RMIN4000 Test 1
• Traditional Definition - Uncertainty concerning the occurrence of a
What is Risk? loss.
• Better Definition - A calculated possibility of a negative outcome.
• A probabilistic outcome (chance of loss, likelihood
of loss) that is known or estimated.
What is Calculated Possibility?
• Ranges from 0 to 1 (0% to 100%)
• Loss
Negative Outcome
• Must be Quantifiable (in $)
• How often does a loss occur?
• The number of losses (such as fire, theft, collision) that
What is Frequency? occur within a specified time period.
• Probability of a loss.
• Ex: Probability of a fire is 0.0071 per loss exposure per year.
What is the Frequency formula? F = Number of Losses / Number of Exposures
• How much does it cost when a loss does occur?
What is Severity? • The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
What is the Severity Formula? S = Total Losses ($) / Number of Losses
• Cause of Loss
What is Peril?
• Examples: Fire, windstorm, flood, collision, burglary, etc.
• Condition that creates or increases the frequency and/or severity
What is Hazard?
of a loss.
• Does not cause a loss.
, 1. Physical
2. Moral
What are the 4 Types of Hazard?
3. Morale (attitudinal)
4. Legal
Physical Hazard? A physical condition that increases the frequency and/or severity of a
loss.
Book definition: Dishonesty or character defects in an
individual that increase the frequency and/or severity of a
loss.
Moral Hazard
Better definition: The presence of insurance changes the
behavior of the insured. Examples -
• Using a hammer to create "hail" damage to a roof.
• Exaggerating the value of insured property.
Carelessness or indifference to a loss, which increases the
frequency and/or severity of a loss.
Morale (Attitudinal) Hazard Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
Characteristics of legal system or regulatory environment
that increase the frequency and/or severity of a loss.
Examples:
Legal Hazard • Juries in some jurisdictions are more sympathetic than
other areas (meaning larger damage awards in liability
lawsuits).
• Georgia now requires Diminution in Value to be paid on
property losses (meaning increased severity in Georgia).
• Pure Risk vs. Speculative Risk
• Diversifiable Risk
Risk Classifications • Nondiversifiable Risk
• Enterprise Risk
• Systemic Risk
Pure Risk -
1) Loss
2) No Loss
Ex: Auto Accident, Fire, Flood, Cancer, Slip & Fall
Pure Risk vs. Speculative Risk Speculative Risk -
1) Loss
2) No Loss / No Gain
3) Gain
Ex: Investment, Gambling
• Affects only individuals or small groups, not entire economy.
• Can be reduced/eliminated through diversification.
Diversifiable Risk (Have multiple facilities, cloud / backup data centers)
, • Risks are not correlated (For example: fire at
multiple locations, theft, vehicle collision).
• Affects the entire economy or large numbers of groups/persons
within the economy.
Nondiversifiable Risk • Cannot be reduced/eliminated through diversification.
• Government assistance may be needed to insure.
• Risks are correlated (inflation, unemployment).
• Traditional Definition - Uncertainty concerning the occurrence of a
What is Risk? loss.
• Better Definition - A calculated possibility of a negative outcome.
• A probabilistic outcome (chance of loss, likelihood
of loss) that is known or estimated.
What is Calculated Possibility?
• Ranges from 0 to 1 (0% to 100%)
• Loss
Negative Outcome
• Must be Quantifiable (in $)
• How often does a loss occur?
• The number of losses (such as fire, theft, collision) that
What is Frequency? occur within a specified time period.
• Probability of a loss.
• Ex: Probability of a fire is 0.0071 per loss exposure per year.
What is the Frequency formula? F = Number of Losses / Number of Exposures
• How much does it cost when a loss does occur?
What is Severity? • The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
What is the Severity Formula? S = Total Losses ($) / Number of Losses
• Cause of Loss
What is Peril?
• Examples: Fire, windstorm, flood, collision, burglary, etc.
• Condition that creates or increases the frequency and/or severity
What is Hazard?
of a loss.
• Does not cause a loss.
, 1. Physical
2. Moral
What are the 4 Types of Hazard?
3. Morale (attitudinal)
4. Legal
Physical Hazard? A physical condition that increases the frequency and/or severity of a
loss.
Book definition: Dishonesty or character defects in an
individual that increase the frequency and/or severity of a
loss.
Moral Hazard
Better definition: The presence of insurance changes the
behavior of the insured. Examples -
• Using a hammer to create "hail" damage to a roof.
• Exaggerating the value of insured property.
Carelessness or indifference to a loss, which increases the
frequency and/or severity of a loss.
Morale (Attitudinal) Hazard Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
Characteristics of legal system or regulatory environment
that increase the frequency and/or severity of a loss.
Examples:
Legal Hazard • Juries in some jurisdictions are more sympathetic than
other areas (meaning larger damage awards in liability
lawsuits).
• Georgia now requires Diminution in Value to be paid on
property losses (meaning increased severity in Georgia).
• Pure Risk vs. Speculative Risk
• Diversifiable Risk
Risk Classifications • Nondiversifiable Risk
• Enterprise Risk
• Systemic Risk
Pure Risk -
1) Loss
2) No Loss
Ex: Auto Accident, Fire, Flood, Cancer, Slip & Fall
Pure Risk vs. Speculative Risk Speculative Risk -
1) Loss
2) No Loss / No Gain
3) Gain
Ex: Investment, Gambling
• Affects only individuals or small groups, not entire economy.
• Can be reduced/eliminated through diversification.
Diversifiable Risk (Have multiple facilities, cloud / backup data centers)
, • Risks are not correlated (For example: fire at
multiple locations, theft, vehicle collision).
• Affects the entire economy or large numbers of groups/persons
within the economy.
Nondiversifiable Risk • Cannot be reduced/eliminated through diversification.
• Government assistance may be needed to insure.
• Risks are correlated (inflation, unemployment).
