RMIN 4000 uga test 1 latest update graded A+

RMIN 4000 uga test 1 latest update graded A+ types of risk -pure risk -speculative risk -diversifiable risk -nondiversifiable risk -enterprise risk -systemic risk risk uncertainty concerning the occurrence of a loss uncertainty probabilities cannot be estimated loss exposure any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs example: earthquake or flood causing damage to a manufacturing plant objective risk (degree of risk) the relative variation of actual loss from expected loss example:10,000 houses insured of a long period of time and on average 100 houses burn each year, however it would be rare for exactly 100 to burn each year law of large numbers as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience example: as the number of homes under observation increases, the greater is the degree of accuracy in predicting the proportion of homes that will burn subjective risk (perceived risk) uncertainty based on a person's mental condition or state of mind example: driver with previous convictions for drunk driving tries to drive home and wonders if he will get arrested by the police or not chance of loss the probability that an event will occur objective probability 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 two ways objective probability can be determined 1) deductive reasoning (priori probabilities): probability of getting a head from the toss of a perfectly balanced coin is 1/2 bc there are two sides 2) inductive reasoning: the probability that a person age 21 will die before age 26 cannot be logically deduced, life insurers can estimate the probability of death and sell a 5 year life insurance policy for a 21 yr old subjective probability the individual's personal estimate of the chance of loss example: people who buy a lottery ticket on their birthday may believe it is their lucky day and overestimate the small chance of winning objective risk the relative variation of actual loss from expected loss peril the cause of loss example: house burns down, peril is the fire hazard condition that creates or increases the frequency or severity of loss 4 types of hazards 1) physical hazard 2) moral hazard 3) attitudinal hazard 4) legal hazard physical hazard physical condition that increases the frequency or severity of loss. example: icy roads that increase chance of automobile accident moral hazard dishonesty or character defects in an individual that increase the frequency or severity of loss example: faking an accident to collect benefits from an insurer -can try to control this by careful underwriting of applicants for insurance and by various policy provisions, such as deductibles, waiting periods attitudinal hazard carelessness or indifference to a loss, which increases the frequency or severity of a loss example: leaving car keys in an unlocked car, which increases the chance of theft, changing lanes on highway without blinker legal hazard characteristics of the legal system or regulatory environment that increase the frequency or severity of losses. example: adverse jury verdicts or large damage awards in liability lawsuits; statues that require insurers to include coverage for certain benefits in health insurance plans pure risk situation in which there are only the possibilities of loss or no loss example: premature death, lightning, flood speculative risk situation in which either profit or loss is possible example: purchase 100 shares of common stock, you would profit if the price of stock increases, but would lose if the price decline diversifiable risk a risk that affects only individuals or small groups and not the entire economy example: only individuals and business firms that experience such losses are affected, not the entire economy nondiversifiable risk risk that affects the entire economy or large numbers of persons or groups within the economy