Q: What is risk? ANSWER Uncertainty about the future; specifically, the
possibility of a loss.
Q: What is a peril? ANSWER The cause of a loss (e.g., fire, wind, theft).
Q: What is a hazard? ANSWER A condition that increases the frequency or
severity of a loss.
Q: Give an example of a physical hazard. ANSWER Icy sidewalks, frayed wiring.
Q: Give an example of a moral hazard. ANSWER Intentional arson to collect
insurance money.
Q: Give an example of a morale (attitudinal) hazard. ANSWER Carelessness
because "insurance will pay for it."
Q: What is the difference between pure risk and speculative risk? ANSWER
Pure risk involves only the chance of loss or no loss; speculative risk involves
the chance of loss, no loss, or gain.
Q: Which type of risk is insurable? ANSWER Pure risk.
Q: What is fundamental risk? ANSWER A risk that affects a large segment of
society (e.g., war, inflation).
Q: What is particular risk? ANSWER A risk that affects only individuals or small
groups (e.g., a car accident).
Q: What are the three steps in the risk management decision-making process?
ANSWER Identify loss exposures, analyze them, and select the appropriate
treatment technique.
Q: What is a pre-loss risk management objective? ANSWER To prepare for
potential losses (e.g., meeting legal requirements, reducing anxiety).
Q: What is a post-loss risk management objective? ANSWER To survive the
loss and continue operations (e.g., maintaining profitability, social
responsibility).
,Q: What is the Cost of Risk (COR)? ANSWER The total cost of managing risk,
including insurance premiums, retained losses, risk control costs, and
administrative expenses.
Q: What is enterprise risk management (ERM)? ANSWER A holistic approach
to managing all organizational risks (operational, financial, strategic, hazard) in
an integrated way.
Q: What is risk appetite? ANSWER The amount and type of risk an
organization is willing to accept in pursuit of its objectives.
Q: What is risk tolerance? ANSWER The specific maximum variation the
organization is willing to accept around a specific objective.
Q: What is a loss exposure? ANSWER Any situation or circumstance in which a
loss is possible, regardless of whether a loss actually occurs.
Q: What is a property loss exposure? ANSWER The possibility that property
will be damaged, destroyed, or lost.
Q: What is a liability loss exposure? ANSWER The possibility that a person or
organization will be held legally responsible for harm.
Q: What is a personnel loss exposure? ANSWER The possibility of loss arising
from death, disability, or resignation of employees.
Q: What is a net income loss exposure? ANSWER The possibility of reduced
income or increased expenses due to a loss.
Q: What is risk avoidance? ANSWER Eliminating a loss exposure by not
engaging in the activity that produces it.
Q: What is risk control? ANSWER Techniques that reduce the frequency or
severity of losses.
Q: What is risk financing? ANSWER Techniques that provide funds to pay for
losses when they occur.
Q: What is risk transfer (in financing)? ANSWER Shifting the financial burden of
a loss to another party (e.g., via insurance or contracts).
Q: What is risk retention? ANSWER Absorbing the financial burden of a loss
within the organization.
, Q: What is the difference between risk control and risk financing? ANSWER
Risk control reduces the chance or size of loss; risk financing pays for the loss
after it happens.
Q: What is a risk management information system (RMIS)? ANSWER A
computerized system that stores, retrieves, and analyzes risk management
data.
Q: What is a peril matrix? ANSWER A grid used to plot the frequency and
severity of different loss exposures.
Q: How is frequency defined? ANSWER The number of times a loss occurs
within a given period.
Q: How is severity defined? ANSWER The size or financial impact of a loss.
Q: What is the law of large numbers? ANSWER As the number of exposure
units increases, the actual loss experience will more closely approximate the
expected loss experience.
Q: Why is the law of large numbers important to insurers? ANSWER It allows
them to predict future losses accurately and set appropriate premiums.
Q: What is adverse selection? ANSWER The tendency of higher-risk individuals
to purchase insurance more often than lower-risk individuals.
Q: What is an insurable interest? ANSWER A financial or legal interest in the
subject matter of insurance, meaning the insured would suffer a loss if the
property were damaged.
Q: What is subrogation? ANSWER The right of an insurer, after paying a loss,
to step into the shoes of the insured and sue a negligent third party to recover
the payment.
Q: What is indemnity? ANSWER A principle stating that an insured should not
collect more from insurance than the actual financial loss suffered.
Q: What is actual cash value (ACV)? ANSWER The replacement cost of
property minus depreciation.
Q: What is replacement cost? ANSWER The cost to replace damaged property
with new property of like kind and quality, without deduction for depreciation.
Q: What is a deductible? ANSWER The amount the insured must pay out-of-
pocket before the insurer pays anything.
possibility of a loss.
Q: What is a peril? ANSWER The cause of a loss (e.g., fire, wind, theft).
Q: What is a hazard? ANSWER A condition that increases the frequency or
severity of a loss.
Q: Give an example of a physical hazard. ANSWER Icy sidewalks, frayed wiring.
Q: Give an example of a moral hazard. ANSWER Intentional arson to collect
insurance money.
Q: Give an example of a morale (attitudinal) hazard. ANSWER Carelessness
because "insurance will pay for it."
Q: What is the difference between pure risk and speculative risk? ANSWER
Pure risk involves only the chance of loss or no loss; speculative risk involves
the chance of loss, no loss, or gain.
Q: Which type of risk is insurable? ANSWER Pure risk.
Q: What is fundamental risk? ANSWER A risk that affects a large segment of
society (e.g., war, inflation).
Q: What is particular risk? ANSWER A risk that affects only individuals or small
groups (e.g., a car accident).
Q: What are the three steps in the risk management decision-making process?
ANSWER Identify loss exposures, analyze them, and select the appropriate
treatment technique.
Q: What is a pre-loss risk management objective? ANSWER To prepare for
potential losses (e.g., meeting legal requirements, reducing anxiety).
Q: What is a post-loss risk management objective? ANSWER To survive the
loss and continue operations (e.g., maintaining profitability, social
responsibility).
,Q: What is the Cost of Risk (COR)? ANSWER The total cost of managing risk,
including insurance premiums, retained losses, risk control costs, and
administrative expenses.
Q: What is enterprise risk management (ERM)? ANSWER A holistic approach
to managing all organizational risks (operational, financial, strategic, hazard) in
an integrated way.
Q: What is risk appetite? ANSWER The amount and type of risk an
organization is willing to accept in pursuit of its objectives.
Q: What is risk tolerance? ANSWER The specific maximum variation the
organization is willing to accept around a specific objective.
Q: What is a loss exposure? ANSWER Any situation or circumstance in which a
loss is possible, regardless of whether a loss actually occurs.
Q: What is a property loss exposure? ANSWER The possibility that property
will be damaged, destroyed, or lost.
Q: What is a liability loss exposure? ANSWER The possibility that a person or
organization will be held legally responsible for harm.
Q: What is a personnel loss exposure? ANSWER The possibility of loss arising
from death, disability, or resignation of employees.
Q: What is a net income loss exposure? ANSWER The possibility of reduced
income or increased expenses due to a loss.
Q: What is risk avoidance? ANSWER Eliminating a loss exposure by not
engaging in the activity that produces it.
Q: What is risk control? ANSWER Techniques that reduce the frequency or
severity of losses.
Q: What is risk financing? ANSWER Techniques that provide funds to pay for
losses when they occur.
Q: What is risk transfer (in financing)? ANSWER Shifting the financial burden of
a loss to another party (e.g., via insurance or contracts).
Q: What is risk retention? ANSWER Absorbing the financial burden of a loss
within the organization.
, Q: What is the difference between risk control and risk financing? ANSWER
Risk control reduces the chance or size of loss; risk financing pays for the loss
after it happens.
Q: What is a risk management information system (RMIS)? ANSWER A
computerized system that stores, retrieves, and analyzes risk management
data.
Q: What is a peril matrix? ANSWER A grid used to plot the frequency and
severity of different loss exposures.
Q: How is frequency defined? ANSWER The number of times a loss occurs
within a given period.
Q: How is severity defined? ANSWER The size or financial impact of a loss.
Q: What is the law of large numbers? ANSWER As the number of exposure
units increases, the actual loss experience will more closely approximate the
expected loss experience.
Q: Why is the law of large numbers important to insurers? ANSWER It allows
them to predict future losses accurately and set appropriate premiums.
Q: What is adverse selection? ANSWER The tendency of higher-risk individuals
to purchase insurance more often than lower-risk individuals.
Q: What is an insurable interest? ANSWER A financial or legal interest in the
subject matter of insurance, meaning the insured would suffer a loss if the
property were damaged.
Q: What is subrogation? ANSWER The right of an insurer, after paying a loss,
to step into the shoes of the insured and sue a negligent third party to recover
the payment.
Q: What is indemnity? ANSWER A principle stating that an insured should not
collect more from insurance than the actual financial loss suffered.
Q: What is actual cash value (ACV)? ANSWER The replacement cost of
property minus depreciation.
Q: What is replacement cost? ANSWER The cost to replace damaged property
with new property of like kind and quality, without deduction for depreciation.
Q: What is a deductible? ANSWER The amount the insured must pay out-of-
pocket before the insurer pays anything.
