UGA RMIN 4000 ACTUAL EXAMS SCRIPT
QUESTIONS AND ANSWERS SET A+
✔✔moral hazard - ✔✔dishonesty or character defects in an individual that increase the
frequency or severity of loss (using a hammer to create "hail" damage to your roof to get
a claim)
✔✔Morale (Attitudinal) Hazard - ✔✔carelessness or indifference to a loss, which
increases the frequency or severity of a loss (leaving car unlocked leading to theft)
✔✔Legal Hazard - ✔✔characteristics of the legal system or regulatory environment that
increase the frequency or severity of losses (a jury in one district may be more
sympathetic than others)
✔✔pure risk - ✔✔a risk with a possibility of loss or no loss; no gain occurs
✔✔speculative risk - ✔✔A chance of loss, no loss, or gain
✔✔diversifiable risk - ✔✔a risk that affects only individuals or small groups and not the
entire economy
✔✔nondiversifiable risk - ✔✔a risk that affects the entire economy or large numbers of
persons or groups within the economy (war, inflation, business recession)
✔✔what makes a risk diversifiable or not? - ✔✔it is diversifiable if it can be reduced or
eliminated by diversification
✔✔enterprise risk - ✔✔encompasses all major risks faced by a business firm
✔✔systemic risk - ✔✔the risk that the failure of one financial institution can bring down
other institutions as well
, ✔✔What are the major types of pure risk? - ✔✔personal, property, and liability
✔✔personal risk - ✔✔A risk that directly affects an individual or family (peril, like
unemployment, causes loss of income)
✔✔property risk - ✔✔possibility of losses associated with the destruction or theft of
property (can be direct or indirect-financial loss result of direct loss)
✔✔legal liability risk - ✔✔financial consequences from injuries or damages you caused
to someone else (defense costs; liens on income or assets seized as punishment)
✔✔What are the techniques of managing risks? - ✔✔risk control and risk financing
✔✔risk control - ✔✔techniques that reduce the frequency or severity of losses
✔✔risk financing - ✔✔techniques for funding losses
✔✔what are some risk control tactics? - ✔✔loss prevention (employee training or safety
equipment to reduce frequency), loss reduction (sprinkler heads for fires to reduce
severity) , duplication, separation, diversification, and avoidance (never acquire loss
exposure (proactive) or abandon loss (reactive))
✔✔what are some risk financing tactics? - ✔✔retention (retaining part or all of losses
from a risk), noninsurance risk transfer (risk is given to party other than insurance
company), and insurance (transfer risk to insurer in exchange for a premium cost)
✔✔insurance - ✔✔pooling of accidental losses by transfer of risks to insurers, who
agree to compensate insureds for such losses, to provide monetary benefits on their
occurrence, or to render services connected to the risks
✔✔basic characteristics of insurance - ✔✔pooling of losses, payment of fortuitous
losses, risk transfer, and indemnification
✔✔pooling of losses - ✔✔spreading the losses of a few over an entire group (reduces
variation which reduces uncertainty)
✔✔payment of fortuitous losses - ✔✔insurance pays for losses that are unforeseen,
unexpected, and occur from chance
✔✔risk transfer - ✔✔A pure risk is transferred from the insured to the insurer, who
typically is in a stronger financial position
✔✔indemnification - ✔✔The insured is restored to his or her approximate financial
position prior to the occurrence of the loss
QUESTIONS AND ANSWERS SET A+
✔✔moral hazard - ✔✔dishonesty or character defects in an individual that increase the
frequency or severity of loss (using a hammer to create "hail" damage to your roof to get
a claim)
✔✔Morale (Attitudinal) Hazard - ✔✔carelessness or indifference to a loss, which
increases the frequency or severity of a loss (leaving car unlocked leading to theft)
✔✔Legal Hazard - ✔✔characteristics of the legal system or regulatory environment that
increase the frequency or severity of losses (a jury in one district may be more
sympathetic than others)
✔✔pure risk - ✔✔a risk with a possibility of loss or no loss; no gain occurs
✔✔speculative risk - ✔✔A chance of loss, no loss, or gain
✔✔diversifiable risk - ✔✔a risk that affects only individuals or small groups and not the
entire economy
✔✔nondiversifiable risk - ✔✔a risk that affects the entire economy or large numbers of
persons or groups within the economy (war, inflation, business recession)
✔✔what makes a risk diversifiable or not? - ✔✔it is diversifiable if it can be reduced or
eliminated by diversification
✔✔enterprise risk - ✔✔encompasses all major risks faced by a business firm
✔✔systemic risk - ✔✔the risk that the failure of one financial institution can bring down
other institutions as well
, ✔✔What are the major types of pure risk? - ✔✔personal, property, and liability
✔✔personal risk - ✔✔A risk that directly affects an individual or family (peril, like
unemployment, causes loss of income)
✔✔property risk - ✔✔possibility of losses associated with the destruction or theft of
property (can be direct or indirect-financial loss result of direct loss)
✔✔legal liability risk - ✔✔financial consequences from injuries or damages you caused
to someone else (defense costs; liens on income or assets seized as punishment)
✔✔What are the techniques of managing risks? - ✔✔risk control and risk financing
✔✔risk control - ✔✔techniques that reduce the frequency or severity of losses
✔✔risk financing - ✔✔techniques for funding losses
✔✔what are some risk control tactics? - ✔✔loss prevention (employee training or safety
equipment to reduce frequency), loss reduction (sprinkler heads for fires to reduce
severity) , duplication, separation, diversification, and avoidance (never acquire loss
exposure (proactive) or abandon loss (reactive))
✔✔what are some risk financing tactics? - ✔✔retention (retaining part or all of losses
from a risk), noninsurance risk transfer (risk is given to party other than insurance
company), and insurance (transfer risk to insurer in exchange for a premium cost)
✔✔insurance - ✔✔pooling of accidental losses by transfer of risks to insurers, who
agree to compensate insureds for such losses, to provide monetary benefits on their
occurrence, or to render services connected to the risks
✔✔basic characteristics of insurance - ✔✔pooling of losses, payment of fortuitous
losses, risk transfer, and indemnification
✔✔pooling of losses - ✔✔spreading the losses of a few over an entire group (reduces
variation which reduces uncertainty)
✔✔payment of fortuitous losses - ✔✔insurance pays for losses that are unforeseen,
unexpected, and occur from chance
✔✔risk transfer - ✔✔A pure risk is transferred from the insured to the insurer, who
typically is in a stronger financial position
✔✔indemnification - ✔✔The insured is restored to his or her approximate financial
position prior to the occurrence of the loss
