FIN 350 Chapter 1

Risk

When an outcome probability can be calculated

Uncertainty

When an outcome cannot be calculated

Loss exposure

When loss is possible

Objective risk

Degree of risk; declines as more units are added

Subjective risk

Uncertainty based on a person's mental condition

Objective probability

Long-run relative frequency of an event based on the assumption of infinite number of observations

Subjective probability

Individual's personal estimate of the chance of loss

Chance of loss

Probability that an event that causes a loss occurs

Piori Probabilities

Deductive reasoning

Peril

Cause of loss

Hazard

Condition that creates or increases severity of loss

Attitudinal Hazard

Negligence

Pure risk

Possibilities of only loss or no loss occurring

Speculative risk

Where profit or loss is available

Diversifiable risk

Risk that only affects small groups

Non-diversifiable risk

Risk that affects an entire economy

Enterprise risk

Risk that a business may face

Systemic risk

Risk of collapse of an entire system

Personal risk

Risk that affects a family or individual

Human Life Value

Present Value of the family's share of dead breadwinner's future earnings

Premature death

Death of a family head with unfulfilled financial obligations

Property risks

Risk of having property damaged or destroyed

Indirect property risk

Financial loss that is indirectly related to physical damage

Liability risk

Doing something that leads to bodily harm

Risk control

Reduce frequency or loss severity

Risk financing

Provide for the funding of losses