RMI 2301 Study Guide - Fall 2019, Comprehensive Final Exam Notes - Retail Loss Prevention, Moral Hazard, Risk Management

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RMI 2301
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Risk Management Lecture One Notes: The Problem of Risk
What is Risk?:
- Uncertainty concerning the occurrence of a loss
o Examples:
Skydiving
Building a new home
Stock Investment
Buying an old gas station
- A condition in which there is a possibility of an adverse deviation from a
desired outcome that is expected or hoped for
Uncertainty:
- A state of mind characterized by doubt
- Ambiguity surrounding an outcome
- Risk
Chance of Loss:
- Chance of loss: the probability that an event that causes a loss will occur
- Chance of Loss vs. Risk
What is the chance a loss will occur?:
- Objective probability
o Measurable, predictable outcomes (at infinity)
- Subjective probability: an individual’s personal prediction for an outcome
What Causes a loss?:
- Peril: the cause of a loss
- Hazard: a condition that creates or increases the chance of a loss
Types of Hazards:
- Physical hazard: a physical condition that increases the chance of a loss
o Slippery road
o Smoking in bed
o Texting while driving
- Legal hazard: characteristics of the legal or regulatory system that increases
the frequency or severity of loss
o Environmental cleanup
o Swimming pools
- Moral hazard: dishonesty or character defects in an individual that
increases the chance of a loss
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o Insurance fraud
o Inflating claims
- Morale hazard: carelessness or indifference to loss because of the existence
of insurance
o Did I leave that burner on…?
Categories of Risk:
- Pure risk: a situation in which the only outcomes are loss or no loss
- Speculative risk: a situation in which profit or loss is possible
- Fundamental risk: risk that affects large numbers of persons or groups
o Catastrophes
o Recession
- Particular risk: risk that affects specific individuals or groups
o Car wreck
o Broken foot
Enterprise Risk:
- Enterprise risk encompasses all of the major risks faced by a business
- Pure and speculative
- Strategic: uncertainty regarding a firm’s long-term goals
- Operational: uncertainty regarding a firm’s day-to-day or ongoing activities
- Financial: uncertainty surrounding a company’s credit, investments, or the
value or money
o Interest rate changes
o Inflation
Types of Pure Risk:
- Personal risks: risk that directly affect an individual
- Property risks: the risk of property being damaged or destroyed
- Liability risks: the risk of being financially responsible for damage to
another entity
- Risk arising from the failure of others
Personal Risks:
- Premature Death: Loss of income to the family; additional expenses;
emotional trauma
- Risk of Poor Health: Loss of income; additional expenses (physician services,
hospital fees)
- Risk of Unemployment: Loss of income; depletion of savings
- Risk of Insufficient Retirement Savings: will social security be enough?;
medical expenses
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