property losses
Pure Risk A chance of loss or no loss, but no chance of gain. Insurance can be bought for
this
Speculative Risk A chance of loss, no loss, or gain.
Diversifiable risk a risk that affects only individuals or small groups and not the entire economy. It
can be eliminated/ reduced through diversification. the risks are not correlated
Developing cancer or your house being caught on fire Pure Risk
are two examples of what kind of risk?
, diversifiable risk A risk that affects only some individuals, businesses, or small groups. they can be
reduced/eliminated through diversification. the risks are not correlated
Non-Diversifiable Risk affects the entire economy or large numbers of persons or groups within the
economy (hurricane, flood), risks are correlated (inflation, unemployment) cannot
be eliminated through diversification
Enterprise Risk encompasses all major risks faced by a business firm, which include: pure risk,
speculative risk, strategic risk, operational risk, and financial risk
systemic risk the risk that the failure of one financial institution can bring down other institutions
as well. instability in the financial system due to the interdependency between the
players in the market
Types of Pure Risk personal risks, property risks, liability risks, loss of business income, cyber-security
risks
Personal risk a risk that can directly affect an individual or a family; loss of income, extra
expenses, and depletion of financial assets
Property Risk a risk that can lead to destruction or theft and loss of personal or business
property including money, vehicles, and buildings; 2 types (direct and indirect)
Direct Loss cost to replace a loss that is a direct result of a peril, such as fire.
Indirect Loss Loss that is a result or consequence of a direct loss
Liability Risk a risk that relates to harm or injury to other people or their property because of
your actions; no upper limit; Defense costs; liens may be placed on income or
assets may be siezed
Loss of business income Financial loss when the firm must shut down for some time after a physical
damage loss
Grease fire in the kitchen causes a restaurant to close Loss of business income
down for 4 weeks while repairs are made. The restaurant
has no income while closed. this is an example of:
2 techniques for managing risk risk control, risk financing
Risk Control techniques that reduce the frequency or severity of losses
Risk Financing techniques that provide for the funding of losses
ANSWERS
Exposures things of value (assets) that could be lost
Perils things that cause injury or loss
risk a calculated possibility of a negative outcome
Frequency the number of losses (such as fire or theft) that occur within a specified time
period. aka the probability of a loss
Severity the dollar amount of a loss for a specific peril (fire, theft, collision) aka How much
does it cost when the loss does occur?
Hazard a condition that creates or increases the frequency or severity of loss but does
NOT cause the loss.
Physical Hazard a physical condition that increases the frequency or severity of loss
Moral Hazard the presence of insurance changes the behavior of the insured. ex: making hail
damage to get a check
Morale hazard (attitudinal hazard) A condition of carelessness or indifference that increases the frequency or
severity of loss.
Legal Hazard characteristics of the legal system or regulatory environment that increase the
frequency or severity of losses
Georgia's Diminution in value is an example of a legal hazard because it increases the severity on property losses
Pure Risk A chance of loss or no loss, but no chance of gain. Insurance can be bought for
this
Speculative Risk A chance of loss, no loss, or gain.
Diversifiable risk a risk that affects only individuals or small groups and not the entire economy. It
can be eliminated/ reduced through diversification. the risks are not correlated
Developing cancer or your house being caught on fire Pure Risk
are two examples of what kind of risk?
, diversifiable risk A risk that affects only some individuals, businesses, or small groups. they can be
reduced/eliminated through diversification. the risks are not correlated
Non-Diversifiable Risk affects the entire economy or large numbers of persons or groups within the
economy (hurricane, flood), risks are correlated (inflation, unemployment) cannot
be eliminated through diversification
Enterprise Risk encompasses all major risks faced by a business firm, which include: pure risk,
speculative risk, strategic risk, operational risk, and financial risk
systemic risk the risk that the failure of one financial institution can bring down other institutions
as well. instability in the financial system due to the interdependency between the
players in the market
Types of Pure Risk personal risks, property risks, liability risks, loss of business income, cyber-security
risks
Personal risk a risk that can directly affect an individual or a family; loss of income, extra
expenses, and depletion of financial assets
Property Risk a risk that can lead to destruction or theft and loss of personal or business
property including money, vehicles, and buildings; 2 types (direct and indirect)
Direct Loss cost to replace a loss that is a direct result of a peril, such as fire.
Indirect Loss Loss that is a result or consequence of a direct loss
Liability Risk a risk that relates to harm or injury to other people or their property because of
your actions; no upper limit; Defense costs; liens may be placed on income or
assets may be siezed
Loss of business income Financial loss when the firm must shut down for some time after a physical
damage loss
Grease fire in the kitchen causes a restaurant to close Loss of business income
down for 4 weeks while repairs are made. The restaurant
has no income while closed. this is an example of:
2 techniques for managing risk risk control, risk financing
Risk Control techniques that reduce the frequency or severity of losses
Risk Financing techniques that provide for the funding of losses
