PRINCIPLES OF RISK MANAGEMENT AND INSURANCE EXAM 1 Rated 100% Correct!!

Objective or degree risk - defined as relative variation of actual loss from expected loss. law of large numbers - number of exposure units increase, the close the actual loss experience will approach the expected loss experience. permits insurer to estimate future losses with some accuracy. Subjective risk - uncertainty based on a person's mental condition or state of mind. Chance of loss - defined as probability that event will occur. Objective probability - long run relative frequency of event based on assume of infinite number of observe and no change in underlying condition. Two way to determine Objective probability: - First by deductive reasoning: call a priori probabilities second inductive reasoning Subjective probability - individual's personal estimate of the chance of loss. chance of Loss Versus Objective Risk. - Chance of loss is the probability that an event that causes a loss will occur. Objective risk is the relative variation of actual loss from expected loss. Peril - defined as the cause of loss hazard - condition that creates or increases the frequency or severity of loss.Physical hazard - physical condition that increases the frequency or severity of loss Moral hazard - dishonesty defects individual increase loss Attitudinal hazard or Morale Hazard - carelessness to loss increase chance of loss