• Chapter 4: Review section, pg. 60: Questions
1. How is loss prevention different from loss reduction? Give some example of each.
Risk management purpose is to prevent and reduce the frequency and severity of potential losses. Loss prevention programs promote avoidance of losses, measuring the loss frequency. Some examples are safety programs implemented to prevent workplace injuries, fire detectors, burglar alarms, and other protective devices to prevent losses caused by fire and theft. Insurance companies offer discounts to organization or individuals taking loss prevention measures as incentive for their participation.
While, in loss reduction the scope of the programs limit the extent ...view middle of the document...
• Chapter 5: Review section, page 78: Questions
14. From the viewpoint of the option holder, what is the difference between call option and put option?
“Options give you the right (without the obligation) to transact a security at a predetermined price within a certain time period. In a call option, the buyer has the right (but is not required) to buy an agreed quantity of a commodity or financial instrument (called the underlying asset) from a seller by a certain date (the expiry) for a certain price (the strike price). A put option is the right to sell the underlying stock at a predetermined strike price by a certain date” (Call Option vs Put Option, 2014).
Chapter 6: Review section, page 92, Question
2. How does insurance redistribute the cost of losses?
Insurance reallocate financial risk among a large number of people to reduce its risk exposure to losses when paying incurred individual. For these reason, a specified payment (premium) is set, the insurer assumes financial responsibility of a specify amount of payment to the insured in the event that the insured suffers a loss covered by the insurance contract. By pooling both the financial contributions and the risks of a large number of policyholders, the insurer is able to absorb more losses than an individual.
4. Describe the difference between a named-perils policy and an open-perils policy.
There are two different types of insurance policies: named perils or specific-perils and open perils policies. Identifying the differences between these two types of contracts can help to select which one offers the coverage and protection a policy holder needs. The main difference is the type of peril coverage each policy provides.
Named perils policy provide coverage of a specific list of risks and events, incidents, and risk categories that are covered. If an event should occur that is not listed on the contract, no coverage will be offered under this particular insurance policy.
For the contrary, an open perils...