INSR 310 EXAM 1
What is objective?
able to calculate it; there is a .0001 risk that i will get killed right now by a meter falling
What is the law of large numbers?
as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience
What is dynamic risk?
changes over time; 125 years ago you didn't have to worry about dying in a car crash cause there was no cars
What is static?
doesn't change with time; as long as we live on earth we will have to worry about earthquakes
What is Subjective?
how people react to objective risk: perception
What is diversifiable risk?
lots of random gains and losses affecting only one or few individuals; happens a lot in stocks
What is Systematic risk?
non-diversifiable risk that may impact an entire market or financial system; interest rates or unemployment
What is non- diversifiable risk?
simultaneous gains and losses affecting sever groups; if you have all your money in one stock
What is subjective probability?
the individual's personal estimate of the chance of loss
What is 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
What is chance of loss?
the probability that an event that causes a loss will occur
What is Speculative Loss?
there are three things that can happen a loss, no loss, or a gain; starting a business you can either lose, break even , or be the next bill gates
What is pure loss?
there's only two things that can happen either a loss or no loss; you either have a car or you don't have a car
What does it mean to control in risk management?
*loss control always makes sense* - you can prevent control by focusing on the number of losses - you can reduce control by focusing on the severity of how bad you lose something - you can diversify control by focusing on the frequency and severity at the same time
What is loss exposure?
- Any condition or situation that presents a possibility of loss, regardless of whether that loss actually occurs.
What is physical hazards?
- EX Ice on roads can cause more wreaks - sloppy house keeping in stores can cause someone to slip a fall
What is risk?
- Uncertainty regarding financial loss
What are the primary burdens of risk?
- actual costs of losses - opportunity costs - mental anguish
What is peril?
- anything that can cause a loss to your exposure - EX: fire, hail, etc.
What are the basic tools of risk management?
- avoid - retain - transfer - control
What does it mean to avoid in risk management?
- don't engage in the activity - if your scared to die in a plane crash don't get on a plane
what are the 2 types of risk?
- entity; loss can happen to you - enterprise; loss can happen to business
What is the possible 5th tool for risk management for bankers?
- hedging/arbitrage: can be good and bad; a hammer can help build a house and kill your neighbor * NOT FOR AMATEURS AND STILL NOT GOOD FOR PROS*
What does it mean to transfer risk in risk management?
- if you buy insurance you are transferring the risk to the insurance company - if you don't get insurance you can lose everything you own and have to bear all the losses
What is a hazard?
- increase likelihood of peril occurring to your exposer
how does objectie risk vary?
- it varies inversely with the square root of the number of cases under observation - it there are 10,000 houses insure the objective risk is 10/100 or 10%
What is the nature of the "Insurance Mechanism"
- legal contract - risk transfer and pooling (sharing)
what does it mean to retain in risk management and what 2 types are there
- passive: ignorant and an accident waiting to happen - active: makes thoughtful decisions
What are the basis for growth of insurance?
- private vs. public property - industrialized society - well-organized legal system - ethical environment - relatively stable economy
What are opportunity costs?
- scarce resources; time and money - risk/ return tradeoffs; every return has risk but not every risk has return
What is an industrialized society?
- specialization on jobs/skills - dependence on income
What is mental anguish?
- stress about risk - a good nights sleep - even if you get all your money back for you car your still aggravated you have to buy a new one
In exposure what is the maximum possible loss?
- the maximum possible loss is the worst that could happen - EX think of 9/11
In exposure what is the maximum probable loss?
- the maximum probable loss is what is likely to happen
when you wreak your car what is loss?
- the money you had invested into the car, not the car itself
What is exposure?
- thing of value that's subject to being loss - EX: car, house, etc.
What are actual costs of losses
- to individuals and society: if you wreak your car you lost 15,000 and if a house burns down have to cut down more trees to rebuild - to current and future premiums: insurance - to loss controls and compliance costs: is a workers is injured on job they have to get workers compensation and investigations; sprinklers in schools are loss controls
What is moral hazard?
-EX: if you kill someone for their life insurence - benefiting you
What is a morale hazard?
-EX: you didn't want to rear end the car in front of you but you made it easier by not paying attention - if you leave your car running with no one in it its easier for someone to steal
What is adverse selection?
-It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. - there is a misclassification of high risk and low risk because information is private - have bad teeth so try and get job with dental insurance - information problems
Is risk probability?
-No
When do you get dividends?
-only when board of directors declare you can