Risk Management Exam #1 (100% correct answers)

What is moral hazard? correct answers 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 answers 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 answers 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 answers 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 answers 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 answers 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 answers 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 answers 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 answers Natural disasters, fire, theft and death are all examples of static risks. What are some examples of dynamic risks? correct answers 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 answers 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 answers The three major types of pure risk are personal, property and liability pure risk.