RMI 3004 Final Exam Vocabulary

Flashcards for RMI 3004 Final Exam Review

Risk

Uncertainty

Human Capital

Your ability to generate income into the future

Personal Risks

Exposes Human Capital to injury, illness, death, unemployment, and retirement (voluntary)

Pure Risk

Only two outcomes = loss or no loss

Speculative Risk

Three possible outcomes = loss, gain, or no change

Subjective Risk

Perceived amount of risk, varies by individual/organization

Objective Risk

Measurable variation of actual outcomes vs. expected outcomes (based on historical information / facts)

Static Risk

Does not change over time / always present

Dynamic Risk

Results from new & emerging trends; and changing circumstances, laws, or conditions

Diversifiable Risk

Effects specific individuals/businesses (isolated events)

Non-Diversifiable Risk

Effects entire industries, or large segments of society at once

Exposure

Condition that presents the possibility of loss (whether or not it actually occurs)

Likelihood (Frequency)

Estimated certainty of an outcome occurring, measured in terms of probability

Consequences (Severity)

If an outcome does occur, what is the impact/effects of it, measured in terms of Financial $$$."

Time Horizon

Estimated duration of time that an exposure exists

Correlation

Relationship between two exposures; that serve to either increase or decrease risk

Volatility

Basic measure of the deviation between EXPECTED outcomes vs. ACTUAL outcomes

Value of Enterprise Risk Management

(RM Objectives) – (Costs of Risk)

Peril

The immediate cause of a loss

Hazard

Condition behind a peril that: Increases the frequency of the peril, Increases the severity of the peril, or BOTH

MoralE Hazard

Simple carelessness / true accidents

MoraL Hazard

Presence of insurance leads to behavior change

Premise Liability

Legal Liability associated with owning property

Product Liability

Legal Liability associated with manufacturing products

Vicarious Liability

Legal Liability when one party is held responsible for the actions of another

Strict / Absolute Liability

Legal Liability when Negligence does not have to be proven

Operational Risk

Risks arising from day-to-day operations of a firm, resulting from people, process, systems or external events

Financial Risk

Risks arising from changing financial market conditions

Risk Register

Tool that identifies, describes, and prioritizes risks identified during the risk identification process

Law of Large Numbers

More information leads to better predictions

Risk Prevention

Measures that reduce frequency of losses

Risk Reduction

Measures that reduce severity of losses

Active Retention

Deliberately Retaining exposure to a risk

Passive Retention

Unknowingly Retaining exposure to a risk

Indemnification

Insurance should provide no greater benefit than the loss suffered by the insured (should NOT profit from a loss!)

Risk Treatment Costs

Cost of Risk Modification activities and/or Insurance Premiums

Worry Value

The cost of anxiety concerning a potential loss

Traditional IRA (401k)

Your contribution is tax deductable now, you will be taxed later when you pull benefits

Roth IRA

Your contribution is non-tax deductable now, you will NOT be taxed later when you pull benefits

Health Maintenance Organization (HMO)

Insured can ONLY use “in-network” providers; NO coverage for “out-of-network” providers

Preferred Provider Organization (PPO)

Insured is allowed to use an “out-of-network” provider > but comes with a higher cost!

High Deductible Plan

Insured has a VERY high retention amount (deductible & coinsurance) Paired with a Health Savings Account (HSA)