RMIN 4000 Test 1 Brown UGA Study Guide 2024 with
complete solution
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 are two examples of
what kind of risk?
Pure 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 down for 4 weeks while
repairs are made. The restaurant has no income while closed. this is an
example of:
Loss of business income
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
Loss Prevention is a _____ _________ technique that reduces the frequency of
a loss. an example would be airport security
risk control
_______ _____________ is a risk control technique that reduces the severity of
a loss. it can occur pre-loss or post-loss. examples are duplication,
diversification, and separation
Loss reduction
which avoidance technique is practiced when a certain loss exposure is never
acquired?
proactive avoidance
which avoidance technique is practiced when an existing exposure is
abandoned?
Reactive avoidance
complete solution
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 are two examples of
what kind of risk?
Pure 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 down for 4 weeks while
repairs are made. The restaurant has no income while closed. this is an
example of:
Loss of business income
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
Loss Prevention is a _____ _________ technique that reduces the frequency of
a loss. an example would be airport security
risk control
_______ _____________ is a risk control technique that reduces the severity of
a loss. it can occur pre-loss or post-loss. examples are duplication,
diversification, and separation
Loss reduction
which avoidance technique is practiced when a certain loss exposure is never
acquired?
proactive avoidance
which avoidance technique is practiced when an existing exposure is
abandoned?
Reactive avoidance
