FIN 341 EXAM 1 TERMS - FIER OLE MISS
Risk - Answers -uncertainty concerning the occurrence of a loss
Objective risk - Answers -relative variation of actual loss from expected loss
Law of Large Numbers - Answers -as number of exposure units increases, the more
closely the actual loss experience will approach the expected loss
chance of loss - Answers -the probability that an event that causes a loss will occur
Objective probability - Answers -the long run relative frequency of an even based on
the assumptions of an infinite # of observations and of no change in underlying
conditions... QUANTIFIABLE!
>>using data to come up with an unbiased estimate of likelihood that something bad
happens.
Subjective probability - Answers -the individual's personal estimate of the loss
>>your own best guess
physical hazard - Answers -a physical condition that increases the chance of loss
EX: dead tree in yard
moral hazard - Answers -dishonesty or character defects in an individual that increases
the frequency/severity of loss
EX: "Nub City"
morale (attitudinal) hazard - Answers -carelessness or indifference to a loss because of
the existence of insurance
EX: skydiving, worker's comp
legal hazard - Answers -characteristics of the legal system or regulatory environment
that increase the frequency/severity of loss
EX: Judicial hellholes
Peril - Answers -cause of a loss >>what's responsible for the damage
EX: collision, fire, theft
Hazard - Answers -increases likelihood of loss
Pure risk - Answers --Loss or no loss
-nothing to benefit/profit from
-easier to price
Speculative risk - Answers --loss or no loss or profit possible
, EX: going to Vegas
Personal risk - Answers -risks that directly affect an individual
EX: premature death
Property risk - Answers -risk of having property damage or loss
EX: theft
Liability risk - Answers -risk that one may be held legally liable for bodily injury or
property damage
EX: Liens
Nondiversifiable (fundamental) - Answers -affects entire economy or large number of
persons
Diversifiable (particular) - Answers -only affects individuals, not entire community
Cost of risks - Answers -(sum of)
-out lays to reduce risk
-opportunity costs
-expenses from financing potential loss
-cost of unreimbursed losses
Exposures - Answers -any situation in which a loss is possible (even if it doesn't
actually happen)
EX: school shooting, tornado, fire
steps for risk management - Answers -1. Identify
2. Evaluate
3. Select Technique (avoid, retain, transfer, or control)
4. Implement monitoring
loss frequency - Answers -how often will this problem happen
loss severity - Answers -how much is this loss going to cost
maximum possible loss - Answers -the most $ you might lose >>worst case scenario
maximum probable loss - Answers -what's most likely going to actually happen
What does having a higher Standard Deviation mean? - Answers -you're more risky
when the mean is the same
retention - Answers -losses paid for out of pocket
EX: active>>auto insurance
passive>> floods in Houston
Risk - Answers -uncertainty concerning the occurrence of a loss
Objective risk - Answers -relative variation of actual loss from expected loss
Law of Large Numbers - Answers -as number of exposure units increases, the more
closely the actual loss experience will approach the expected loss
chance of loss - Answers -the probability that an event that causes a loss will occur
Objective probability - Answers -the long run relative frequency of an even based on
the assumptions of an infinite # of observations and of no change in underlying
conditions... QUANTIFIABLE!
>>using data to come up with an unbiased estimate of likelihood that something bad
happens.
Subjective probability - Answers -the individual's personal estimate of the loss
>>your own best guess
physical hazard - Answers -a physical condition that increases the chance of loss
EX: dead tree in yard
moral hazard - Answers -dishonesty or character defects in an individual that increases
the frequency/severity of loss
EX: "Nub City"
morale (attitudinal) hazard - Answers -carelessness or indifference to a loss because of
the existence of insurance
EX: skydiving, worker's comp
legal hazard - Answers -characteristics of the legal system or regulatory environment
that increase the frequency/severity of loss
EX: Judicial hellholes
Peril - Answers -cause of a loss >>what's responsible for the damage
EX: collision, fire, theft
Hazard - Answers -increases likelihood of loss
Pure risk - Answers --Loss or no loss
-nothing to benefit/profit from
-easier to price
Speculative risk - Answers --loss or no loss or profit possible
, EX: going to Vegas
Personal risk - Answers -risks that directly affect an individual
EX: premature death
Property risk - Answers -risk of having property damage or loss
EX: theft
Liability risk - Answers -risk that one may be held legally liable for bodily injury or
property damage
EX: Liens
Nondiversifiable (fundamental) - Answers -affects entire economy or large number of
persons
Diversifiable (particular) - Answers -only affects individuals, not entire community
Cost of risks - Answers -(sum of)
-out lays to reduce risk
-opportunity costs
-expenses from financing potential loss
-cost of unreimbursed losses
Exposures - Answers -any situation in which a loss is possible (even if it doesn't
actually happen)
EX: school shooting, tornado, fire
steps for risk management - Answers -1. Identify
2. Evaluate
3. Select Technique (avoid, retain, transfer, or control)
4. Implement monitoring
loss frequency - Answers -how often will this problem happen
loss severity - Answers -how much is this loss going to cost
maximum possible loss - Answers -the most $ you might lose >>worst case scenario
maximum probable loss - Answers -what's most likely going to actually happen
What does having a higher Standard Deviation mean? - Answers -you're more risky
when the mean is the same
retention - Answers -losses paid for out of pocket
EX: active>>auto insurance
passive>> floods in Houston
