rmi exam 1

Risk

uncertainty concerning the occurrence of a loss.

Risk

Exposure to loss or harm due to fortuitous uncertainty, whether measurable or not t to liability for loss or harm unintentionally caused, or unfavorable variance from expected return of an opportunity or these combines. Loss or harm without exposure is a possibility (chance) or a probability if measurable 

Society

People  

Businesses and corporations

Who Cares About Risk?

Objective risk (degree of risk)

the relative variation of actual loss from expected loss

Objective risk example

expected losses vs. actual losses 

Law of Large Numbers

states that as the number of exposure units increases the more closely the actual loss experience will approach the expected loss experience. 

Subjective risk (perceived risk)

defined as uncertainty based on a person’s mental condition or state of mind

Subjective risk (perceived risk) example

Behavior alters risk; drinking and driving 

Pure risk

the uncertainty concerning the occurrence of a loss. A situation in which there are only possibilities

Pure risk example

Job related accidents, premature death, catastrophes 

Speculative risk

possibility of gain or loss. A situation I which either profit or loss is possible

Speculative risk example

a corporation’s stock 

Diversifiable risk

is a risk that affects only individuals or small groups and not the entire economy

Diversifiable risk example

if a corporation experiences a negative even, then in turn the stock price could drop. We saw this in the Hawaii wildfires case with the electric company. This risk can be mitigated with diversification

Non-diversifiable risk

is a risk that affects the entire economy or large numbers of persons or groups within the economy. This risk cannot be eliminated or mitigated by diversification

Non-diversifiable risk examples

war, natural disasters, earthquakes, rapid inflation 

Enterprise risk

*a term that encompasses all major risks all major risks faced by a business firm.* 

Enterprise risk

*Strategic risk* 

*Operational risk* 

*Financial risk* 

*Enterprise risk management* 

Enterprise risk example

risk of starting new line of business ort offering a new product/service

Systematic risk

*the risk of collapse of an entire systems or entire market due to the failure of a single entity or group of entities that result in the breakdown of the entire financial system*

Systematic risk example

The Great Depression 

2008 recession 

Venezuela

Personal Risks examples

Premature death 

Retirement risks 

Poor health 

Unemployment 

Drug and alcohol addiction 

Property risks

Liability Risks 

Commercial Risks

 Property risks

Liability Risks 

Chance of Loss

The probability that an event will occur

Peril

The cause of loss

Peril example

Fire 

Hazard

Condition that creates or increases the frequency or severity of a loss

Physical hazard

a physical condition that increases the frequency or severity of a loss

Physical hazard example

icy roads and side walks 

Moral hazard 

is dishonesty or character defects in an individual that increases the frequency and severity of loss. 

Moral hazard example

fraud and dishonesty 

Morale hazard

carelessness or indifference to a loss, which increases the frequency and severity of a loss.

Morale hazard example

careless acts such as switching lanes without looking, leaving a valuable in a vehicle, not locking the front door at night or when you leave  

Legal hazard

the characteristics of the legal system or the regulatory environment that increases the frequency and severity of a loss.

Legal hazard example

statutes, jury verdicts, settlement awards

Burden of Risk on Society

The size of an emergency fund must be increased

Society is deprived of certain goods and services

Worry and fear are present

*Risk Control*

a general term to describe the techniques for reducing the frequency and severity of losses

Types of Risk Control

Avoidance, Loss prevention, Loss reduction

Avoidance example

releasing certain products and services, living in high crime areas 

Loss prevention

techniques that reduce the probability of loss that the frequency of losses is reduced

Loss prevention example

Defensive driving course, quality assurance, safety programs, inspections of machinery 

Loss reduction

techniques that reduce the frequency of losses 

Loss reduction example

Sprinklers and fire walls and doors

Separation

assets exposed to losses are separated or divided to minimize the financial loss 

Diversification

spreading the risk across different parties

Benefits of Loss Control

The indirect costs of losses maybe large and in some instances can exceed the direct costs 

The social costs of losses are reduced

Steps in the Risk Management Process

Identify loss exposures

Analyze loss exposures

Select appropriate techniques

Implement and monitor the risk management

Insurance

*The* __*pooling*__ *of* __*fortuitous*__ *losses by* __*transfer*__ *of such risks to insurers, who agree to* __*indemnify*__ *insureds for such loses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk*

Pooling of Losses

The spreading of losses incurred by the few over the entire group so that in the process average loss is substituted for actual loss

The primary purpose of pooling/sharing of the losses

Some statistical concepts: expected loss, variance, standard deviation

Remember the law of large numbers. 

Payment of Fortuitous Losses

one that is unforeseen and unexpected by the insured and occurs as a result of chance

Indemnification

means that the insured is restored to his or her approximate financial position prior to the occurrence of loss

Characteristics of an Insurable Risk

Large number of exposure units

Accidental and unintentional loss

Loss is determinable and measurable.

Not catastrophic

Calculable chance of loss

Economically feasible premium

Adverse Selection and Insurance

is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwriting and policy provision, results in higher-than-expected loss levels and unprofitable business

Adverse Selection and Insurance example

smokers have morality rates than non-smokers and must pay substantially higher for life insurance. Some smokers may try to conceal this information to obtain lower rates.

Types of Insurance

private, government

Benefits of Insurance to Society

Indemnification for loss

Reduction of worry and fear

Source of investment funds

Loss prevention

 Enhancement of credit

Risk Management

Is a process that identifies loss exposure faced by the organization and selects the most appropriate techniques for treating the loss exposure

The main objectives of risk management

Pres-loss objectives

Post-loss objectives

Pre-loss objectives

Objectives prior to a loss occurring.

Loss severity

refers to the probable size if the losses that might occur

Loss frequency

refers to the probable number of losses that might occur during some given timer period

Risk financing 

refers to the technique that provides for funding of the losses

Retentions

the firms retains part or all of the losses that can result from a given loss 

*Captive Insurer*

is an insurer owned by a parent firm for the purpose of insuring the parent company’s losses.

Principle of Indemnity

the insurer agrees to pay no more than the actual amount of the loss. There should be loss ot gain by the insured

Three methods to determine the Actual Cash Value

Replacement cost less depreciation

Fair market value

Broad evidence rule

Fair Market Value

the price a willing would pay in the free market

Broad Evidence Rule

the actual cash value is determined when all relevant factors an expert would use to determine the value of the property

Principle of Insurable Interest

states that the insured must be in position to lose financially if a loss occurs

Purpose of Insurable Interest

Prevent gambling, Reduce moral hazard, Measure the amount of the insureds loss in property insurance

Examples of Insurable Interest

Property and Casualty, Life Insurance

Subrogation

a legal right held by insurers to pursue an at fault third party for losses incurred by a third party. The purpose to recover the amount of the claim paid by the insurer to the insured for the loss

Utmost Good Faith

a higher degree of honesty is imposed on both parties to an insurance contract when compared to other contracts.

Requirements of an Insurance Contract

1\. Offer and acceptance \n 2. Exchange of consideration \n 3. Competent parties \n 4. Legal purpose

Coinsurance

encourages the insured to insure to the stated amount in the policy. If the insured does not then insured will share in the loss

Legal Wrong

is a violation of a persons legal rights or failure to perform a legal duty

Three categories of legal wrongs

Crime 

Breach of contract 

Torts

Intentional torts 

Injury caused by deliberate action or inaction

Strict liability 

Injuries which hold an individual liable without the existence of negligence or fault

Negligence 

Injury caused by a breach of duty or failed to act reasonably

Intentional torts examples

Assault

Battery

False Imprisonment 

Infliction of Emotional Distress 

Defamation

Res Ipsa Loquitur

“The thing speaks for itself”

Defenses Against Negligence

Contributory negligence

Comparative negligence

Last clear chance rule

Assumption of risk

Comparative Negligence

This principle prevents a person who has been injured or harmed from recovering if that person’s owns negligence contributed to the harm/injury 

Assumption of the Risk

Voluntary exposure to a known risk

Imputed Negligence

under certain conditions the negligence of one party can be contributed for another party or organization

strict liability

Intentional torts and torts or negligence involve acts which depart from a responsible standard of care

Strict Liability examples

Dynamite blasting: liable for injuries from dynamite blasting even if no fault exists

Manufacturing explosives

Owning dangerous animals

False

True or False: Gambling and insurance are both pure risks.

Riley’s Organic Foods is a well-known sustainable grocer in the southeast. Paul shops at Riley’s every Sunday morning to get all his groceries for the upcoming week. Unfortunately, Paul slips and falls on a shattered bottled of juice which also brings down a shelf nearby. Due to the slip and fall, Paul breaks his hip, arm, and leg as well as suffers permanent brain damage. Paul is unable to work in the future and will need in home care. Paul decides to bring suit against Riley’s for his physical and mental injuries, pain and suffering, medical bills, and loss of income. After a long trial, the jury awards Paul $500 million dollars which is a record amount for this type \n of loss. This settlement will serve as a benchmark for future settlements. This award can best be described as what type of hazard?

Legal

The law of large numbers assists with determining this type of risk

Objective risk

A risk manager can use which of the following to identify loss exposure

Financial statements

The ongoing war in Ukraine is best described as

Non-diversifiable risk

False

True or False: Deductibles do not require collateral.

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Peril

Katya is a resident of Cedar Key, Florida. In preparation for Hurricane Idalia, she boards up her home and evacuates from the area. Upon her return, Katya’s sees that her entire home has been destroyed in the hurricane due to flood and wind damage. The flood and wind damage can \n be defined as

Diversification

Insurance carriers like to spread their property risk across multiple states to create a better spread of risk. This philosophy depicts what risk control method

True

True or False: Some personal risks include: Premature death, retirement, poor health, unemployment, addiction

The law of large numbers assumes losses are _______________ and _______

Accidental and random

On Friday night after a long stressful week, Georgie decides to attend a girl’s dinner with all her best friends. At dinner, Georgie consumed several martinis and glasses of wine. At the end of dinner, Georgie was highly intoxicated and not able to drive home. Georgie attempts to call Uber however there is surge pricing and extended wait times. Georgie decides she should drive home instead of Ubering. This type of risk could be described as

Subjective risk