RMIN 4000 Exam 1 Questions & Answers (Graded A)

Frequency - ANSWER-How often does a loss occur? Frequency = Number of Losses / Number of Exposures Severity - ANSWER-How much does it cost when a loss does occur? Severity = Total Losses ($) / Number of Losses Moral Hazard - ANSWER-The presence of insurance changes the behavior of the insured. Morale (Attitudinal) Hazard - ANSWER-Carelessness or indifference to a loss, which increases the frequency and/or severity of a loss. Legal Hazard - ANSWER-Characteristics of legal system or regulatory environment that increases the frequency and/or severity of a loss. Pure Risk - ANSWER-risks that are beyond human control and result in a loss or no loss with no possibility of financial gain Speculative Risk - ANSWER-risk that is taken on voluntarily and can result in either a profit or loss Diversifiable Risk - ANSWER-Affects only individuals or small groups, not the entire economy. Nondiversifiable Risk - ANSWER-Affects the entire economy or large numbers of groups/persons within the economy. Systemic Risk - ANSWER-Risk of collapse of an entire system or entire market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system. Loss Exposure - ANSWER-Any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs. Maximum Possible Loss - ANSWER-the worst loss that could happen to the firm during its lifetime. Probable Maximum Loss (PML) - ANSWER-the worst loss that is likely to happen.