1-7 Flashcards
Residual uncertainty is a factor in the case of
speculative and pure risk
residual uncertainty is costly to minimize because
more has to be spent on attempts to control or finance the risks involve
captive insurers are used to insure
property loss exposures that are difficult to insure in the primary market
ERM adds a decision step prior to risk treatment that asks the risk manager to determine whether
residual impact is within risk tolerancce/appetite
if an insurer cannot provide the insurance product at a reasonable premium,
there will be no demand
complying with legal requirements presents a conflict between
profit goal and customer needs goal
this can be transformed through the IoT to facilitate instantaneous communication
claims handling
small businesses typically select what distribution system
independent agent
an important question to ask when examining a customers’ needs and characteristics to select a distribution channel is
how quickly can inquiries and transactions be processed?
three reasons that subjective risk and objective risk can differ substantially
familiarity and control
consequences over likelihood
risk awareness
4 risk quadrants
hazard
operational
financial
strategic
hazard and operational are classified as
pure risks
financial and strategic risks are classified as
speculative risks
3 components of financial consequences of risk faced by individuals or organizations
expected cost of losses or gains
expenditures on risk management
cost of residual uncertainty
the cost of residual uncertainty for an organization includes the affect that it has on
consumers, investors, and suppliers
how are consumers affected by residual uncertainty
they may not be willing to pay as much for products from organizations with a poor safety reputation
how are investors affected by residual uncertainty
they will require a larger rate of return on their investment from riskier organizations
how are suppliers affected by residual uncertainty
suppliers will be less willing to sell their supplies on credit to financially unstable organizations
6 post loss goals
survival
continuity of operations
profitability
earnings stability
social responsibility
growth
6 steps in a risk management process
- identifying loss exposures
- analyzing loss exposures
- examining the feasibility of risk management techniques
- selecting the appropriate risk management techniques
- implementing selected risk management techniques
- monitoring results and revising the risk management program
four dimensions by which loss exposures are analyzed
frequency
severity
total dollar losses
timing
four steps to monitor and revise risk managment programs
- establishing standards of acceptable performance
- comparing actual results with these standards
- correcting substandard performance or revising standards that prove to be unrealistic
- evaluating standards that have been substantially exceeded
6 categories of risk control
avoidance
loss prevention
loss reduction
separation
duplication
diversification
the intent of separation
reduce the severity of an individual loss at a single location
how does duplication differ from separation
duplicates are not a part of an organizations daily working resources
4 risk control goals
implement effective and efficient risk control measures
comply with legal requirements
promote life safety
ensure business continuity
6 steps in the business continuity process
- identify the organization’s critical functions
- identify the risks to the organization’s critical functions
- evaluate the effect of the risks on those critical functions
- develop a business continuity strategy
- develop a business continuity plan
- monitor and revise the business continuity process
5 risk financing goals
pay for losses
manage the cost of risk
manage cash flow variability
maintain an appropriate level of liquidity
comply with legal requirements
3 expense components of cost of risk
administrative expenses
risk control expenses
risk financing expenses
four measures available to an organization to fund retention
current expensing of losses
unfunded loss reserve
funded reserve
borrowing funds
4 advantages of retention
cost savings
control of claim process
timing of cash flows
incentives for risk control
4 advantages of risk transfer
reducing exposure to large losses
reducing cash flow variability
providing ancillary services
avoiding adverse employee and public relations
using frequency and severity, which losses should be retained?
low frequency low severity
high frequency low severity
using frequency and severity, which losses should be transferred
high severity low frequency
6 characteristics that can affect the selection of appropriate risk financing measures
risk tolerance
financial condition
core operations
ability to diversify
ability to control losses
ability to administer the retention plan
an organization is often better able to retain the loss exposures directly related to its core operations because
it has an information advantage regarding those operations
goal not met by self insurance program
managing cash flow variability
what type of plan is often used for especially hazardous loss exposures for which insurance capacity is limited or unavailable
finite risk plan
goal not met by finite risk plan
maintaining appropriate level of liquidity because premium payments are usually paid upfront
4 things included in capital market solutions
securitization
insurance securitization
hedging
contingent capital arrangements
the most common insurance securitizations
catastrophe bonds
the asset held in hedging to offset the risk if often
a contract, such as an option or futures contract
goal that capital market solutions fails
managing the cost of risk because they are expense relative to other risk financing measures
5 steps in integrating ERM and strategic planning
- develop ERM goals/ establish internal and external contexts
- identify risks
- analyze, evaluate, and prioritize critical risks
- treat critical risks, considering priority
- monitor critical risks
ERM most effectively improves management consensus if
it has been integrated throughout the organization
who leads ERM
upper management and motivate all employees to embrace it
ISO 31 includes
guidelines and principles for implementing risk managment
ISO 31 is supported by
a glossary and documents that describe implementation methods
ISO 31 provides an
international standard for risk management as well as a generic approach to risk management
3 parts of ISO 31
principles, a framework, and processes for managing risks
BS 31 establishes
principles and terminology for risk management
BS 31 provides
recommendations for the model framework, process, and implementation of risk management
BS 31 is intended to be
a scalable standard that can be used by individuals responsible for risk management activity in organizations of all sectors and sizes
4 primary goals of BS 31
ensuring that an organization achieves its goals
ensuring that risks are managed in specific areas or activities
overseeing risk management in an organization
providing “reasonable assurance” on an organization’s risk management
COSO defines ERM as
a process driven from an organization’s board of directors that establishes an organization-wide strategy to manage risk within its risk appetite
COSO provides
an effective mechanism for initiating a dialogue with the org’s board about establishing ERM goals as a part of the strategic management process
COSO’s intended audience
an org large enough to require examination of risk appetite and board direction of ERM strategies
AZ/NZS is designed for
directors, elected officials, CEOs, senior executives, line managers, and staff across a wide range of orgs
AS/NZS is intended to provide
only a broad overview of risk management
FERMA stands for
federation of european risk management associations
FERMA consists of
the national risk management associations, individual risk managers from central european countries, and representatives from health organizations, educational sectors, and public sectors
FERMA’s standard has these four elements
establishment of consistent terminology
process by which risk management can be executed
organized risk management structure
risk management goals
FERMA is intended for
public and private organizations
ferma recognizes that
risk has both an upside and a downside
Basel ii established an
international standard that banking regulators can use when creating regulations regarding the amount of capital banks need to keep in reserve
Basel II is intended to
protect the international financial system from problems that might arise if a major bank or a series of banks were to collapse
Solvency II consists of
regulatory requirements for insurance firms that operate in the EU
pooling changes
the probability distribution of losses facing each person in the pool because the sources of loss exposures and resources to pay for losses have been combined
while pooling is a risk sharing mechanism, insurance is a
risk transfer mechanism
2 sources of additional financial resources for an insurer
initial capital from investors
retained earnings
who benefits from insurance providing a source of investment funds
both insureds and insurers
6 characteristics of insurable loss exposures
pure risk
fortuitous
definite and measurable
large number of similar exposure units
independent and not catastrophic
economically feasible premium
indemnification
the process of restoring an individual or organization to a pre-loss financial condition
these exposures meet all 6 requirements
personal auto and premises liability
in addition to market failures, 4 reasons that governments get involved in the insurance market
- to fill insurance needs unmet by private insurers
- to help people to buy a mandatory type of insurance
- to obtain greater efficiency and/or provide convenience to insurance buyers
- to achieve collateral social purposes
3 levels at which the government can participate in insurance
exclusive insurer
partner with private insurers
competitor to private insurers
when should the federal government run the insurance program instead of state
if the rationale for government involvement extends beyond state boundaries or would affect interstate commerce
3 examples of property-liability federal insurance progreams
national flood insurance program
terrorism risk insurance program
federal crop insurance program
3 examples of property-liability insurance offered by state governments
workers compensation insurance
beach and windstorm plans
residual auto plans
5 major goals of an insurer
- earn a profit
- meet customer needs
- comply with legal requirements
- diversify risk
- fulfill duty to society
at a minimum, the obligation for an insurer to fulfill its duty to society demands
that the insurer avoid causing public harm
4 internal constraints for insurers to meet their goals
efficiency
expertise
size
financial resources
5 external constraints for insurers to meet their goals
regulation
rating agencies
public opinion
competition
economic conditions
4 ways that property-casualty insurers can be classified
legal form of ownership
place of incorporation
licensing status
insurance distribution systems and channels
3 types of proprietary insuresr
stock insurers
lloyd’s of london and american lloyd’s
insurance exchanges
6 types of cooperative insurers
mutual insurers
reciprocal insurance exchanges
fraternal organizations
captives
RRGs
purchasing groups
a reciprocal consists of
a series of private contracts in which subscribers agree to insure each other
fraternal orgs primarily write
life and health insurance
the only unincorporated insurers permitted in most states
reciprocals
6 ways to measure meeting customer needs
complaints and praise
customer satisfaction data
insurer’s retention ratio and lapse ratio
insurer-producer relationships
state insurance department statisitcs
consumer reports
3 core functions of an insurer
marketing and distribution
underwriting
claims
5 supporting functions of an insurer
risk control
premium auditing
actuarial
reinsurance
information technology
blockchain is a
virtual distributed ledger that maintains a dynamically updated list of data records/blocks
2 techniques that can identify and prevent fraud
network analysis and clustering
a hard market is characterized by
periods of decreased competition, with rising prices and increased insurer’s profitability
a soft market occurs as
competition increases and insurers lower premiums to compete, which eventually leads to diminished profitability and the need to increase pricing
each marketing segment should be
accessible, substantial, and responsive
6 steps in product development
- opportunity assessment
- development of contract, underwriting, and pricing
- business forecast
- regulatory requirements
- distribution requirements
- introduction
MGAs serve as
intermediaries between insurers and the agents and brokers who sell insurance directly to the customer
an insurer operating through an MGA gets these advantages
low fixed cost, specialty expertise, and the assumption of insurer activities
