Basic Concept of Risk Management and Insurance

Flashcards covering key vocabulary related to risk management and insurance.

Risk

The uncertainty of outcome, whether positive opportunity or negative threat, of actions and events.

Loss Exposure

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

Objective Risk

The degree of risk measured by the difference between actual losses and predicted losses.

Subjective Risk

Uncertainty based on a person’s mental condition or state of mind, varying by individual perception.

Chance of Loss

The probability that an event causing a loss will occur.

Objective Probability

The long-run relative frequency of an event based on an infinite number of observations.

Hazard

The cause that makes the danger more likely to occur.

Pure Risk

A type of risk that only has two outcomes: loss or no loss.

Speculative Risk

A type of risk that can result in either profit or loss.

Indemnification

The process of restoring the insured to their approximate financial position prior to the occurrence of a loss.

Adverse Selection

When high-risk individuals obtain insurance coverage at standard rates, leading to higher losses.

Self-Insurance

A planned retention strategy where a firm retains part or all of a given loss exposure.

Risk Management

The process of identifying and addressing potential losses faced by an organization.

Enterprise Risk Management (ERM)

A structured approach to managing risks across an organization to meet its objectives.

Pooling of Losses

The sharing of losses incurred by a few over the entire group to allow for accurate loss prediction.

Risk Control

Techniques for reducing the frequency or severity of losses.

Retention

A technique where an individual or firm chooses to bear the financial responsibility for losses.

Legal Hazard

A type of hazard that could result in loss due to legal issues.

Cybersecurity and Identity Theft

Risks associated with breaches in a firm's computer system leading to unauthorized access.

Direct Loss

A financial loss resulting directly from physical damage to property.

Indirect or Consequential Loss

A financial loss that occurs indirectly as a result of direct loss.