RM 357E Exam 1 Review (updated)
questions well answered
What is risk? - correct answer ✔✔1. Chance of loss
2. Probability of loss
3. Dispersion of actual result of the prospected losses
Uncertainty Concept - correct answer ✔✔1. Majority of insurance authors define risk as uncertainty.
2. Risk and probability-if the probability of an event occurring is either zero or one, there is no risk since
there is no uncertainty.
Objective Risk - correct answer ✔✔1. Defined as the relative variation of actual loss from expected loss
2. Declines as the number of exposure units increases
3. Is measurable by using the standard deviation or coefficient of variation
C. Subjective Risk - correct answer ✔✔1. Defined as uncertainty based on one's mental condition or
state of mind
2. Difficult to measure
II. Chance of Loss - correct answer ✔✔1. Objective Probability
2. Subjective Probability
3. Chance of Loss Distinguished from Risk
Peril - correct answer ✔✔defined as the cause of loss (cause).
, Hazard - correct answer ✔✔defined as condition increases the chances of loss arriving by the cause of
peril (condition).
types of hazards - correct answer ✔✔1. Physical hazard
2. Moral Hazard
3. Morale Hazard
Physical Hazard - correct answer ✔✔physical condition that increases the chance of loss. Examples are
icy streets, poor designed intersections, and dimly lit stairways.
Moral Hazard - correct answer ✔✔dishonesty or characteristics of an individual that increase the chance
of loss.
Morale Hazard - correct answer ✔✔carelessness or indifference to a loss because of the existence of
insurance. Due to the transfer of risk to the third party.
BASIC CATEGORIES OF RISK: - correct answer ✔✔1. Pure vs. Speculative Risks
2. Diversifiable vs. Non-Diversifiable Risks
3. Enterprise Risk
4. Static vs. Dynamic Risks
pure risk - correct answer ✔✔a situation where there are only the possibilities of loss or no loss
Speculative risk - correct answer ✔✔a situation where either profit or loss is possible. Ex: investing in
stock (win/loss).
Why the distinction is important - correct answer ✔✔The law of numbers works best in pure risk.
Diversifiable - correct answer ✔✔individual risk
-Ex: property risk, legal liability
questions well answered
What is risk? - correct answer ✔✔1. Chance of loss
2. Probability of loss
3. Dispersion of actual result of the prospected losses
Uncertainty Concept - correct answer ✔✔1. Majority of insurance authors define risk as uncertainty.
2. Risk and probability-if the probability of an event occurring is either zero or one, there is no risk since
there is no uncertainty.
Objective Risk - correct answer ✔✔1. Defined as the relative variation of actual loss from expected loss
2. Declines as the number of exposure units increases
3. Is measurable by using the standard deviation or coefficient of variation
C. Subjective Risk - correct answer ✔✔1. Defined as uncertainty based on one's mental condition or
state of mind
2. Difficult to measure
II. Chance of Loss - correct answer ✔✔1. Objective Probability
2. Subjective Probability
3. Chance of Loss Distinguished from Risk
Peril - correct answer ✔✔defined as the cause of loss (cause).
, Hazard - correct answer ✔✔defined as condition increases the chances of loss arriving by the cause of
peril (condition).
types of hazards - correct answer ✔✔1. Physical hazard
2. Moral Hazard
3. Morale Hazard
Physical Hazard - correct answer ✔✔physical condition that increases the chance of loss. Examples are
icy streets, poor designed intersections, and dimly lit stairways.
Moral Hazard - correct answer ✔✔dishonesty or characteristics of an individual that increase the chance
of loss.
Morale Hazard - correct answer ✔✔carelessness or indifference to a loss because of the existence of
insurance. Due to the transfer of risk to the third party.
BASIC CATEGORIES OF RISK: - correct answer ✔✔1. Pure vs. Speculative Risks
2. Diversifiable vs. Non-Diversifiable Risks
3. Enterprise Risk
4. Static vs. Dynamic Risks
pure risk - correct answer ✔✔a situation where there are only the possibilities of loss or no loss
Speculative risk - correct answer ✔✔a situation where either profit or loss is possible. Ex: investing in
stock (win/loss).
Why the distinction is important - correct answer ✔✔The law of numbers works best in pure risk.
Diversifiable - correct answer ✔✔individual risk
-Ex: property risk, legal liability
