Risk Mgmt Quiz #1

3 Definitions of Risk

1. Uncertainty
2. The possibility of loss
3. The possibility of undesired outcome

Interest Rate Risk

The possibility of loss due to changes in the cost of borrowing money.

Product Acceptance Risk

The possibility of loss due to lower than expected or wear demand for a company's product.

Loss Exposure

a situation or action that creates the possibility of a loss; a loss enabler; a risk

Peril

a cause of loss

Hazard

a condition that makes losses more likely to occur and/or more severe (to a financial loss) if they occur.

Physical Hazard

location of building, type of material the building is made of

Moral Hazard

dishonest acts that 1) cause one to have a loss or 2) increase the probability and or severity of ones loss because insurance is involved.

Moral (attitudinal hazard)

carelessness or indifference to loss especially loss covered by insurance

Legal Hazard

legal or regulatory matters that each increase the probability or severity of loss

Direct Loss

financial loss due to physical damage to property

Indirect Loss

financial loss resulting from loss of use of the damaged property

Idemnify

to restore the position/condition that existed immediately before the loss

Chance of loss

the probability that a loss causing event will occur

objective probabiltiy

the long run statistical probability (infinite number of observations), assuming no change in conditions

law of large numbers

as N increases, actual losses approach expected losses

objective risk (degree of risk)

The probability of actual losses deviating from expected losses; an estimate of the range of deviation from the expected loss; uncertainty about whether actual loss will equal expected loss

Frequency of Loss

probability of loss during a given period

severity of loss

size of loss

risk avoidance

eliminating the possibility of loss

loss prevention

taking steps to reduce the probability of a loss

loss reduction

measures designed to lessen the severity of a loss if one occurs

loss control (risk control)

measures intended to reduce losses by reducing their frequency and/or severity; includes avoidance, reduction and prevention

Insurance

a contractual transfer of risk form the insured to the insurance company (carrier)

Deductable

first dollars of loss paid by the insured before the insurance company pays for the loss

Risk Retention

to hold onto risk

Risk Retention Level

maximum loss the firm is willing to retain/incur

Captive Insurer

carried formed by a company to insure its losses

Pure Captive

owned by just one parent company

group captive

owned by more than 1 parent company

parent company

company which owns another company

subsidiary company

a company which is owned by another company (the parent)

Passive Retention Risk

unknowingly retaining risk by failing to identify risk exposures and or failing to implement risk management techniques

Funded Reserve

firm sets aside money to cover losses as they arise

2 requirements for self insurance

1. setting aside funds in advance to cover losses
2. losses must be predictable and stable

Stop loss insurance

insurance that pays after the self insurer has reached a specific limit or loss

Insurance premium formula

Premium= expected losses+admin cost+ selling cost+ profit for insurer- investment income

LLC

limited liability company