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Test 1 Notes

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University of Toronto Mississauga
James Appleyard

MGM101 Risk Management Finance III 1 What environmental changes have made risk management more importantGlobal warming terrorist threats natural disasters war and an unstable economy have all contributed to additional risk and the need for risk management 2 What are the four ways of managing riskBARS A Reduce risk loss prevention programs such as fire drills safety inspections and accident prevention programs B Avoid risk rejecting highrisk jobs C Selfinsureset aside money to cover routine claims and purchase only catastrophe policies for big losses D Buy insurance purchase insurance to minimize financial risks 3 What is risk and what are the two kinds of risk Risk refers to the chance of loss the probability of loss and the amount of possible lossSpeculative risk a chance of either profit or loss Pure risk the threat of loss with no chance for profit 4 What is the difference between uninsurable risk and insurable risk Uninsurable risk is a risk that no insurance company will cover such as market risks and personal risksInsurable risk is a risk that a typical insurance company will cover Insurance companies have a guideline to evaluate whether or not a risk is insurable APolicy holder must have insurable interest meaning policy holder must be at risk B Loss should be measurable C Loss should be accidental D Risk should be dispersed E Insurance company can set standards for accepting the risk 5 What is an insurance policy and what is a premium Insurance policy is a contract between the insurer and the insurance companyPremium is a fee charged by the insurance company 6 What is the law of large numbers Law of large numbers is a principle that if a large number of people are exposed to the same risk a predictable number of losses can be determined for a given period of time7 What is the rule of indemnity Rule of indemnity states that a person or organization cannot gain from risk management they can only minimize the losses8 What is the difference between a stock insurance company and a mutual insurance company A stock insurance company is owned by stockholders and a mutual insurance company is owned by its policyholders9 Discuss the various types of insurance
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