RMIN Chapter One

Risk is defined as uncertainty concerning the occurrence of loss.

Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

Defined as the relative variation of actual loss from expected loss. Declines with an increase in the number of exposures. Measurable.

States that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience. The law helps insurers predict future loss experience.

Defined as uncertainty based on a person's mental condition or state of mind. Varies depending on individual.

Conservative and prudent behavior.....Less conservative behavior.

Defined as the probability that an event will occur. Occurs both subjectively and objectively.

Refers to the long-run relative frequency of an event based on the assumptions of infinite number of observations and of no change in underlying conditions.

One way of determining objective probability through the use of deductive reasoning. Ex. Chance of getting a head from a coin toss is 1/2 because there is only one head and two sides.

Is a risk that affects only individuals or small groups and not the entire economy. The risk can reduced or eliminated through diversification.

1. Deductive Reasoning- logic 2. Inductive Reasoning- careful analysis

Is the individual's personal estimate of the chance of loss. Common factors- age, gender, intelligence, education, and alcohol use. Ex. Believing extra luck on winning lottery on birthday.

Defined as the cause of loss. Ex. House burning, the fire is the peril. Car accident, the collision is the peril.Common perils- fire, lightning, windstorm, hail, tornado, flood, earthquake, burglary, and theft.

Combines into a single unified treatment program all major risks faced by a firm.

is a condition that creates or increases the frequency or severity of loss. 4 Major Types- Physical, Moral, Attitudinal (Morale), Legal.