Risk Management and Types of Risk Flashcards

Vocabulary practice flashcards generated from lecture notes covering risk handling techniques, risk management objectives, types of risk, perils, hazards, and probabilities.

Risk Avoidance

A method of handling risk where an individual or organization chooses not to engage in the activity that creates the risk exposure.

Active Retention

A deliberate and desirable decision to assume part or all of a loss exposure, such as paying a deductible.

Passive Retention

The dangerous retention of risk that occurs due to ignorance, inertia, or a failure to identify loss exposures.

Noninsurance Transfers

Conscious decisions to transfer risk to another party without using traditional insurance, such as through contracts, hedging, or incorporation to reduce liability.

Loss Control

Risk management techniques consisting of loss prevention (reducing the probability of loss) and loss reduction (minimizing damage before or after a loss).

Risk Management

A process that identifies loss exposures for an organization and selects the proper techniques to address them, of which insurance is a subset.

Pre-Loss Objectives

Objectives pursued prior to a loss, which include economy goals, reduction of anxiety, and meeting external obligations (such as creditors, legally imposed rules, or contractual terms).

Post-Loss Objectives

Objectives pursued after a loss occurs, prioritizing survival of the firm, continued operations, stability of earnings, continued growth, and social responsibility.

Objective Risk

The relative variation of actual loss from expected loss, which declines as exposure units increase and is measured by standard deviation or coefficient of variation.

Subjective Risk

Uncertainty based on an individual's state of mind, which is difficult to measure.

Objective Probability

The long-run relative frequency of an event calculated using logical deduction (a priori) or empirical data.

Subjective Probability

A personal estimate of the chance of loss that is influenced by individual demographics.

Pure Risk

A category of risk where the only possibilities are loss or no loss.

Speculative Risk

A category of risk where either profit or loss is possible.

Diversifiable Risk

A risk that affects only individuals or specific entities (such as reputation and brand) and can be eliminated through diversification.

Nondiversifiable Risk

A risk that affects broad groups or the entire economy (such as inflation) and cannot be eliminated through diversification.

Static Risk

A risk that remains unchanging or constant over time, such as a tornado.

Dynamic Risk

A risk that shifts or changes over time.

Peril

The specific cause of a loss, such as a natural disaster or tornado.

Hazard

A condition that increases the chance or severity of a loss.

Physical Hazard

A physical condition that increases the chance of loss, such as an icy street or dim stairs.

Moral Hazard

Dishonesty or character flaws in an individual that increase the chance of a loss.

Morale Hazard

Carelessness or indifference to loss created by the existence of insurance coverage.

Personal Risk

A type of pure risk involving premature death or injury, leading to loss of income, extra expenses, and depletion of assets.

Liability Risk

A type of pure risk stemming from legal liability for damages, caused by perils like negligence or breach of warranty.

Risk Premium

The additional amount charged by an insurance company due to volatility and differences between actual and expected losses.

Types of loss

Loss of earned income, extra expenses, and depletion of financial assets

Property risks

Types of losses include direct physical damage losses, theft losses, indirect or consequential losses, and extra expenses. Perils include natural disasters or dishonesty or failure of third parties to perform.

Liability risks

Losses: legal liability for damages out of bodily injury or property damage to another party. Perils: negligence, breach of warranty, etc

Commercial Risks

Property risks, liability risks, loss of business income

Methods of handling risk

avoidance, retention, non insurance transfers, loss control, insurance.

Risk management process

Identify possible risk, analysis, selection of RM techniques, implementation, continual evaluation