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Cards In This Set
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Risk (historically defined)
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Risk is defined as uncertainty concerning the occurrence of loss.
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Loss exposure (definition)
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Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
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Objective Risk/Degree of Risk
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Defined as the relative variation of actual loss from expected loss. Declines with an increase in the number of exposures. Measurable.
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Law of large numbers and its importance for insurers
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States that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience. The law helps insurers predict future loss experience.
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Subjective Risk
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Defined as uncertainty based on a person's mental condition or state of mind. Varies depending on individual.
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What type of behavior occurs from high subjective risk? Low subjective risk?
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Conservative and prudent behavior.....Less conservative behavior.
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Chance of Loss (definition)
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Defined as the probability that an event will occur. Occurs both subjectively and objectively.
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Objective Probability
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Refers to the long-run relative frequency of an event based on the assumptions of infinite number of observations and of no change in underlying conditions.
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A priori probabilities
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One way of determining objective probability through the use of deductive reasoning. Ex. Chance of getting a head from a coin toss is 1/2 because there is only one head and two sides.
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Diversifiable Risk (Def.)AKA- nonsystematic risk, particular risk
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Is a risk that affects only individuals or small groups and not the entire economy. The risk can reduced or eliminated through diversification.
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Two ways to determine objective probability of risk
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1. Deductive Reasoning- logic 2. Inductive Reasoning- careful analysis
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Subjective Probability (Def.) and common influencing factors/ an example
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Is the individual's personal estimate of the chance of loss. Common factors- age, gender, intelligence, education, and alcohol use. Ex. Believing extra luck on winning lottery on birthday.
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Peril (Def.) with an example and common perils
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Defined as the cause of loss. Ex. House burning, the fire is the peril. Car accident, the collision is the peril.Common perils- fire, lightning, windstorm, hail, tornado, flood, earthquake, burglary, and theft.
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Enterprise Risk Management (Def.)
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Combines into a single unified treatment program all major risks faced by a firm.
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Hazard (Def.) with four major types of hazards
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is a condition that creates or increases the frequency or severity of loss. 4 Major Types- Physical, Moral, Attitudinal (Morale), Legal.
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