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RMIN 4000 UGA- Brown- exam 1 Questions and Answers
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RMIN 4000 UGA- Brown- exam 1
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RMIN 4000 UGA- Brown- exam 1definition of risk - answer A calculated possibility of a negative outcome
calculated possibility - answer probabilistic outcome, ranges from 0-1 (0-100%)
negative outcome - answer loss, must be quantifiable ($)
frequency - answer-"how often does a loss occur?"
-number of losses in a certain time period
-probability of a loss
Severity - answer-"how much does it cost when a loss occurs?"
- dollar amount
how to calculate frequency - answer# of losses/# of exposures
how to calculate severity - answer total losses ($)/# number of losses
peril - answer cause of loss (ex: fire)
hazard - answercondition that creates or increases frequency of a loss. 4 types:
physical, moral, morale (attitudinal), legal
physical hazard - answera physical condition that increases the frequency or severity of
loss
moral hazard - answerthe presence of insurance changes the behavior of the insured
(ex: faking damages or exaggerating value of insured property)
Morale (attitudinal) hazard - answercarelessness or indifference to a loss because of
the existence of insurance, increases frequency and severity (ex: leaving keys in car,
ignoring limbs)
legal hazard - answercharacteristics 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 - answerloss or no loss (no gain), insurable (ex: fire or cancer)
speculative risk - answerA chance of loss, no loss, or gain. (ex: gambling or investing),
not always insurable
, diversifiable risk - answer-affects only small groups not whole economy
-can be reduced/eliminated thru diversification
-risks aren't correlated (fire, theft, collision)
nondiversifiable risk - answer-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 - answerencompasses all major risks faced by a business: pure,
speculative, operational, and financial
systemic risk - answer-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 - answer-personal
-property
-liability
-loss of business income
-cyber security
personal risk - answer-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 - answer-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 - answer-legal liability (financial consequences)
-no upper limit
-liens can be placed on income, assets seized
-defense costs- lawyers
loss of business income - answer-if a business has to shut down for a period due to
physical damages and cannot generate income
-indirect loss
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