FCS 340 MONEY MANAGEMENT EXAM 4
Risk - Answers -uncertainty about the outcome of a situation or event.
Risk Management - Answers -process of identifying and evaluating purely risky
situations to determine and implement appropriate management.
Perils - Answers -any event that can cause a financial loss.
property insurance - Answers -protection from financial losses resulting from the
damage to or destruction of your property or possessions.
liability insurance - Answers -protection from financial losses suffered when you are
held liable for others' losses.
risk reduction - Answers -includes mechanisms, such as insurance that reduce the
overall uncertainty about the magnitude of loss.
risk retention - Answers -accepting that some risks simply arise in the course of one's
life and consciously retaining that risk.
Risk avoidance - Answers -the simplest way to handle risk is to avoid it.
deductible clause - Answers -requires that the policyholder pays an initial portion of any
loss.
loss control - Answers -designing specific mechanisms to reduce loss frequency and
loss severity.
large-loss principle - Answers -a basic rule of risk management that encourages us to
insure the risks that we cannot afford and retain the risks that we can reasonably afford.
distinguish between pure risk and speculative risk - Answers -pure risk exists when
there is no potential for gains, only the possibilities of loss. speculative risk in the other
hand exists when there is a possibility of gains as well as for loss. Example: stock
market are speculative because you can either win or loss depending on the market.
Insurance policy is a pure risk because it will come up in the event of loss or destruction
of possessions.
explain the distinctions between risk and odds - Answers -odds are based on ratio of
things while risks are based on probabilities.
distinguish among the five common risk exposures that most people face - Answers -
Risk avoidance, risk retention, loss control, risk transfer, and risk reduction.
,risk transfer - Answers -another way to handle risk is to transfer it to an insurance
company.
Describe the 5 steps of risk management - Answers -1. Identify your risk exposure-
what you own and what you do.
2- estimate your risk and potential losses- how frequently you can have a loss and how
severe it would be.
3- choose how to handle your risk of loss- choose which one of the five exposures you
can handle.
4- implement your risk management program- what methods you will use to handle risk
management.
5- evaluate and adjust your program- life changes so the risks on it, periodically
evaluate and check if your methods are right for your current situation.
When considering likelihood of loss and severity of loss, explain which one of these two
concepts is more important when deciding whether to buy insurance and why. -
Answers -loss severity is most important because if a person is involved in an accident,
the amount he has to pay could be enormous because liability is more expensive.
insurance - Answers -mechanism for transferring and reducing pure risk though which
a large number of individuals share the financial losses suffered by members of the
group as a whole.
premium - Answers -the fee paid for insurance
insurance policy - Answers -contract between the person buying insurance (the
insured) and the insurance company (The insurer).
hazard - Answers -any condition that increases the probability that a peril will occur.
principle of indemnity - Answers -insurance will pay no more than the actual financial
loss suffered.
policy limits - Answers -specify the maximum dollar amounts that will be paid under the
policy.
coinsurance - Answers -method by which the insured and the insurer share
proportionately in the payment for a loss.
law of large numbers - Answers -as the number of members in a group increases,
predictions about the group's behavior become increasingly accurate.
insurance agents - Answers -representative of an insurance company authorized to
sell, modify, service, and terminate insurance contracts.
, direct sellers - Answers -companies that market insurance policies through salaried
employees, mail-order promotions, newspapers, the internet,, and even vending
machines.
distinguish among the three types of hazards - Answers -physical hazard- a particular
characteristic of the person who is insured or his insured property that can increase the
chance of loss. for example, having a high blood pressure is a hazard for the person
covered by health insurance.
2. morale hazard- when the person is indifferent to a peril; not locking the doors
because the insurer already knows that the insurance will pay for a loss.
3- moral hazard- occurs when the insured person will cause an accident to occur to
collect money from the insurance.
why is the principle of indemnity so important to insurance sellers? - Answers -because
the insurance will not pay more than the actual loss and also because it is protected
against moral hazards.
identify 4 key points to review when reading an insurance policy - Answers -1- Perils
covered, 2- property covered, 3-people covered, 4- time period of coverage, 5- amount
of coverage.
Summarize how to use deductibles, coinsurance, hazard reduction, and loss reduction
to lower the cost of insurance - Answers -deductible is the amount of money pay by the
insured before the insurance provides coverage; coinsurance is paying a share of the
costs of damage with the insurance; for example the insurer pays 20% and insurance
the remaining 80% of a loss. Hazard reduction is used when the insurer takes steps to
reduce the chances of losses. for example, losing weight or quit smoking. Loss
reduction takes place when the insurer takes steps to prevent the severity of loss in
case of a peril. installing smoke alarms and having fire extinguishers for example.
Differentiate among independent agents, exclusive agents, and direct sellers - Answers
-independent agents are independent business people who act as a third party links
between insurers and insureds. they earn commissions from the companies they
represent and look for the best insurance companies for the clients.
Exclusive agents-represent only one company for a specific type of insurance. for
example, life insurance.
direct sellers market their business through salaried employees, magazines, internet,
etc.
homeowner's insurance - Answers -combines liability and property insurance overages
that homeowners and rents typically need into single-package policies
named-perils policies - Answers -cover only losses caused by perils that the policy
specifically mentions.
Risk - Answers -uncertainty about the outcome of a situation or event.
Risk Management - Answers -process of identifying and evaluating purely risky
situations to determine and implement appropriate management.
Perils - Answers -any event that can cause a financial loss.
property insurance - Answers -protection from financial losses resulting from the
damage to or destruction of your property or possessions.
liability insurance - Answers -protection from financial losses suffered when you are
held liable for others' losses.
risk reduction - Answers -includes mechanisms, such as insurance that reduce the
overall uncertainty about the magnitude of loss.
risk retention - Answers -accepting that some risks simply arise in the course of one's
life and consciously retaining that risk.
Risk avoidance - Answers -the simplest way to handle risk is to avoid it.
deductible clause - Answers -requires that the policyholder pays an initial portion of any
loss.
loss control - Answers -designing specific mechanisms to reduce loss frequency and
loss severity.
large-loss principle - Answers -a basic rule of risk management that encourages us to
insure the risks that we cannot afford and retain the risks that we can reasonably afford.
distinguish between pure risk and speculative risk - Answers -pure risk exists when
there is no potential for gains, only the possibilities of loss. speculative risk in the other
hand exists when there is a possibility of gains as well as for loss. Example: stock
market are speculative because you can either win or loss depending on the market.
Insurance policy is a pure risk because it will come up in the event of loss or destruction
of possessions.
explain the distinctions between risk and odds - Answers -odds are based on ratio of
things while risks are based on probabilities.
distinguish among the five common risk exposures that most people face - Answers -
Risk avoidance, risk retention, loss control, risk transfer, and risk reduction.
,risk transfer - Answers -another way to handle risk is to transfer it to an insurance
company.
Describe the 5 steps of risk management - Answers -1. Identify your risk exposure-
what you own and what you do.
2- estimate your risk and potential losses- how frequently you can have a loss and how
severe it would be.
3- choose how to handle your risk of loss- choose which one of the five exposures you
can handle.
4- implement your risk management program- what methods you will use to handle risk
management.
5- evaluate and adjust your program- life changes so the risks on it, periodically
evaluate and check if your methods are right for your current situation.
When considering likelihood of loss and severity of loss, explain which one of these two
concepts is more important when deciding whether to buy insurance and why. -
Answers -loss severity is most important because if a person is involved in an accident,
the amount he has to pay could be enormous because liability is more expensive.
insurance - Answers -mechanism for transferring and reducing pure risk though which
a large number of individuals share the financial losses suffered by members of the
group as a whole.
premium - Answers -the fee paid for insurance
insurance policy - Answers -contract between the person buying insurance (the
insured) and the insurance company (The insurer).
hazard - Answers -any condition that increases the probability that a peril will occur.
principle of indemnity - Answers -insurance will pay no more than the actual financial
loss suffered.
policy limits - Answers -specify the maximum dollar amounts that will be paid under the
policy.
coinsurance - Answers -method by which the insured and the insurer share
proportionately in the payment for a loss.
law of large numbers - Answers -as the number of members in a group increases,
predictions about the group's behavior become increasingly accurate.
insurance agents - Answers -representative of an insurance company authorized to
sell, modify, service, and terminate insurance contracts.
, direct sellers - Answers -companies that market insurance policies through salaried
employees, mail-order promotions, newspapers, the internet,, and even vending
machines.
distinguish among the three types of hazards - Answers -physical hazard- a particular
characteristic of the person who is insured or his insured property that can increase the
chance of loss. for example, having a high blood pressure is a hazard for the person
covered by health insurance.
2. morale hazard- when the person is indifferent to a peril; not locking the doors
because the insurer already knows that the insurance will pay for a loss.
3- moral hazard- occurs when the insured person will cause an accident to occur to
collect money from the insurance.
why is the principle of indemnity so important to insurance sellers? - Answers -because
the insurance will not pay more than the actual loss and also because it is protected
against moral hazards.
identify 4 key points to review when reading an insurance policy - Answers -1- Perils
covered, 2- property covered, 3-people covered, 4- time period of coverage, 5- amount
of coverage.
Summarize how to use deductibles, coinsurance, hazard reduction, and loss reduction
to lower the cost of insurance - Answers -deductible is the amount of money pay by the
insured before the insurance provides coverage; coinsurance is paying a share of the
costs of damage with the insurance; for example the insurer pays 20% and insurance
the remaining 80% of a loss. Hazard reduction is used when the insurer takes steps to
reduce the chances of losses. for example, losing weight or quit smoking. Loss
reduction takes place when the insurer takes steps to prevent the severity of loss in
case of a peril. installing smoke alarms and having fire extinguishers for example.
Differentiate among independent agents, exclusive agents, and direct sellers - Answers
-independent agents are independent business people who act as a third party links
between insurers and insureds. they earn commissions from the companies they
represent and look for the best insurance companies for the clients.
Exclusive agents-represent only one company for a specific type of insurance. for
example, life insurance.
direct sellers market their business through salaried employees, magazines, internet,
etc.
homeowner's insurance - Answers -combines liability and property insurance overages
that homeowners and rents typically need into single-package policies
named-perils policies - Answers -cover only losses caused by perils that the policy
specifically mentions.
