RMIN 4000 Test1 (questions n answers)
A+ rated
frequency equation - correct answer ✔✔number of losses/number of exposures
severity equation - correct answer ✔✔total losses ($) / number of losses
What is risk? - correct answer ✔✔Traditional Definition - Uncertainty concerning the
occurrence of a loss.
Better Definition - A calculated possibility of a negative outcome.
risk of driving a car example - correct answer ✔✔Exposures - car, life/health, money, future
income, contents in car, freedom, license
Perils - Accident, license revoked, acts of God(tree falls), breakdown, vandalism, maintenance,
theft, liability
Risk Management - Drive safely, wear seatbelts, insurance, lock vehicle, driver's Ed, obey laws,
car alarm, park in safe areas
Exposure - correct answer ✔✔Things of Value (Assets) That Could be Lost
Perils - correct answer ✔✔Things That Could Happen to These Assets
,Risk Management - correct answer ✔✔What do you to protect these assets and/or
prevent/reduce losses?
calculated possibility - correct answer ✔✔A probabilistic outcome (chance of loss, likelihood of
loss) that is known or estimated
• Ranges from 0 to 1 (0% to 100%)
0- impossible
0.5 - Highest Risk
1 - Certain Event
Negative outcomes - correct answer ✔✔Loss
Must be quantifiable in $$$
Frequency - correct answer ✔✔How often does a loss occur?
• The number of losses (such as fire, theft, collision) that occur within a specified time period.•
Probability of a loss.
• Ex: Probability of a fire is 0.0071 per loss exposure per year.
severity - correct answer ✔✔• How much does it cost when a loss does occur?
• The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
Peril vs. Hazard - correct answer ✔✔Peril is the CAUSE of loss.
Like fire storm flood
,Hazard is a condition that increases LIKELIHOOD of loss but doesn't cause it
four types - Physical, moral, morale(attitude), legal
1. Physical Hazard - correct answer ✔✔A physical condition that increases the frequency and/or
severity of a loss.
is a hazard that arises from the condition, occupancy, or use of the property itself.
An example of a physical hazard is a skateboard left on the porch steps.
Moral Hazard - correct answer ✔✔Book definition
Dishonesty or character defects in an individual that increase the frequency and/or severity of a
loss.
Better definition
The presence of insurance changes the behavior of the insured.
Examples
• Using a hammer to create "hail" damage to a roof.
• Exaggerating the value of insured property
3. Morale (Attitudinal) Hazard - correct answer ✔✔Carelessness or indifference to a loss, which
increases the frequency and/or severity of a loss.
Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
, 4. Legal Hazard - correct answer ✔✔Characteristics of legal system or regulatory environment
that increase the frequency and/or severity of a loss.
Examples:
• Juries in some jurisdictions are more sympathetic than other areas (meaning larger damage
awards in liability lawsuits).
• Georgia now requires Diminution in Value to be paid on property losses
(meaning increased severity in Georgia).
Risk Classifications - correct answer ✔✔• Pure Risk vs. Speculative Risk
• Diversifiable Risk
• Nondiversifiable Risk
• Enterprise Risk
• Systemic Risk
Pure vs. Speculative Risk - correct answer ✔✔-A pure risk is a situation in which there are only
the possibilities of loss or no loss (earthquake, fire accident)
-A speculative risk is a situation in which either profit or loss is possible (gambling, investment)
can you buy insurance for pure risks? - correct answer ✔✔Yes, typically but some types can be
hard to insure
Can you buy insurance for speculative risks? - correct answer ✔✔generally no
Diversifiable Risk - correct answer ✔✔• Affects only individuals or small groups, not entire
economy.
• Can be reduced/eliminated through diversification. (Have multiple facilities, cloud / backup
data centers)
A+ rated
frequency equation - correct answer ✔✔number of losses/number of exposures
severity equation - correct answer ✔✔total losses ($) / number of losses
What is risk? - correct answer ✔✔Traditional Definition - Uncertainty concerning the
occurrence of a loss.
Better Definition - A calculated possibility of a negative outcome.
risk of driving a car example - correct answer ✔✔Exposures - car, life/health, money, future
income, contents in car, freedom, license
Perils - Accident, license revoked, acts of God(tree falls), breakdown, vandalism, maintenance,
theft, liability
Risk Management - Drive safely, wear seatbelts, insurance, lock vehicle, driver's Ed, obey laws,
car alarm, park in safe areas
Exposure - correct answer ✔✔Things of Value (Assets) That Could be Lost
Perils - correct answer ✔✔Things That Could Happen to These Assets
,Risk Management - correct answer ✔✔What do you to protect these assets and/or
prevent/reduce losses?
calculated possibility - correct answer ✔✔A probabilistic outcome (chance of loss, likelihood of
loss) that is known or estimated
• Ranges from 0 to 1 (0% to 100%)
0- impossible
0.5 - Highest Risk
1 - Certain Event
Negative outcomes - correct answer ✔✔Loss
Must be quantifiable in $$$
Frequency - correct answer ✔✔How often does a loss occur?
• The number of losses (such as fire, theft, collision) that occur within a specified time period.•
Probability of a loss.
• Ex: Probability of a fire is 0.0071 per loss exposure per year.
severity - correct answer ✔✔• How much does it cost when a loss does occur?
• The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
Peril vs. Hazard - correct answer ✔✔Peril is the CAUSE of loss.
Like fire storm flood
,Hazard is a condition that increases LIKELIHOOD of loss but doesn't cause it
four types - Physical, moral, morale(attitude), legal
1. Physical Hazard - correct answer ✔✔A physical condition that increases the frequency and/or
severity of a loss.
is a hazard that arises from the condition, occupancy, or use of the property itself.
An example of a physical hazard is a skateboard left on the porch steps.
Moral Hazard - correct answer ✔✔Book definition
Dishonesty or character defects in an individual that increase the frequency and/or severity of a
loss.
Better definition
The presence of insurance changes the behavior of the insured.
Examples
• Using a hammer to create "hail" damage to a roof.
• Exaggerating the value of insured property
3. Morale (Attitudinal) Hazard - correct answer ✔✔Carelessness or indifference to a loss, which
increases the frequency and/or severity of a loss.
Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
, 4. Legal Hazard - correct answer ✔✔Characteristics of legal system or regulatory environment
that increase the frequency and/or severity of a loss.
Examples:
• Juries in some jurisdictions are more sympathetic than other areas (meaning larger damage
awards in liability lawsuits).
• Georgia now requires Diminution in Value to be paid on property losses
(meaning increased severity in Georgia).
Risk Classifications - correct answer ✔✔• Pure Risk vs. Speculative Risk
• Diversifiable Risk
• Nondiversifiable Risk
• Enterprise Risk
• Systemic Risk
Pure vs. Speculative Risk - correct answer ✔✔-A pure risk is a situation in which there are only
the possibilities of loss or no loss (earthquake, fire accident)
-A speculative risk is a situation in which either profit or loss is possible (gambling, investment)
can you buy insurance for pure risks? - correct answer ✔✔Yes, typically but some types can be
hard to insure
Can you buy insurance for speculative risks? - correct answer ✔✔generally no
Diversifiable Risk - correct answer ✔✔• Affects only individuals or small groups, not entire
economy.
• Can be reduced/eliminated through diversification. (Have multiple facilities, cloud / backup
data centers)
