Chapter One
Read Chapter One or Search on the Internet
Answer the following questions:
Risk in Our Society
1. Objective Risk or Subjective Risk?
a. A property insurer has 9,000 houses insured over a long period of time. On
average, 2 %, or 180 houses, are expected to be burn each year. However, the
statistical data showed that the actual number of the burn houses varies from
171 to 189 during the years.
b. Risk that may happen when a person who was drinking heavily in a bar may
foolishly attempt to drive home. He is not sure that he will drive home safely
without being arrested by the police.
2. Objective Probability or Subjective Probability?
a. The probability of getting a head from tossing of a two-side coin is 50%. Or
the probability of getting a 6 with a single die is 1/6.
b. David bought a lottery ticket because he thought that he had high probability of
wining that lucky day.
3. Give an example to show that chance of loss may differ from objective risk.
4. Match the phrases or sentences in the right column to that of the left column:
1. Tom has his car insured. In a a. Peril
collision accident, although the
actual loss was about $ 2,000, he has
inflated into $5,000 by including
those damaged that happened before
the event.
2. The cause of loss b. Legal Hazard
3. There is a big hole on the street that c. Moral Hazard
may cause accidents to car drivers.
4. Bob has driven very fast because he d. Hazard
thinks that his car is insured and he
losses nothing if there is damages to
the car.
5. The condition that creates or e. Physical Hazard
increases the chance of loss.
6. A government policy that turned the f. Morale Hazard
two-way Victory avenue into one-
way one has caused a lot of traffic
jam and car accidents
5. Pure Risk or Speculative Risk?
a. Premature death, job-related accidents, damage to property from fire,
earthquake, etc.
b. Buying stocks, bonds in stock markets, betting on a horse race, investing in
real estate, etc.
6. Particular Risk, Fundamental Risk, or Enterprise Risk?
a. Car theft, bank robberies, dwelling fires, ect.
b. Foreign exchange fluctuation that causes loss to a business, interest rate
increases, new products were not profitable, etc.
c. Earthquake, flood, tsunami, hurricane, etc
Which of the above type of risk may receive the government’s assistance?
7. Direct Loss or Indirect Loss?
a. The physical damage to the restaurant which was caused by fire.
b. While the restaurant is newly being built, the owner losses profits for several
months.
8. Which of the following is Liability risk?
a. A Business fails to pay injured customers for using their defective products
b. Tom fails to pay damages to the person he has injured
c. An insure fails to pay you the insurance face- value amount
d. a and b are correct.
9. Active Retention or Passive Retention?
a. You buy an Auto Insurance policy with high deductibles just in case of a future
possible accident, you will receive payment from the insurer.
b. You save your money just in case of a future possible accident happens to your
car, you will use your saved money to pay for the damage.
10. Methods of handling risk:
Match the phrases and sentences in the right column to that of the left column:
1. After buying an LCD, you sign a a. Buy Insurance
service contract with the retailer for
all repairs after the warranty time
expires
2. An importer may transfer his risk to b. Incorporation of a Business Firm
the banks by buying forward
contracts, options or future contracts
3. By forming Limited –Liability c. Transfer of Risk by contracts
company with other partners, your
personal assets are not used to pay to
creditors.
4. Transfer your risk to insurance d. Hedging Price Risks
companies
11. Provide 2 examples of risk for each of the following aspects:
a. Daily life
b. Finance and Banking
c. Production operations