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FIN 3440 Midterm

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FIN 3440
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FIN 3440 MidtermRISKRisk the possibility of an unfavorable variation from a desired resultThe insurer hopes that actual losses will not vary unfavorably from forecasted lossesExpected Value probability x severity of lossBURDEN OF RISKLossNo loss uncertainties may try to avoid or reduce negative consequences of risk or to retain themCost of Risk cost outlay to reduceopportunity cost of activities foregone due to riskexpenses of strategies to finance potential lossescost of losses not reimbursed DEFINITIONS OF RISKPure risk is uncertainty of loss only fire or flood to property Normally only pure losses are insurable but not all pure risks are insurableVSSpeculative risk is uncertainty of loss or gain business ventures gambling where a voluntary choice of risk is assumed bc of the possibility of gainStaticderives from perils in nature or dishonesty of people random events like lightning windstorms and death do not benefit society and tend to occur with predictable regularity such that they are more appropriate to the use of insurance than dynamic risksVSDynamic risks are produced by changes in the economy usually benefit society over time and are generally less predictable than static risks not suitable for insuranceSubjectiverisk is psychological assessment of outcomeVSObjective more precisely observable and measurable probable variation of actual from expected1SOURCES OF PURE RISKProperty involve loss of property and loss of use lost incomeadded expensesLiability intentional or negligent harm to other people or property can result in significant financial damages to the other partyPersonal a result of ones inability to earn an income premature death illness disability unemployment retirementMEASUREMENT OF RISKChance of Loss the relative frequency of loss the chance of loss occurring among a largeof possible losses in a given groupCOL ratio of likely losses to possible losses in a given groupPeril a cause of loss collision for cars fire for buildingsHazards increase chance of loss make loss more severe for perilPhysical Hazard physical condition of an object ex physical hazardsperils icy streetauto collision dry forestfire earth faultsearthquakeMorale Hazard indifference or negligenceMoral Hazard intent to cause loss or increase its severityDegree of Risk amount of objective riskrelative variation of actual from expected losses or range of variation around expected lossesRISK MANAGEMENT PROCESSGoal is to contribute to maximizing the value of the firm by minimizing the cost of pure risk2
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