Module 1: Introduction to Risk and Risk Management (RMIN 4000)

Vocabulary flashcards covering key terms and definitions from the Risk Management lecture notes.

Risk

The probability that exposure to a peril could lead to a loss.

Pure Risk

Risk that involves only the possibility of loss or no loss, with no opportunity for gain.

Speculative Risk

Risk that involves the possibility of loss or gain (includes profit potential).

Fundamental Risk

Risks that affect large populations or systems (economies, society) rather than individuals.

Particular Risk

Risks that affect individuals or small groups rather than society at large.

Static Risk

Risk that does not change with societal or economic changes.

Dynamic Risk

Risk that arises from changes in society, technology, laws, or the economy.

Subjective Risk

Risk as perceived and understood by an individual.

Objective Risk

Risk that can be measured statistically and analyzed objectively.

Risk Attitude: Risk Averse

Prefers to avoid risk and will pay to transfer or reduce risk (e.g., buying insurance).

Risk Attitude: Risk Neutral

Indifferent to risk as long as wealth is unchanged (often in corporate decisions).

Risk Attitude: Risk Seeking

Prefers taking on risk and may pay to assume more risk (e.g., gambling).

Chance of Loss (Probability of Loss)

The probability that a specific loss occurs in a given time period; usually losses expected divided by losses possible.

Expected Loss

The average loss amount, accounting for the chance of loss; calculated as probability of loss times amount of loss.

Degree of Risk

The amount of objective risk in a situation; the probable variation of actual losses relative to expected losses.

Peril

The event or action that causes a loss (e.g., collision, theft, fire).

Hazard

A condition that increases the frequency or severity of a loss (e.g., icy roads).

Physical Hazard

A physical condition that increases the likelihood or severity of a loss (e.g., icy roads, faulty wiring).

Moral Hazard

A change in behavior caused by insurance, leading to increased risk; carelessness or indifference toward loss.

Risk Management

The process used to systematically identify, assess, and control risk exposures to minimize adverse impacts.

Enterprise Risk Management (ERM)

A modern, integrated approach to managing all forms of risk; coordinated by a Chief Risk Officer.

Risk Management Process

The cycle of identifying risks, evaluating them, selecting management techniques, and implementing and reviewing decisions.

Loss Exposure Checklist

A checklist used to identify potential loss exposures within an organization.

Financial Statement Analysis (Risk Identification Tool)

Review of financial statements to identify risks and exposures from the income statement and balance sheet.

Flowcharts

Diagrammatic tools used to map processes and identify risk points.

Contract Analysis

Review of contracts to identify risk allocations, omissions, and exposure.

On-site Inspections

Physical examinations of facilities to identify hazards and exposures.

Analysis of Past Losses

Review and statistical analysis of historical losses to identify patterns and risk areas.

RMIS

Risk Management Information System; software to track past losses and their characteristics.

Property Loss Exposures

Risks of property being damaged, destroyed, or stolen.

Liability Loss Exposures

Risks of legal liability arising from injuries or damages to others.

Health Loss Exposures

Risks affecting an individual’s health and related costs.

Net Worth Loss Exposures

Risks that threaten an entity’s overall net worth (economic value).

Real Property

Land and permanently attached structures; fixed property.

Personal Property

Movable property such as inventory, vehicles, and equipment.

Direct Loss

A loss that occurs directly from a peril (the immediate result of the peril).

Indirect Loss

A loss that results as a consequence of a direct loss (e.g., business interruption).

Torts

Civil wrong leading to legal liability, typically focusing on negligence or intentional acts.

Negligence

Failure to exercise the degree of care required by law; four elements are duty, breach, damages, and proximate cause.

Duty Owed

The legal obligation to exercise reasonable care toward others.

Breach of Duty

Failure to meet the legal duty of care owed.

Damages

Injuries or losses (bodily injury, property damage) resulting from a tort.

Proximate Cause

The legal cause linking the breach of duty to the resulting damages.

Contributory Negligence

Plaintiff’s own negligence reduces or bars recovery in some jurisdictions.

Comparative Negligence

Damages are allocated based on fault percentages among parties.

Joint and Several Liability

Multiple negligent parties; any one party may be responsible for the full extent of damages.

Employer-Employee Liability

Liability arising from an employer’s responsibility for employees’ actions.

Product Liability

Liability for defective products causing injury or damage.

Ownership and Operation of Automobiles

Liability arising from the ownership or use of vehicles; employer liability for employees’ driving; head of household liability in some cases.

Principal-Agent Liability

Liability for the acts of agents or those guided by principals.

Attractive Nuisance

Higher duty of care owed to children for dangerous features on a property.

Subrogation

An insurer’s right to recover from a responsible third party after paying a claim.

Insurable Interest

A financial stake in the insured subject; must exist at policy inception.

Indemnity

Restoration to the insured’s financial position before a loss; no more.

Utmost Good Faith

Honesty in the insurance contract; misrepresentation or nondisclosure can void coverage.

Material Misrepresentation

A false statement material to the risk that can void an insurance contract.

Warranty

A condition or action required before the insurer pays a claim.

Law of Large Numbers (LLN)

With many similar exposures, losses can be predicted statistically; requires a large sample and similar probability distributions.

Ideally Insurable Risk Requisites

Six conditions: large number of similar exposures, accidental loss, determinable/measurable loss, non-catastrophic to insurer, losses large to insured, and frequency not too high.

Large Number of Similar Exposures

To apply LLN, insurers need many similar risks with similar distributions.

Accidental and Unintended Loss

Losses should occur without the insured’s control to maintain insurability.

Determinable and Measurable Loss

Loss must be identifiable in time/place and quantifiable in dollars.

Not Catastrophic to Insurer

Losses should not be correlated across many insureds to avoid insolvency of the insurer.

Losses Should be Large (to Insureds)

Insurance is best for high-severity losses that are not frequent.

Probability of Loss Cannot be Too High

If frequency is high, premiums may be unaffordable; balance with severity.

Value of Insurance

Reduces pre-funding needs, increases capital availability, lowers cost of capital, and stabilizes society.

Loss Control

Measures to reduce either the frequency or severity of losses; used with retention or transfer.

Risk Retention

Keeping and funding risco internally (sharing the cost of losses).

Risk Transfer

Shifting risk to another party, often through insurance or contractual agreements.

Risk Avoidance

Choosing not to expose oneself or the firm to a particular risk of loss.

Present Value Analysis

A method to evaluate the financial impact of loss control and risk management decisions in today’s dollars.

Higher Deductibles, Lower Premiums

A common insurance principle where higher out-of-pocket costs reduce the insurer’s risk and premiums.

Self-Insurance

A form of risk retention using internal reserves and statistical forecasting.

Captive Insurance

A dedicated subsidiary used to insure the parent company’s risks; part of Alternative Risk Transfer.

Finite Risk / Financial Insurance

A form of risk transfer with predefined limits and durations.

Securitization

Turning insurance risks into financial instruments or securities to transfer risk.

Alternative Risk Transfer (ART)

Methods beyond traditional insurance to transfer risk, including captives, finite risk, and securitization.