# FBLA Insurance & Risk Management

Risk
Uncertainty of something, concerns a loss
Risk refers to ___ and ___ being injured
Property & Life
Objective Risk
Defined as relative variation of actual loss from expected loss
Objective Risk varies inversely with
square root of # of cases under observation
EX: 10,000 houses were insured
Objective Risk is 10/100 or 10%
The Law of Large Numbers
states that if the # of exposure units increases, the more closely the actual loss experience will approach the expected loss experience
Subjective Risk
defined as uncertainty based on a person’s mental condition or state of mind
Chance of Loss
probability that an event will occur
Probability has both ___ and ___ aspects
objective and subjective
Objective Probability
refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in underlying conditions
Peril
defined as the cause of loss
Hazard
condition that creates or increases chance of loss
Four Types of Hazards
physical, legal, moral, morale
Subjective Probability
A probability derived from an individual’s personal judgment about whether a specific outcome is likely to occur. Subjective probabilities contain no formal calculations and only reflect the subject’s opinions and past experience.
Physical Hazard
a physical condition that increases the chance of loss
EX: icy roads, chance of fire, defective lock on a door
Moral Hazard
dishonesty or character defects in an individual that increases severity of loss
EX: faking an accident to collect money from insurer, fraudulent claims, murdering insured to collect life insurance
Morale Hazard
carelessness or indifference to a loss because of the existence of insurance
EX: leaving doors unlocked, leaving car keys in unlocked car
Legal Hazard
refers to the characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
EX: large jury verdicts, large damage awards in liability lawsuits, coverage for alcoholism, etc.
Risk Categories
Pure and Speculative
Fundamental Risk and Partial Risk
Enterprise Risk
Pure Risk
situation where there are only possiblities of loss or no loss
EX: premature death, job accidents, medical expenses, damage to property from fire, lightning, flood, or earthquake
Speculative Risk
only profit or loss possible
Fundamental Risk
affects entire economy or large numbers of people
EX: war, inflation, terrorist attack
Particular Risk
affects only individuals and not entire community
EX: car theft, bank robbery, house fire
Enterprise Risk
encompasses all major risks faced by business firms
EX: pure risk, speculative risk, strategic risk, operation risk, financial risk
Strategic Risk
uncertainty regarding the firm’s financial goals and objectives
Operational Risk
EX: if hackers hack an online bank
Financial Risk
refers to unceratinty of loss because of adverse changes in commoditity prices, interest rates, foreign exhance rates, value of money
EX: if food prices raise, school can lose money in lunch department
Enterprise Risk Management
single treatment program that has all major risks faced by firm
Major Types of Pure Risk
personal risks, property risks, liability risks
Premature Death
death of a family head with unfulfilled financial obligations, surviving members have to deal with
Life Value
present value of the family’s share of deceased breadwinner’s future earnings
Other things that need tended to after premature death
funeral expenses, medical bills, estate settlement costs, taxes on large estates
Non-Monetary Things that come with Premature Death
grief, loss of role model, counseling and guidance for children
Risk of Insufficient Income During Retirement
major risk associated with old age is not enough money during retirement, US citizens retire before 65 usually

money goes down when someone retires unless people save enough money for retirement

Risk of Poor Health
includes both payment of medical bills and loss of earned income, major surgery, etc.
Health insurance helps, planning for future
Risk of Unemployment
major threat to financial security, comes from business cycle downswings, structural changes in economy, seasonal factos, imperfections in labor market
Downsizing
a way to hold down labor costs, reducing # of workers
Property Risks
risk of having property damaged or lost from numerous cases
Direct Loss
financial loss from the physical damage, destruction, theft of property
Indirect Loss
financial loss from the occurrence of direct physical damage or theft loss
Consequential Loss
loss of profits
EX: loss of rents, loss of use of building, loss of a local market
Liability Risks
important type of pure risk that most people face, there is no limit of \$ that can be asked for, can be very costly
EX: vehicle accidents
Methods of Handling Risk
avoidance, loss control, retention, non insurance transfers, insurance
Avoidance
avoiding the risk
ex: stay out of high crime areas, avoid driving, etc.
Loss Control
reduces frequency and severity of losses
Loss Prevention
aims to reduce probability of loss
EX: not smoking, safe driving
Loss Reducation
reduce frequency of loss
EX: sprinklers so that business doesn’t stay on fire as long
Retention
business firm or individual retains all or part of a given risk
Active Retntion
individual is consciously aware of the risk and plans to retain all or part of it, it can save money
Passive Retention
certain risks are unkowningly retained because of ignorance, indifference, laziness, very dangerous

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