Exam (elaborations)
RMIN 4000 Test1 Questions and Answers 2024
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Exam of 21 pages for the course RMIN 4000 UGA at RMIN 4000 UGA (RMIN 4000 Test1)
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RMIN 4000 Test1frequency equation - answer number of losses/number of exposures
severity equation - answer total losses ($) / number of losses
What is risk? - answer Traditional Definition - Uncertainty concerning the occurrence of
a loss.
Better Definition - A calculated possibility of a negative outcome.
risk of driving a car example - answer Exposures - car, life/health, money, future
income, contents in car, freedom, license
Perils - Accident, license revoked, acts of God(tree falls), breakdown, vandalism,
maintenance, theft, liability
Risk Management - Drive safely, wear seatbelts, insurance, lock vehicle, driver's Ed,
obey laws, car alarm, park in safe areas
Exposure - answer Things of Value (Assets) That Could be Lost
Perils - answer Things That Could Happen to These Assets
Risk Management - answer What do you to protect these assets and/or prevent/reduce
losses?
calculated possibility - answer A probabilistic outcome (chance of loss, likelihood of
loss) that is known or estimated
• Ranges from 0 to 1 (0% to 100%)
0- impossible
0.5 - Highest Risk
1 - Certain Event
Negative outcomes - answerLoss
Must be quantifiable in $$$
Frequency - answerHow often does a loss occur?
,• The number of losses (such as fire, theft, collision) that occur within a specified time
period.• Probability of a loss.
• Ex: Probability of a fire is 0.0071 per loss exposure per year.
severity - answer• How much does it cost when a loss does occur?
• The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
Peril vs. Hazard - answerPeril is the CAUSE of loss.
Like fire storm flood
Hazard is a condition that increases LIKELIHOOD of loss but doesn't cause it
four types - Physical, moral, morale(attitude), legal
1. Physical Hazard - answerA physical condition that increases the frequency and/or
severity of a loss.
is a hazard that arises from the condition, occupancy, or use of the property itself.
An example of a physical hazard is a skateboard left on the porch steps.
Moral Hazard - answerBook definition
Dishonesty or character defects in an individual that increase the frequency and/or
severity of a loss.
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
3. Morale (Attitudinal) Hazard - answerCarelessness or indifference to a loss, which
increases the frequency and/or severity of a loss.
Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
4. Legal Hazard - answerCharacteristics of legal system or regulatory environment that
increase the frequency and/or severity of a loss.
Examples:
• 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).
, Risk Classifications - answer• Pure Risk vs. Speculative Risk
• Diversifiable Risk
• Nondiversifiable Risk
• Enterprise Risk
• Systemic Risk
Pure vs. Speculative Risk - answer-A pure risk is a situation in which there are only the
possibilities of loss or no loss (earthquake, fire accident)
-A speculative risk is a situation in which either profit or loss is possible (gambling,
investment)
can you buy insurance for pure risks? - answerYes, typically but some types can be
hard to insure
Can you buy insurance for speculative risks? - answergenerally no
Diversifiable Risk - answer• Affects only individuals or small groups, not entire economy.
• Can be reduced/eliminated through diversification. (Have multiple facilities, cloud /
backup data centers)
• Risks are not correlated (For example: fire at multiple locations, theft, vehicle collision).
Nondiversifiable Risk - answer• Affects the entire economy or large numbers of
groups/persons within the economy.
• Cannot be reduced/eliminated through diversification.
• Government assistance may be needed to insure.
• Risks are correlated (inflation, unemployment).
Enterprise Risk - answerEncompasses all major risks faced by a business firm:
• Pure Risk
• Speculative Risk
• Strategic Risk*
• Operational Risk*
• Financial Risk*
Systemic Risk - answer• Risk of collapse of an entire system or entire market due to the
failure of a single entity or group of entities that can result in the breakdown of the entire
financial system.
• Instability in the financial system due to the interdependency between the players in
the market
Major Types of Pure Risks - answer• Personal Risk
• Property Risk
• Legal Liability Risk
• Loss of Business Income
• Cyber-security
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