Ch 3 Flashcards
___ is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.
Risk management
A(n) ___ is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
Loss exposure
Name the three pre-loss objectives of risk management.
- Prepare for potential losses in the most economical way
- Reduce anxiety
- Meet any legal obligations
Name the 5 post-loss objectives of risk management.
- Survival of the firm
- Continue operating
- Stability of earnings
- Continued growth of the firm
- Minimize the effects that a loss will have on other persons and on society
Name the 4 main steps of the risk management process.
- Identify potential losses
- Measure and analyze the loss exposures
- Select the appropriate combination of techniques for treating a loss exposure
- Implement and monitor the risk management program
The ___ is the worst loss that could happen to the firm during its lifetime.
Maximum possible loss
The ___ is the worst loss that is likely to happen.
Probable maximum loss
___ refers to techniques that reduce frequency and severity of losses.
Risk control
___ means that a certain loss exposure is never acquired/undertaken, or an existing loss exposure is abandoned.
Avoidance
___ refers to measures that reduce the frequency of a particular loss.
Loss prevention
___ refers to measures that reduce the severity of a loss after it occurs.
Loss reduction
___ refers to having back-ups or copies of important documents or property available in case a loss occurs.
Duplication
___ means dividing the assets exposed to loss to minimize the harm from a single event.
Separation
___ means spreading the loss exposure across different parties, securities, or transactions, to reduce the chance of a loss.
Diversification
___ refers to techniques that provide for the payment of losses after they occur. Examples include retention, non-insurance transfers, and commercial insurance.
Risk financing
___ means that the firm retains part or all of the losses that can result from a given loss.
Retention
Name the three criteria that must be fulfilled in order for retention to be used effectively.
- No other method of treatment is available
- The worst possible loss is not serious
- Losses are highly predictable
The ___ is the dollar amount of the losses that the firm will retain.
Retention level
Name the four main methods for paying retained losses.
- Current net income: Losses are treated as current expenses
- Unfunded reserve: Losses are deducted from a bookkeeping account
- Funded reserve: Losses are deducted from a liquid fund
- Credit line: Funds are borrowed to pay losses as they occur
A(n) ___ is an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures.
Captive insurer
A(n) ___ is an insurer owned by several parent firms.
Association (Group captive)
___ is a special form of planned retention by which part or all of a given loss exposure is retained by the firm.
Self insurance (self-funding)
A(n) ___ is a group captive that can write any type of liability coverage except for employers’ liability, workers compensation, and personal lines.
Risk retention group
A(n) ___ is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party.
Non-insurance transfer
A(n) ___ is a specified amount subtracted from the loss payment otherwise payable to the insured.
Deductible
In a(n) ___, the insurer pays only if the actual loss exceeds the amount that a firm has decided to retain.
Excess insurance policy
Throughout a(n) ___, the market will go between “hard” and “soft.” In a “hard” market, profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain. In a “soft” market, profitability is improving, standards are loosened, premiums decline, and insurance becomes easier to obtain.
Underwriting cycle
Implementation of a risk management program begins with a risk management policy statement. What are the four main purposes of this statement?
- Outlines the firm’s objectives and policies
- Educates top-level executives
- Gives the risk manager greater authority
- Provides standards for judging the risk manager’s performance
When implementing a risk management program, a risk management manual may be used for what two purposes?
- Describe the risk management program
- Train new employees
___ refers to the identification and analysis of pure risks faced by an individual or family, and to the selection of the most appropriate technique(s) for treating such risks.
Personal risk management
