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RMIN 4000 uga test 1 Study Guide Solutions types of risk - ANSWER--pure risk -speculative risk -diversifiable risk -nondiversifiable risk -enterprise risk -systemic risk risk - ANSWER-uncertainty concerning the occurrence of a loss uncertainty - ANSWER-probabilities cannot be estimated lo...

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  • November 11, 2024
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  • 2024/2025
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RMIN 4000 uga test 1 Study Guide

Solutions


types of risk - ANSWER✔✔--pure risk


-speculative risk


-diversifiable risk


-nondiversifiable risk


-enterprise risk


-systemic risk


risk - ANSWER✔✔-uncertainty concerning the occurrence of a loss


uncertainty - ANSWER✔✔-probabilities cannot be estimated


loss exposure - ANSWER✔✔-any situation or circumstance in which a loss is possible, regardless of

whether a loss actually occurs


example: earthquake or flood causing damage to a manufacturing plant


objective risk (degree of risk) - ANSWER✔✔-the relative variation of actual loss from expected loss


example:10,000 houses insured of a long period of time and on average 100 houses burn each year,

however it would be rare for exactly 100 to burn each year




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law of large numbers - ANSWER✔✔-as the number of exposure units increases, the more closely the

actual loss experience will approach the expected loss experience




example: as the number of homes under observation increases, the greater is the degree of accuracy in

predicting the proportion of homes that will burn


subjective risk (perceived risk) - ANSWER✔✔-uncertainty based on a person's mental condition or state

of mind




example: driver with previous convictions for drunk driving tries to drive home and wonders if he will get

arrested by the police or not


chance of loss - ANSWER✔✔-the probability that an event will occur


objective probability - ANSWER✔✔-the long run relative frequency of an event based on the

assumptions of an infinite number of observations and of no change in the underlying conditions


two ways objective probability can be determined - ANSWER✔✔-1) deductive reasoning (priori

probabilities): probability of getting a head from the toss of a perfectly balanced coin is 1/2 bc there are

two sides


2) inductive reasoning: the probability that a person age 21 will die before age 26 cannot be logically

deduced, life insurers can estimate the probability of death and sell a 5 year life insurance policy for a 21

yr old


subjective probability - ANSWER✔✔-the individual's personal estimate of the chance of loss



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example: people who buy a lottery ticket on their birthday may believe it is their lucky day and

overestimate the small chance of winning


objective risk - ANSWER✔✔-the relative variation of actual loss from expected loss


peril - ANSWER✔✔-the cause of loss


example: house burns down, peril is the fire


hazard - ANSWER✔✔-condition that creates or increases the frequency or severity of loss


4 types of hazards - ANSWER✔✔-1) physical hazard


2) moral hazard


3) attitudinal hazard


4) legal hazard


physical hazard - ANSWER✔✔-physical condition that increases the frequency or severity of loss.


example: icy roads that increase chance of automobile accident


moral hazard - ANSWER✔✔-dishonesty or character defects in an individual that increase the frequency

or severity of loss


example: faking an accident to collect benefits from an insurer




-can try to control this by careful underwriting of applicants for insurance and by various policy

provisions, such as deductibles, waiting periods




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