RMIN 4000 Final Exam
Peril - answer Cause of loss
Risk - answer Uncertainty about chance, timing, or amount of loss
Chance of Loss – answer Probability that an event will occur
Objective Risk - answer The relative variation of actual loss from expected loss; (Actual-
Expected)/Expected; higher variation means higher risk
Law of Large Numbers - answer Objective risk varies inversely with the square root of
the number of cases
Subjective Risk - answer Uncertainty based on a person's mental condition or state of
mind
Hazard - answer A condition that increased the frequency or severity of the loss
Moral Hazard - answer Arson
Morale Hazard - answer Driving drunk
Pure risk - answer Chance of loss or no loss (no gain)
Speculative risk - answer Chance of loss, no loss, or gain
Particular risk - answer Risk that affects only affects individuals as individuals
Legal hazard - answer Large damage awards in litigation
Fundamental/systematic risk - answer Affects a large number of individuals or the entire
economy
Enterprise risk - answerAll major risks faced by a business
Direct loss (property) - answerFinancial loss that results from physical damage,
destruction, or theft
Indirect loss (property) - answerFinancial loss arising from loss of USE of property
, Liability risk - answerResponsibility for actions that cause injury or property damage to
another (no limit)
Fortuitous loss - answerUnforeseen and unexpected by the insured and occurs as a
result of chance
Risk Transfer - answerPure risk is transferred from the insured to the insurer, who
typically is in a better financial position to pay the loss than the insured
Indemnification - answerThe injured is restored to his approximate financial position
prior to the occurrence of the loss
Adverse Selection - answerThe tendency of persons with a higher-than-average chance
of loss to seek insurance at standard (average) rates, which if not controlled by
underwriting, results in higher-than-expected loss levels
Viatical settlement - answerBenefactor pays AIDS patient to take out life policy
Risk Management - answerFormal decision-making process to address risk, including
the potential financial consequences associated with loss exposures
Loss exposure - answerAny item exposed to loss; any situation in which a loss may
occur
Risk Control - answerReduce frequency or severity of losses
Risk Management Process (IESI) - answer1. Identify potential losses
2. Evaluate potential losses
3. Select appropriate RM technique
4. Implement and monitor
Risk Financing - answerTechniques that provide for the funding of losses
Retention - answerFirms retain part or all of the losses that can result from a given loss;
Ex: Expense, set aside liquid, credit line
Retention level - answerThe dollar amount of losses the firm will retain
Captive - answerInsurer owned by a parent firm for the purpose of insuring the parent
firm's loss exposure; have easier access to a reinsurer; source of profit
Self-Insurance (self-funding) - answerForm of retention; PArt or all of a given loss
exposure retained by firm; used for workers comp and health plans
Risk Retention Group - answerA group captive that can write any type of liability
coverage except employer liability, workers comp, and personal lines
Peril - answer Cause of loss
Risk - answer Uncertainty about chance, timing, or amount of loss
Chance of Loss – answer Probability that an event will occur
Objective Risk - answer The relative variation of actual loss from expected loss; (Actual-
Expected)/Expected; higher variation means higher risk
Law of Large Numbers - answer Objective risk varies inversely with the square root of
the number of cases
Subjective Risk - answer Uncertainty based on a person's mental condition or state of
mind
Hazard - answer A condition that increased the frequency or severity of the loss
Moral Hazard - answer Arson
Morale Hazard - answer Driving drunk
Pure risk - answer Chance of loss or no loss (no gain)
Speculative risk - answer Chance of loss, no loss, or gain
Particular risk - answer Risk that affects only affects individuals as individuals
Legal hazard - answer Large damage awards in litigation
Fundamental/systematic risk - answer Affects a large number of individuals or the entire
economy
Enterprise risk - answerAll major risks faced by a business
Direct loss (property) - answerFinancial loss that results from physical damage,
destruction, or theft
Indirect loss (property) - answerFinancial loss arising from loss of USE of property
, Liability risk - answerResponsibility for actions that cause injury or property damage to
another (no limit)
Fortuitous loss - answerUnforeseen and unexpected by the insured and occurs as a
result of chance
Risk Transfer - answerPure risk is transferred from the insured to the insurer, who
typically is in a better financial position to pay the loss than the insured
Indemnification - answerThe injured is restored to his approximate financial position
prior to the occurrence of the loss
Adverse Selection - answerThe tendency of persons with a higher-than-average chance
of loss to seek insurance at standard (average) rates, which if not controlled by
underwriting, results in higher-than-expected loss levels
Viatical settlement - answerBenefactor pays AIDS patient to take out life policy
Risk Management - answerFormal decision-making process to address risk, including
the potential financial consequences associated with loss exposures
Loss exposure - answerAny item exposed to loss; any situation in which a loss may
occur
Risk Control - answerReduce frequency or severity of losses
Risk Management Process (IESI) - answer1. Identify potential losses
2. Evaluate potential losses
3. Select appropriate RM technique
4. Implement and monitor
Risk Financing - answerTechniques that provide for the funding of losses
Retention - answerFirms retain part or all of the losses that can result from a given loss;
Ex: Expense, set aside liquid, credit line
Retention level - answerThe dollar amount of losses the firm will retain
Captive - answerInsurer owned by a parent firm for the purpose of insuring the parent
firm's loss exposure; have easier access to a reinsurer; source of profit
Self-Insurance (self-funding) - answerForm of retention; PArt or all of a given loss
exposure retained by firm; used for workers comp and health plans
Risk Retention Group - answerA group captive that can write any type of liability
coverage except employer liability, workers comp, and personal lines
