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RMIN 4000 Test 1 Questions and Answers.
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RMIN 4000 Test 1 Questions and Answers.
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RMIN 4000 Test 1 Questions andAnswers
frequency equation - (correct answer) -number of losses/number of exposures
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severity equation - (correct answer) -total losses ($) / number of losses
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What is risk? - (correct answer) -Traditional Definition - Uncertainty concerning the occurrence of a
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loss.
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Better Definition - A calculated possibility of a negative outcome.
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risk of driving a car example - (correct answer) -Exposures - car, life/health, money, future income,
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contents in car, freedom, license
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Perils - Accident, license revoked, acts of God(tree falls), breakdown, vandalism, maintenance, theft,
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liability
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Risk Management - Drive safely, wear seatbelts, insurance, lock vehicle, driver's Ed, obey laws, car
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alarm, park in safe areas
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Exposure - (correct answer) -Things of Value (Assets) That Could be Lost
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Perils - (correct answer) -Things That Could Happen to These Assets
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Risk Management - (correct answer) -What do you to protect these assets and/or prevent/reduce
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losses?
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calculated possibility - (correct answer) -A probabilistic outcome (chance of loss, likelihood of loss) that
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is known or estimated
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,• Ranges from 0 to 1 (0% to 100%)
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0- impossible
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0.5 - Highest Risk io io io
1 - Certain Event
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Negative outcomes - (correct answer) -Loss io io io io io
Must be quantifiable in $$$ io io io io
Frequency - (correct answer) -How often does a loss occur? io io io io io io io io io
• The number of losses (such as fire, theft, collision) that occur within a specified time period.•
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Probability of a loss.
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• Ex: Probability of a fire is 0.0071 per loss exposure per year.
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severity - (correct answer) -• How much does it cost when a loss does occur?
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• The dollar amount of loss for a specific peril (fire, theft, collision).
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• Example: Average structure fire loss is about $25,000
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Peril vs. Hazard - (correct answer) -Peril is the CAUSE of loss.
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Like fire storm flood io io io io
Hazard is a condition that increases LIKELIHOOD of loss but doesn't cause it
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io four types - Physical, moral, morale(attitude), legal
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1. Physical Hazard - (correct answer) -A physical condition that increases the frequency and/or severity
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of a loss.
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is a hazard that arises from the condition, occupancy, or use of the property itself.
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,An example of a physical hazard is a skateboard left on the porch steps.
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Moral Hazard - (correct answer) -Book definition
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Dishonesty or character defects in an individual that increase the frequency and/or severity of a loss.
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Better definition io
The presence of insurance changes the behavior of the insured.
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Examples
• Using a hammer to create "hail" damage to a roof.
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• Exaggerating the value of insured property
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3. Morale (Attitudinal) Hazard - (correct answer) -Carelessness or indifference to a loss, which increases
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the frequency and/or severity of a loss.
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Examples:
• Leaving car keys in an unlocked car.
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• Neglecting a tree limb growing over your roof.
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4. Legal Hazard - (correct answer) -Characteristics of legal system or regulatory environment that
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increase the frequency and/or severity of a loss.
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Examples:
• Juries in some jurisdictions are more sympathetic than other areas (meaning larger damage awards
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in liability lawsuits).
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• Georgia now requires Diminution in Value to be paid on property losses
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(meaning increased severity in Georgia). io io io io
Risk Classifications - (correct answer) -• Pure Risk vs. Speculative Risk
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• Diversifiable Risk
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• Nondiversifiable Risk
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• Enterprise Risk
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• Systemic Risk
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, Pure vs. Speculative Risk - (correct answer) --A pure risk is a situation in which there are only the
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possibilities of loss or no loss (earthquake, fire accident)
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-A speculative risk is a situation in which either profit or loss is possible (gambling, investment)
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can you buy insurance for pure risks? - (correct answer) -Yes, typically but some types can be hard to
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insure
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Can you buy insurance for speculative risks? - (correct answer) -generally no
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Diversifiable Risk - (correct answer) -• Affects only individuals or small groups, not entire economy.
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• Can be reduced/eliminated through diversification. (Have multiple facilities, cloud / backup data
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centers)
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• Risks are not correlated (For example: fire at multiple locations, theft, vehicle collision).
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Nondiversifiable Risk - (correct answer) -• Affects the entire economy or large numbers of io io io io io io io io io io io io io
groups/persons within the economy.
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• Cannot be reduced/eliminated through diversification.
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• Government assistance may be needed to insure.
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• Risks are correlated (inflation, unemployment).
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Enterprise Risk - (correct answer) -Encompasses all major risks faced by a business firm:
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• Pure Risk
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• Speculative Risk
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• Strategic Risk*
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• Operational Risk*
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• Financial Risk*
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Systemic Risk - (correct answer) -• Risk of collapse of an entire system or entire market due to the
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failure of a single entity or group of entities that can result in the breakdown of the entire financial
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system.
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• Instability in the financial system due to the interdependency between the players in the market
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Major Types of Pure Risks - (correct answer) -• Personal Risk
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• Property Risk
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• Legal Liability Risk
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