Risk Management and Insurance Flashcards

Flashcards covering key vocabulary and concepts from lecture notes on Risk Management and Insurance.

Risk

Uncertainty concerning the occurrence of a loss.

Loss Exposure

Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

Objective Risk

The relative variation of actual loss from expected loss.

Subjective Risk

Uncertainty based on a person’s mental condition or state of mind.

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.

Subjective Probability

The individual’s personal estimate of the chance of loss.

Peril

The cause of the loss.

Hazard

A condition that increases the chance of loss.

Physical Hazard

A physical condition that increases the frequency or severity of loss.

Moral Hazard

Dishonesty or character defects in an individual that increase the frequency or severity of loss.

Attitudinal Hazard (Morale Hazard)

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

Legal Hazard

Characteristics of the legal system or regulatory environment that increase the frequency or severity of loss.

Pure Risk

A situation in which there are only the possibilities of loss or no loss.

Speculative Risk

A situation in which either profit or loss is possible.

Diversifiable Risk

A risk that affects only individuals or small groups.

Non-diversifiable Risk

A risk that affects the entire economy or large numbers of persons or groups within the economy.

Enterprise Risk

Encompasses all major risks faced by a business firm, including pure, speculative, strategic, operational, and financial risks.

Strategic Risk

Uncertainty regarding the firm’s financial goals and objectives.

Operational Risk

Risk that results from the firm’s business operations.

Financial Risk

Uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.

Enterprise Risk Management (ERM)

Combines into a single unified treatment program all major risks faced by the firm.

Personal Risks

Risks that directly affect an individual or family, involving the possibility of a loss or reduction in income, extra expenses, or depletion of financial assets.

Direct Loss

A financial loss that results from the physical damage, destruction, or theft of property.

Indirect Loss

A financial loss that results indirectly from the occurrence of a direct physical damage or theft loss.

Liability Risks

Risks that involve the possibility of being held legally liable for bodily injury or property damage to someone else.