Risk Management Exam #1 with
complete solutions
What is moral hazard? - correct answer ✔✔Moral hazard is a behavior change due to insurance-like
benefits. An example of a moral hazard would be if a building owner burned a building. The peril would
be fire, frequency would be increased, and the crime would be Arson. Finally, the moral hazard would be
to collect property insurance.
What is pure risk? - correct answer ✔✔Pure risk is the focus of traditional risk management, where all
losses are recorded in financial terms. There is either a loss or no loss. When a loss is incurred, it is due
to random events.
What are some examples of pure risk? - correct answer ✔✔Flood, fire, theft, sickness and death are all
examples of pure risk. These risks generally are insurable.
What happens if a loss is known with certainty? - correct answer ✔✔If a loss was known with certainty,
there is no risk present because there is no uncertainty. However, there is still a loss.
What are the three ways to help prevent and brace for a loss? - correct answer ✔✔The three ways to
help prevent and brace for a loss are loss mitigation (reducing severity; e.g. safety programs) activities,
budgeting for the loss, and avoiding the loss situation.
What is speculative risk? - correct answer ✔✔Speculative risk is a risk that provides either a gain, loss, or
no loss/gain. These risks are generally not insurable.
What are some examples of speculative risk? - correct answer ✔✔Gambling, investments, stocks,
owning a business and developing a new product are all examples of speculative risk.
What is the difference between static and dynamic risk? - correct answer ✔✔Static risk does not change
significantly over time and it is always present. Dynamic risk is a result of changing circumstances, laws
and conditions and is not always present.
, What are some examples of static risks? - correct answer ✔✔Natural disasters, fire, theft and death are
all examples of static risks.
What are some examples of dynamic risks? - correct answer ✔✔Internet, privacy, exchange rates, fuel
prices, tax laws and terrorism are all examples of dynamic risks.
What is the cost/burden of risk? What are its components? - correct answer ✔✔The cost/burden of risk
is the cost of actual losses sustained. The components are 1.) financial losses, 2.) loss of goodwill, 3.) loss
mitigation tools, 4.) loss of goods and services that are too risky, and 5.) loss of residual uncertainty. A
primary example of this would be medical malpractice.
What are the three major types of pure risk? - correct answer ✔✔The three major types of pure risk are
personal, property and liability pure risk.
What are sources of personal pure risk? - correct answer ✔✔Injury, illness, sickness and death are all
sources of personal pure risk because they all damage human capital. Everyone faces personal pure risk
because everyone has human capital.
What do loss of income and medical expenses equal? - correct answer ✔✔Loss of income and medical
expenses equal the an economic loss, which is a financial consequence of a loss exposure to human
capital.
What are the two components to the sources of property pure risk? - correct answer ✔✔The two
components are direct losses and indirect losses. Ultimately, these two create a net income loss
exposure. For example, if there is a fire in a building, the direct losses would be the cost of replacing and
repairing the building. On the other hand, in result of the loss occurring, the indirect losses would be
extra expenses and loss of income. Everybody faces property pure risk because everybody owns
something.
What is a source of liability pure risk? - correct answer ✔✔A source of liability pure risk is negligence.
This results in financial consequences (legal fees, judgement, reputation loss). This can be seen in
product liability cases, where a product manufactured by a company injures/hurts someone that is using
the product.
What is a peril? - correct answer ✔✔A peril is the immediate cause of a loss.
complete solutions
What is moral hazard? - correct answer ✔✔Moral hazard is a behavior change due to insurance-like
benefits. An example of a moral hazard would be if a building owner burned a building. The peril would
be fire, frequency would be increased, and the crime would be Arson. Finally, the moral hazard would be
to collect property insurance.
What is pure risk? - correct answer ✔✔Pure risk is the focus of traditional risk management, where all
losses are recorded in financial terms. There is either a loss or no loss. When a loss is incurred, it is due
to random events.
What are some examples of pure risk? - correct answer ✔✔Flood, fire, theft, sickness and death are all
examples of pure risk. These risks generally are insurable.
What happens if a loss is known with certainty? - correct answer ✔✔If a loss was known with certainty,
there is no risk present because there is no uncertainty. However, there is still a loss.
What are the three ways to help prevent and brace for a loss? - correct answer ✔✔The three ways to
help prevent and brace for a loss are loss mitigation (reducing severity; e.g. safety programs) activities,
budgeting for the loss, and avoiding the loss situation.
What is speculative risk? - correct answer ✔✔Speculative risk is a risk that provides either a gain, loss, or
no loss/gain. These risks are generally not insurable.
What are some examples of speculative risk? - correct answer ✔✔Gambling, investments, stocks,
owning a business and developing a new product are all examples of speculative risk.
What is the difference between static and dynamic risk? - correct answer ✔✔Static risk does not change
significantly over time and it is always present. Dynamic risk is a result of changing circumstances, laws
and conditions and is not always present.
, What are some examples of static risks? - correct answer ✔✔Natural disasters, fire, theft and death are
all examples of static risks.
What are some examples of dynamic risks? - correct answer ✔✔Internet, privacy, exchange rates, fuel
prices, tax laws and terrorism are all examples of dynamic risks.
What is the cost/burden of risk? What are its components? - correct answer ✔✔The cost/burden of risk
is the cost of actual losses sustained. The components are 1.) financial losses, 2.) loss of goodwill, 3.) loss
mitigation tools, 4.) loss of goods and services that are too risky, and 5.) loss of residual uncertainty. A
primary example of this would be medical malpractice.
What are the three major types of pure risk? - correct answer ✔✔The three major types of pure risk are
personal, property and liability pure risk.
What are sources of personal pure risk? - correct answer ✔✔Injury, illness, sickness and death are all
sources of personal pure risk because they all damage human capital. Everyone faces personal pure risk
because everyone has human capital.
What do loss of income and medical expenses equal? - correct answer ✔✔Loss of income and medical
expenses equal the an economic loss, which is a financial consequence of a loss exposure to human
capital.
What are the two components to the sources of property pure risk? - correct answer ✔✔The two
components are direct losses and indirect losses. Ultimately, these two create a net income loss
exposure. For example, if there is a fire in a building, the direct losses would be the cost of replacing and
repairing the building. On the other hand, in result of the loss occurring, the indirect losses would be
extra expenses and loss of income. Everybody faces property pure risk because everybody owns
something.
What is a source of liability pure risk? - correct answer ✔✔A source of liability pure risk is negligence.
This results in financial consequences (legal fees, judgement, reputation loss). This can be seen in
product liability cases, where a product manufactured by a company injures/hurts someone that is using
the product.
What is a peril? - correct answer ✔✔A peril is the immediate cause of a loss.
