RMIN 4000
Risk - answer Uncertainty concerning the occurrence of a loss
Loss exposure - answer any situation or circumstance in which a loss might occur
(regardless of if it happens or not)
- ex: When we think about if we might get sick.. my body is the exposure. If I have a
business and 10 buildings. My buildings are exposures.
Objective risk - answer relative variation of actual loss from expected loss.
Law of large numbers - answer as the # of exposures increases the more closely the
actual loss will get to the expected.
Pure risk - answer there’s no up-side to the risk (nothing good comes from it), chance of
loss or chance of no loss
Speculative risk - answer There is a chance for a win or a gain, you're creating a risk.
Ex: golden balls (split or steal) or gambling or buying a house - when we go to sell it,
there could be a gain or a sell.
Subjective risk - answeruncertainity based on a person's mental condition or state of
mind. How we feel about the loss.
Ex:$500 is different for a poor person and a rich person
- sister's afraid of water and atkinson is afraid of ziplining
- the risks are the same, but affects them differently (different way of handling it)
Chance of loss - answerthe probability that an event will occur
Objective probability - answerthe long-run relative frequency of an event based on the
assumptions of an infinite # of observations and no change in underlying conditions
Subjective probability - answerthe individual's personal estimate of the chance of loss.
Ex: sending annthrax in the mail.
- this cost companies a lot of money, when in reality only 5 letters were actually sent
with annthrax in them. - so this probably wasn't a huge risk, but it was in light of 9/11
Risk Averse - answerAvoid Risk if and when possible. Will pay extra to remove risk from
a set of outcomes.
Risk is scary
, Risk Seeker / Taker - answerEnjoys risk. Will "gamble" on a big payout and not take
many precautions (would not pay anywhere close to expected loss) to avoid risk.
Risk Tolerant / Risk Neutral - answer- Risk is just right. Will evaluate risk and will strive
to "pay" no more or less than the expected loss to avoid the risk.
- The value of risky situation is the expected loss
Peril - answerthe cause of loss
Hazard - answera condition that creates or increases the frequency or severity of loss.
4 main types: physical, moral, attitudinal, legal
Physical hazard - answer- physical condition that increases the frequency or severity of
loss
- ex: icy roads, defective wiring
Moral Hazard - answer- dishonesty or character defects in an individual that increases
the frequency or severity of loss
- ex: insurance fraud, burning down own house to collect
Morale hazard - answer- carelessness or indifference to a loss, which increases the
frequency or severity of loss
- ex: leaving keys in unlocked car, leaving door unlocked
Legal hazard - answer- characteristics of legal system or regulatory environment that
increase the frequency or severity of loss
- ex: large damage rewards in liability lawsuits
Particular/Diversifiable Risk - answerA risk that affects only individuals as individuals.
Fundamental/Systematic/Non-diversifiable Risk - answerRisk that affects a large
number of individuals or the entire economy.
Risk Management - answerA process that identifies loss exposure faced by an
organization and selects the most appropriate techniques for treating such exposures.
Enterprise Risk Management (ERM) - answercombines into a single unified treatment
program all major risks faced by the firm
Pre-loss objectives - answer- Economy - Doing it ahead of time saves $, if you wait til
you're in a bind things get expensive.
- Anxiety Reduction.
- Fulfilling Legal Requirements.
- Challenge is to show value, esp. since it's hard to measure the effects of losses that
don't occur.
Risk - answer Uncertainty concerning the occurrence of a loss
Loss exposure - answer any situation or circumstance in which a loss might occur
(regardless of if it happens or not)
- ex: When we think about if we might get sick.. my body is the exposure. If I have a
business and 10 buildings. My buildings are exposures.
Objective risk - answer relative variation of actual loss from expected loss.
Law of large numbers - answer as the # of exposures increases the more closely the
actual loss will get to the expected.
Pure risk - answer there’s no up-side to the risk (nothing good comes from it), chance of
loss or chance of no loss
Speculative risk - answer There is a chance for a win or a gain, you're creating a risk.
Ex: golden balls (split or steal) or gambling or buying a house - when we go to sell it,
there could be a gain or a sell.
Subjective risk - answeruncertainity based on a person's mental condition or state of
mind. How we feel about the loss.
Ex:$500 is different for a poor person and a rich person
- sister's afraid of water and atkinson is afraid of ziplining
- the risks are the same, but affects them differently (different way of handling it)
Chance of loss - answerthe probability that an event will occur
Objective probability - answerthe long-run relative frequency of an event based on the
assumptions of an infinite # of observations and no change in underlying conditions
Subjective probability - answerthe individual's personal estimate of the chance of loss.
Ex: sending annthrax in the mail.
- this cost companies a lot of money, when in reality only 5 letters were actually sent
with annthrax in them. - so this probably wasn't a huge risk, but it was in light of 9/11
Risk Averse - answerAvoid Risk if and when possible. Will pay extra to remove risk from
a set of outcomes.
Risk is scary
, Risk Seeker / Taker - answerEnjoys risk. Will "gamble" on a big payout and not take
many precautions (would not pay anywhere close to expected loss) to avoid risk.
Risk Tolerant / Risk Neutral - answer- Risk is just right. Will evaluate risk and will strive
to "pay" no more or less than the expected loss to avoid the risk.
- The value of risky situation is the expected loss
Peril - answerthe cause of loss
Hazard - answera condition that creates or increases the frequency or severity of loss.
4 main types: physical, moral, attitudinal, legal
Physical hazard - answer- physical condition that increases the frequency or severity of
loss
- ex: icy roads, defective wiring
Moral Hazard - answer- dishonesty or character defects in an individual that increases
the frequency or severity of loss
- ex: insurance fraud, burning down own house to collect
Morale hazard - answer- carelessness or indifference to a loss, which increases the
frequency or severity of loss
- ex: leaving keys in unlocked car, leaving door unlocked
Legal hazard - answer- characteristics of legal system or regulatory environment that
increase the frequency or severity of loss
- ex: large damage rewards in liability lawsuits
Particular/Diversifiable Risk - answerA risk that affects only individuals as individuals.
Fundamental/Systematic/Non-diversifiable Risk - answerRisk that affects a large
number of individuals or the entire economy.
Risk Management - answerA process that identifies loss exposure faced by an
organization and selects the most appropriate techniques for treating such exposures.
Enterprise Risk Management (ERM) - answercombines into a single unified treatment
program all major risks faced by the firm
Pre-loss objectives - answer- Economy - Doing it ahead of time saves $, if you wait til
you're in a bind things get expensive.
- Anxiety Reduction.
- Fulfilling Legal Requirements.
- Challenge is to show value, esp. since it's hard to measure the effects of losses that
don't occur.
