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RMIN 4000 UGA- Brown- exam 1|80 Accurate Q’s and A’s
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RMIN 4000 UGA- Brown- exam 1|80 Accurate Q’s and A’s
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RMIN 4000 UGA- Brown- exam 1|80 Accurate Q’s and A’s
Definition of risk - -A calculated possibility of a negative outcome
- calculated possibility - -probabilistic outcome, ranges from 0-1 (0-100%)
- negative outcome - -loss, must be quantifiable ($)
- frequency - --"how often does a loss occur?"
-number of losses in a certain time period
-probability of a loss
- Severity - --"how much does it cost when a loss occurs?"
- dollar amount
- how to calculate frequency - -# of losses/# of exposures
- how to calculate severity - -total losses ($)/# number of losses
- peril - -cause of loss (ex: fire)
- hazard - -condition that creates or increases frequency of a loss. 4 types:
physical, moral, morale (attitudinal), legal
- 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: faking damages or exaggerating value of insured property)
- Morale (attitudinal) hazard - -carelessness or indifference to a loss
because of the existence of insurance, increases frequency and severity (ex:
leaving keys in car, ignoring limbs)
- legal hazard - -characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses (ex: different
juries in different areas, diminution in value laws)
- pure risk - -loss or no loss (no gain), insurable (ex: fire or cancer)
- speculative risk - -A chance of loss, no loss, or gain. (ex: gambling or
investing), not always insurable
, - diversifiable risk - --affects only small groups not whole economy
-can be reduced/eliminated thru diversification
-risks aren't correlated (fire, theft, collision)
- nondiversifiable risk - --affects entire economy
-cannot be reduced thru diversififcation
-gov. assistance may be needed to insure
-risks are correlated (inflation, unemployment)
-ex: flood, earthquake
- enterprise risk - -encompasses all major risks faced by a business: pure,
speculative, operational, and financial
- systemic risk - --risk collapse of an entire system or entire market due to a
failure of a single entity or group of entities that can result in a breakdown of
the entire financial system
-instability in the financial system due to interdependency between the
players and the market
- types of pure risks - --personal
-property
-liability
-loss of business income
-cyber security
- personal risk - --directly affects individual or family, involves a possibility
of loss of income, extra expenses, or depletion of financial assets
-perils maybe involved: death, unemployment, disability/injury/poor health,
inadequate retirement income
- property risk - --possibility of losses associated with the destruction of
property
-direct loss: cost to replace damaged property
-indirect loss: financial loss resulting as a consequence of the direct loss (ex:
having to pay to live somewhere while home is being repaired from fire
damages)
- liability risk - --legal liability (financial consequences)
-no upper limit
-liens can be placed on income, assets seized
-defense costs- lawyers
- loss of business income - --if a business has to shut down for a period due
to physical damages and cannot generate income
-indirect loss
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