Fundamentals of Risk, Risk Management, and Insurance

Flashcards covering key vocabulary and definitions related to risk management and insurance, based on lecture notes.

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

Affects only individuals or small groups; also called nonsystematic or particular risk

Non-diversifiable Risk

Affects the entire economy or large numbers of persons or groups within the economy; also called systematic risk or fundamental risk

Enterprise Risk

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

Strategic Risk

Uncertainty regarding the firm’s financial goals and objectives

Operational Risk

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

Direct Loss

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

Indirect Loss

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

Liability Risks

Involve the possibility of being held legally liable for bodily injury or property damage to someone else