Risk Management and Insurance Chapter 1 & 2 Que & Ans

Objective Risk - ANS the relative variation of actual loss from expected loss Law of Large Numbers - ANS the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience Subjective Risk - ANS uncertainty based on a person's mental condition or state of mind Chance of Loss - ANS the probability that an event will occur Objective Probability - ANS The probability that an event will occur based an analysis in which each measure is based on a recorded observation, rather than a subjective estimate Subjective Probability - ANS an individual's personal estimate of the chance of loss Peril - ANS the cause of loss Hazard - ANS a condition that creates or increases the frequency or severity of loss Physical Hazard - ANS a physical condition that increases the frequency or severity of loss Moral hazard - ANS dishonesty or character defects in an individual that increase the frequency or severity of a loss Attitudinal Hazard - ANS carelessness or indifference to a loss, which increases the frequency or severity of a loss Legal Hazard - ANS characteristics of the legal system or regulatory environment that increase the frequency or severity of losses Pure Risk - ANS a situation in which there are only the possibilities of loss or no loss Speculative Risk - ANS a situation in which either profit or loss is possible Nondiversifiable Risk - ANS a risk that affects the entire economy or large numbers of persons or groups within the economy Enterprise Risk - ANS encompasses all major risks faced by a business firm Financial Risk - ANS the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money Enterprise Risk Management - ANS a single unified treatment program all major risks faced by the firm Personal Risk - ANS risk that directly affect an individual or family Premature Death - ANS the death of a family head with unfulfilled financial obligations Human Life Value - ANS the present value of the family's share of the deceased breadwinner's future earnings Property Risk - ANS the risk of having property damaged or lost from numerous causes Direct Loss - ANS a financial loss that results from the physical damage, destruction, or theft of the property Indirect loss - ANS a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss Consequential Loss - ANS the amount of loss incurred as a result of being unable to use business property or equipment Liability Risk - ANS Risk to a company arising from the possibility of liability for damages resulting from the purchase, ownership, or use of a good or service offered by that company Risk Control - ANS techniques that reduce the frequency or severity of losses Risk Financing - ANS techniques that provide for the funding of losses Avoidance - ANS the use of legal methods to modify an individual's financial situation to lower the amount of income tax owed Retention - ANS an individual or a business firm retains part of all of the losses that can result from a given risk Active Retention - ANS The practice of protecting against a loss via the designation of specific funds to pay for the expected amount of the loss Passive Retention - ANS practice in which no funds are set aside on a mathematical basis to pay for expected losses Self-insurance - ANS a special form of planned retention by which part or all of a given loss exposure is retained by the firm Hold-harmless Clause - ANS a statement in a legal contract stating that an individual or organization is not liable for any injuries or damages caused to the individual signing the contract Hedging - ANS a technique for transferring the risk of unfavorable price fluctuations to speculator by purchasing and selling futures contracts on an organized exchange, such as the New York Stock Exchange. Insurance - ANS the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk Pooling - ANS the spreading of losses incurred by the few over the entire group, so that in the process, the average loss is substituted for actual loss Risk Transfer - ANS a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured Indemnification - ANS the insured is restored to his or her approximate financial position prior to the occurrence of the loss Insurable Risk - ANS a large number of exposure units, the loss should be accidental and unintentional, the loss should be both determinable and measurable, ideally the loss should not be catastrophic, loss should be calculable, and the premium should be economically feasible Reinsurance - ANS an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance