RMIN 4000 EXAM 1 – EDMUNDS STUDY GUIDE | 2025 | WITH
FULL SOLUTIONS
1. Risk: a calculated possibility of a negative
outcome Ex: Auto - UGA football accident after
winning the natty
2. Risks of Auto Driving: Exposure: vehicle
damange Perils: accident
Risk Management: Drive safely
3. calculated possibility: a probabilistic outcome (chance of loss, likelihood of loss) that is known or estimat-
ed; Ranges from 0% to 100%
- 0% = impossible event (no risk)
- 50% = highest risk (most uncertainty)
- 100% = certain event (no risk)
4. Negative outcome: loss, must be quantifiable in $
- Ex: lare fire/auto accident - how much did you damage things?
5. Frequency: - How often does loss occur?
- The number of losses (fire, theft, collison) that occur within a specific time period?
- Probability of Loss
Ex: The probability of a fire is 0.0071 per loss exposure per year
Frequency = (# of losses)/(# of exposures)
6. Severity: - How much does it cost when a loss does occur?
- The dollar amount of loss for a specific peril (fire, theft,
collison) Ex: avg structure fire loss is about $25k
Severity = (total losses $)/(# of losses)
7. Peril: cause of loss
,Ex: fire, windstorm, collision, flood, burglary, etc.
8. Hazard: condition that creates or increases the frequency and/or severity of a loss
- Does
not cause
a loss 4
Types
- physical
- moral
- morale (attitudinal)
- legal
9. Physical hazard: A physical condition that increases the frequency and/or severity of a
loss Ex: electrical outlets that are overloaded with things plugged into them
, 10. moral hazard: Dishonesty or character defects in an individual that increase the frequency and or severity of a
loss/the presence of insurance changes the behavior of the insured
Ex: using a hammer to create "hail" damage to a roof or exaggerating the value of insured property
11. morale hazard: Carelessness or inditterence to a loss, which increases the frequency and/or severity of a
loss
Ex: leaving keys in an unlocked car or neglecting a tree limb growing over your roof
12. legal hazard: Characteristics of the legal system or regulatory environment that increase the frequency and/or
severity of a loss
Ex: juries in some jurisdictions are more sympathetic than other areas (meaning larger damage awards reliability lawsuits)
Ex: Georgia now requires Diminution in Value to be paid on property losses (meaning increased severity in GA) - a Car
getting into an accident
13. Pure Risk: loss or no loss - insurance is used to make you whole again
Ex: auto accident, fire, flood, cancer, slip and fall
Types: personal risk, property risk, legal liability risk, loss of business income, cyber-security (All relevant to both families and
businesses)
14. Speculative Risk: loss, no loss/no gain, gain - outcome is uncertain
Ex: investment, gambling
15. Diversifiable risk: - Attects only individuals or small groups, not entire economy
- Can be reduced/eliminated thru diversification (have multiple facilities, cloud/backup data centers)
- Risks are not correlated (Ex: fire at multiple locations, theft, vehicle collision)
16. nondiversifiable risk: - attects the entire economy or large numbers of groups/persons within the
economy
- Cannot be reduced/eliminated thru diversification
- Govt assistance may be needed to insure
- Risks are correlated (inflation, unemployment)
FULL SOLUTIONS
1. Risk: a calculated possibility of a negative
outcome Ex: Auto - UGA football accident after
winning the natty
2. Risks of Auto Driving: Exposure: vehicle
damange Perils: accident
Risk Management: Drive safely
3. calculated possibility: a probabilistic outcome (chance of loss, likelihood of loss) that is known or estimat-
ed; Ranges from 0% to 100%
- 0% = impossible event (no risk)
- 50% = highest risk (most uncertainty)
- 100% = certain event (no risk)
4. Negative outcome: loss, must be quantifiable in $
- Ex: lare fire/auto accident - how much did you damage things?
5. Frequency: - How often does loss occur?
- The number of losses (fire, theft, collison) that occur within a specific time period?
- Probability of Loss
Ex: The probability of a fire is 0.0071 per loss exposure per year
Frequency = (# of losses)/(# of exposures)
6. Severity: - How much does it cost when a loss does occur?
- The dollar amount of loss for a specific peril (fire, theft,
collison) Ex: avg structure fire loss is about $25k
Severity = (total losses $)/(# of losses)
7. Peril: cause of loss
,Ex: fire, windstorm, collision, flood, burglary, etc.
8. Hazard: condition that creates or increases the frequency and/or severity of a loss
- Does
not cause
a loss 4
Types
- physical
- moral
- morale (attitudinal)
- legal
9. Physical hazard: A physical condition that increases the frequency and/or severity of a
loss Ex: electrical outlets that are overloaded with things plugged into them
, 10. moral hazard: Dishonesty or character defects in an individual that increase the frequency and or severity of a
loss/the presence of insurance changes the behavior of the insured
Ex: using a hammer to create "hail" damage to a roof or exaggerating the value of insured property
11. morale hazard: Carelessness or inditterence to a loss, which increases the frequency and/or severity of a
loss
Ex: leaving keys in an unlocked car or neglecting a tree limb growing over your roof
12. legal hazard: Characteristics of the legal system or regulatory environment that increase the frequency and/or
severity of a loss
Ex: juries in some jurisdictions are more sympathetic than other areas (meaning larger damage awards reliability lawsuits)
Ex: Georgia now requires Diminution in Value to be paid on property losses (meaning increased severity in GA) - a Car
getting into an accident
13. Pure Risk: loss or no loss - insurance is used to make you whole again
Ex: auto accident, fire, flood, cancer, slip and fall
Types: personal risk, property risk, legal liability risk, loss of business income, cyber-security (All relevant to both families and
businesses)
14. Speculative Risk: loss, no loss/no gain, gain - outcome is uncertain
Ex: investment, gambling
15. Diversifiable risk: - Attects only individuals or small groups, not entire economy
- Can be reduced/eliminated thru diversification (have multiple facilities, cloud/backup data centers)
- Risks are not correlated (Ex: fire at multiple locations, theft, vehicle collision)
16. nondiversifiable risk: - attects the entire economy or large numbers of groups/persons within the
economy
- Cannot be reduced/eliminated thru diversification
- Govt assistance may be needed to insure
- Risks are correlated (inflation, unemployment)
