Risk Assessment & Management Flashcards

A business decides not to offer a product because the liability exposure is too great. This risk management strategy is called:

Answer: Risk avoidance

Risk avoidance involves eliminating the activity or exposure that creates the risk entirely, such as not offering a product to avoid its associated liability.

Which of the following is an example of a physical hazard?

Answer: Icy roads that increase accident likelihood

A physical hazard is a tangible condition that increases the probability of a loss, such as icy roads, faulty wiring, or defective machinery.

What is 'moral hazard' in the context of insurance?

Answer: Dishonest or fraudulent behavior that increases the chance of loss

Moral hazard refers to dishonest behavior or intentional misconduct by the insured that increases the probability or severity of a loss.

Which risk assessment tool plots risks on a grid based on their probability and potential impact?

Answer: Risk matrix

A risk matrix (also called a heat map) is a visual tool that categorizes risks by plotting their likelihood against their potential severity.

An insured who neglects to maintain their property because 'insurance will cover it' is demonstrating:

Answer: Morale hazard

Morale hazard (also called attitudinal hazard) is the indifference or carelessness that arises from knowing that insurance will cover losses.

In risk management, what does 'frequency' refer to?

Answer: How often losses are expected to occur over a period

Loss frequency measures how often a particular type of loss is expected to occur within a defined time period.

Which of the following is NOT a characteristic of an insurable risk?

Answer: The loss must be speculative in nature

Insurable risks must be pure risks (chance of loss or no loss), not speculative risks (which also include the possibility of gain).