RMI 211 MSU Exam 1 STUDY GUIDE WITH COMPLETE SOLUTIONS

RMI 211 MSU Exam 1 STUDY GUIDE WITH COMPLETE SOLUTIONS Peril - Answer️️ -Cause of a lost Hazard - Answer️️ -Condition that creates frequency or severity of loss Chance of Loss - Answer️️ -the probability that an event will occur Pure Risk - Answer️️ -A situation in which there are only the possibilities of loss or no loss Objective Probability - Answer️️ -the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions Subjective Probability - Answer️️ -the individual's personal estimate of the chance of loss Speculative Risk - Answer️️ -a situation in which either profit or loss is possible Objective Risk (Degree of Risk) - Answer️️ -The relative variation of actual loss from expected loss Subjective Risk - Answer️️ -uncertainty based on a person's mental condition or state of mind Diversifiable Risk - Answer️️ -affects only individuals or small groups (car theft). It is also called nonsystematic or particular risk. ©SOPHIABENNETT@ Sunday, August 25, 2024 2:42 PM 2 Enterprise Risk - Answer️️ -encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk Nondiversifiable Risk - Answer️️ -Affects a large number of people or whole economy Direct Loss - Answer️️ -financial loss that results from physical damage, destruction, or theft of property Indirect Loss - Answer️️ -financial loss that results indirectly from the occurence of a direct physical damange Retention - Answer️️ -an individual or business firm retains part or all of the losses that can result from a given risk -Active means they are aware of the risk -Passive means they are unaware Risk Control - Answer️️ - Risk Transfer - Answer️️ -A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position Law of Large Numbers - Answer️️ -states that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience Fortuitous Loss - Answer️️ -Unforeseen and unexpected loss that occurs as a result of chance. ©SOPHIABENNETT@ Sunday, August 25, 2024 2:42 PM 3 Adverse Selection - Answer️️ -the tendency of persons with a higher- than-average chance of loss to seek insurance at standard rates Indemnity - Answer️️ -Insurance restores families to their former financial position Expense Loading - Answer️️ -the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit Risk Management - Answer️️ -identifies loss exposures faced by an organization and selects the best techniques for treating such exposures Loss Exposure - Answer️️ -any situation in which a loss is possible, regardless of whether a loss occurs -ex. Manufactoring plants that may be damaged by an earthquake o