RMI Exam 1 Review terms

RMI Exam 1 Review terms - 1 RMI Exam 1 Review What is risk?...

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RMI Exam 1 Review What is risk ? Uncertainty concerning the occurrence of event (e.g., will I profit or lose by playing the game? Perhaps the possibility of a negative outcome, or more specifically the probability of a negative outcome Categorization of Risk : Pure : situation where there is only the possibility of loss or no loss, e.g., a costly accident or no accident. Commercial liability insurance—less variability, more predictable. Pure risks are insurable b/c they are more predictable. Speculative : Either profit, loss, or no loss, e.g., betting, football pools, going into business for yourself, etc. Chance you will succeed, chance you will fail Typically not insurable. Types of Losses from Pure Risks: Direct Losses : damage to assets, injury and illness to employees, liability claims and defense costs Indirect Losses : loss of net cash flow, continuing and extra operating expenses, sub-optimal financial leverage and bankruptcy costs o Residual affects of direct losses; secondary/ income statement affects Static : risks inherent in a level, unchanging society (random events like fire, windstorm, death Dynamic : risks produced because of changes in society, i.e., technology, or legal liability due to change of attitude by courts Data security (not a concern 10 years ago) Change or reaction of laws can increase or decrease risk Fundamental (systematic): a risk that affects the entire economy, i.e., inflation, wars, natural disasters Particular (non-systematic): affects only the individual, not entire community, i.e., theft of our TV. Personal : how is an individual impacted when its assets or earnings are disrupted? Commercial : how is a firm or organization impacted by various risks that can upset its assets or earnings? Peril: cause or source of loss Hazard: condition that increases the frequency or severity of loss 1
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Not all hazards are physical! Moral Hazards: can be attributable to actions hidden from an insurer Ex ante moral hazard: the very presence of insurance leads to actions not preferred by the insurer; lack of care by insured Ex post moral hazard: after a loss, actions that would be preferred by the insurer are not taken to control the loss. Loss exposure: a condition that presents the possibility of loss and has the following elements: an asset exposed to loss a cause of the loss the financial consequences if a loss occurs Loss exposures and a firm: owned property, employee health and safety, data and IT systems, customers, vendors, and suppliers and the firm’s legal obligations to them LLOYD’S MARKET: “serves as a partially-mutualised marketplace where multiple financial backers, underwriters, or members , whether individuals (traditionally known as Names ) or corporations, come together to pool and spread risk. Unlike most of its competitors in the insurance and reinsurance industry, it
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This note was uploaded on 02/28/2011 for the course RMI 3361 taught by Professor Puelz during the Spring '11 term at SMU.

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RMI Exam 1 Review terms - 1 RMI Exam 1 Review What is risk?...

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