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Risk and Insurance definitions

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  • Risk
    Uncertainty about future financial outcomes, where both gains and losses are possible and unpredictable.
  • Risk Aversion
    Preference for avoiding uncertainty, where losses cause more dissatisfaction than equivalent gains provide satisfaction.
  • Utility
    Quantitative measure of satisfaction or happiness derived from consuming goods or experiencing outcomes.
  • Marginal Utility
    Additional satisfaction gained from consuming one more unit of a good or service.
  • Diminishing Marginal Utility
    Declining increase in satisfaction as more units of a good are consumed, making each extra unit less valuable.
  • Insurance
    Financial arrangement exchanging a certain, small payment for protection against unlikely but severe losses.
  • Catastrophic Loss
    Rare but severe financial setback, such as a fire, that insurance is designed to protect against.
  • Market Failure
    Situation where markets do not efficiently allocate resources, often due to unaddressed risks or externalities.
  • External Cost
    Negative impact from an economic activity that is not reflected in market prices, often addressed by insurance.
  • Deadweight Loss
    Loss of economic efficiency resulting from unpredictable financial shocks or unmitigated risks.
  • Risk Management
    Strategies and practices used to minimize exposure to uncertain financial outcomes.
  • Satisfaction
    Level of happiness or contentment achieved from consuming goods or experiencing positive outcomes.
  • Insurance Market
    Economic system where individuals and firms buy and sell protection against financial risks.
  • Financial Shock
    Sudden, unexpected change in financial status, often causing significant losses.
  • Protection
    Safeguard provided by insurance, reducing the impact of unpredictable and severe financial events.