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Rmin 4000 ch 1
| Term | Definition |
|---|---|
| Exposures | things of value (assets) that could be lost |
| Perils | things that could happen to these assets, cause of loss (fire, tornado, collision, burglary) |
| Risk Management | what do you do to protect these assets and/or prevent/reduce losses? |
| Cost | any cost as a result of any scenario; lost to yourself, lost to other people, future economical lost |
| Risk | uncertainty concerning the occurrence of a loss. A calculated possibility of a negative outcome. |
| Frequency: | How often does a loss occur? The number of a losses (such as fire, theft, collision) that occur within a specified time period |
| Severity: | How much does it cost when a loss does occur? The dollar amount of loss for a specific peril (fire, theft, collision) |
| Hazard | condition that creates or increases the frequency and/or severity of a loss |
| Physical hazard: | A physical condition that increases the frequency and/or severity of a loss. ex: Broken pipe, overcrowded wires |
| Moral hazard: | dishonesty or character defects in an individual that increase the frequency and/or severity of a loss. The presence of insurance changes the behavior of the insured (lying to minimize or exaggerate damage; who's paying?) |
| Morale (Attitudinal) hazard: | carelessness or indifference to a loss, which increases the frequency and/or severity of a loss |
| Legal hazard: | characteristics of legal system or regulatory environment that increase the frequency and/or severity of a loss |
| Pure risk | either or, no gain: loss or no loss, ex: fire, cancer |
| Speculative risk | have some leeway: loss, no loss/no gain, gain. ex: investment, gambling |
| Diversifiable Risk: | Affects only individuals or small groups, not entire economy, Can be reduced/eliminated through diversification. Risks aren't correlated, independent events. ex: fire, theft, collision |
| Nondiversifiable Risk: | Affects the entire economy or large numbers of groups/persons within the economy. Cannot be reduced/eliminated through diversification. Risks are correlated. ex: inflation, unemployment, natural disasters |
| Systemic Risk: | 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 (system crashes when too many people act the same way in the same time). |
| Personal Risk: | directly affects an individual or family; involves the possibility of loss of income, extra expenses, depletion of financial assets (exposure). Perils: Death, unemployment, disability/injury/poor health, inadequate retirement income |
| Property Risk: | the possibility of losses associated with the destruction or theft of property |
| Direct loss: | cost to repair or replace property damaged by a peril |
| Indirect loss: | financial loss resulting as a consequence of a direct loss. Fire damages in the home, you have to pay to live elsewhere while repaired. ex: business interruption, loss of income |
| Liability Risk: | legal liability (financial consequences) resulting from injuries or damages you caused to someone else. No upper limit. Liens can be placed on income, assets seized. Defense costs – lawyers are expensive. ex: recalls, callbacks of phones |
| Loss of Business Income: | if a business is shut down for some time due to a physical damage loss, it is unable to generate an income. ex: Grease fire in the kitchen closes down kitchen for months for repairs |
| Rule of 72 | how long it takes to double the money for future planning |
| Risk Control methods | Loss Prevention, Loss Reduction, Duplication, Separation, and Diversification, Avoidance |
| Risk Control: | techniques to reduce the frequency or severity of losses |
| Loss Prevention: | Reduces frequency. Airport security, safety training programs |
| Loss Reduction: | Reduces severity (fire sprinklers). Can occur pre-loss or post-loss |
| Avoidance: | A certain loss exposure is never acquired (proactive). Would cost more (paying alone for everything), safety issues, opportunity costs. An existing loss exposure is abandoned from experience (reactive) |
| Risk Financing methods: | Retention, Noninsurance Transfer, Insurance |
| Risk Financing | techniques for funding losses |
| Retention | retaining part of all of losses that can occur from a given risk |
| Active retention | deliberately retaining risk (choosing a high deductible) |
| Passive retention | unknowingly retaining risk (not purchasing disability insurance) |
| Noninsurance Transfer | transferring the risk to another party. By contract, Hedging: derivatives such as options, futures; Incorporation (to protect personal property from company loss) |
| Insurance | transferring risk to insurance |
| frequency eq | number of losses / number of exposures |
| severity eq | total losses ($) / number of losses |
| expected loss eq | frequency x severity |
Created by:
aychan
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