RMI 211 EXAM 1 Questions With Correct
Answers
What is Risk? - answerUncertainty regarding loss
Objective Risk - answerthe relative variation of actual loss from expected loss
Subjective Risk - answeruncertainty based on a person's mental condition or state of mind
(difficult to measure)
objec...
What is Risk? - answer✔✔Uncertainty regarding loss
Objective Risk - answer✔✔the relative variation of actual loss from expected loss
Subjective Risk - answer✔✔uncertainty based on a person's mental condition or state of mind
(difficult to measure)
objective probability - answer✔✔Likelihood that a specific result will occur, based on hard facts
and numbers
a priori - answer✔✔by logical deduction such as in games of chance
empirically - answer✔✔by induction, through analysis of data
subjective probability - answer✔✔- personal estimate of the chance of loss
- it need not coincide with objective probability and is influenced by a variety of factors
including age, sex, intelligence, education, and personality.
Chance of Loss Distinguished from Risk - answer✔✔although chance of loss may be the same
for two groups, the relative variation of actual loss from expected loss may be quite different
Peril - answer✔✔The cause of a loss (Fire, Hurricane, Tornado)
Objective Risk - answer✔✔-Can be measured by using the standard deviation or coefficient of
variation
-Declines as the number of exposure units increase
Hazard - answer✔✔A condition that increases the frequency or severity of a loss.
Physical Hazard - answer✔✔A physical condition that increases the chance of loss.
Examples: Icy Streets, poorly designed intersections, and dimly lit stairways.
Moral Hazard - answer✔✔Dishonesty or characteristics of an individual that increases the
chance of loss.
Example: You have not insured your house from any future damages. It implies that a loss will
be completely borne by you at the time of a mishappening like fire or burglary. Hence you will
show extra care and attentiveness.
Attitudinal (Morale) Hazard - answer✔✔Carelessness or indifference to a loss, which increases
the frequency or severity of a loss.
Examples: Suppose a person pays insurance for his new phone. Morale Hazard arises when the
model of his phone becomes outdated, and he no longer cares about it.
Legal Hazard - answer✔✔Characteristics of the legal system or regulatory environment that
increase the frequency or severity of losses.
Example: A court notice about a property, dispute of an insured person or some other similar
legal matter which could result in loss for the insured and for which insurance company may
have to pay.
Pure Risk - answer✔✔A situation in which there are only the possibilities of loss or no loss.
Speculative Risk - answer✔✔A situation in which either profit or loss is possible.
Diversifiable Risk - answer✔✔A risk that affects only individuals or small groups and not the
entire economy.
It can be reduced or eliminated by diversification.
nondiversifiable risk - answer✔✔A risk that affects the entire economy or large numbers of
persons or groups within the economy.
It cannot be eliminated or reduced by diversification.
Enterprise Risk - answer✔✔Encompasses all major risks faced by a business firm, which
include: pure risk, speculative risk, strategic risk, operational risk, and financial risk.
Personal Risk - answer✔✔Anything that exposes you to the risk of losing something of value.
Usually, the personal risk is associated with your financial investments/insurance and personal
health.
Risk of Premature Death - answer✔✔The main risk life insurance policies are designed to cover
is an unexpected loss of life. Usually, involves unfilled financial obligations.
Risk of Insufficient Income During Retirement - answer✔✔A major risk associated with old age
is not enough money during retirement, US citizens retire before 65 usually.
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