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ARM 54 > Ch. 3: Hazard risk > Flashcards

Ch. 3: Hazard risk Flashcards

1
Q

Casualty Actuarial Society describes these 6 risks as hazard risk

A 
Fire & other property damage
Windstorm & other natural perils
Theft & other crime, personal injury
Business interruption
Disease & disability (incl. work-related injuries & diseases)
Liability claims
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2
Q

3 categories of hazard risk

A

Personnel risk - uncertainty related to death, incapacity, ill health, prospect of harm to or unexpected departure of key employees
Property risk - uncertainty related to damage or destruction of property
Liability risk - uncertainty related to financial responsibility due to bodily injury

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3
Q

the two measures traditionally used for hazard risk exposure

A

Frequency and severity

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4
Q

frequency (definition)

A

Number of losses

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5
Q

severity (definition)

A

The size of a loss

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6
Q

the 6 techniques used to prevent loss or reduce frequency and/or severity

A 
Avoidance
Separation
Duplication
Diversification
Prevention
Reduction
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7
Q

avoidance (definition)

A

A technique that involves ceasing or never undertaking an activity so that the possibility of future gains and losses occurring from that activity is eliminated

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8
Q

Separation (definition)

A

A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss

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9
Q

Duplication (definition)

A

A risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve

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10
Q

Diversification (definition)

A

A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions

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11
Q

The two most common techniques used by risk managers

A

Prevention and reduction, often in combination

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12
Q

Insurance (definition)

A

A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer

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13
Q

Losses with low frequency and low severity are typically ________

A

Retained

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14
Q

Losses with high frequency but low severity are typically _________ because ___________

A

Retained, because the aggregate results are usually fairly predictable

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15
Q

Losses with high severity but low frequency are typically ___________

A

Transferred

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16
Q

Losses with high frequency and high severity are typically __________

A

Avoided

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17
Q

The principal advantage of risk transfer

A

It provides an offset to an organization’s exposure to large losses, and can lessen the variability of cash flow

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18
Q

Peril (definition)

A

The cause of a loss

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19
Q

Wrongful act (definition)

A

Any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty

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20
Q

Legal liability (definition)

A

The legally enforceable obligation of a person or an organization to pay a sum of money (called damages) to another person or organization

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21
Q

Errors and omissions (E & O) (definition)

A

Negligent acts (errors) committed by a person conducting insurance business that give rise to legal liability for damages; a failure to act (omission); that creates legal liability

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22
Q

Exclusion (definition)

A

A policy provision that eliminates coverage for specified exposures

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23
Q

Policy limits (definition)

A

The maximum that can be paid on the claim, regardless of the actual value of the property damaged

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24
Q

Business income insurance (definition)

A

Insurance that covers the reduction in organizations income when operations are interrupted by damage to property caused by a covered peril

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25
Q

Directors and officers (D&O) liability insurance (definition)

A

Insurance that covers a corporation’s directors and officers against liability for the wrongful acts covered by the policy and also covers the sums that the insured corporation is required or permitted by law to pay to the directors and officers as indemnification

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26
Q

Environmental hazard (definition)

A

Any hazardous condition beyond the control of the property owner that might give rise to a covered loss

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27
Q

Estimates indicate that insurance provides coverage for only ___ percent of operational risk losses

A

20% – 30%

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28
Q

Loss exposure (definition)

A

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs

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29
Q

The three elements of every loss exposure

A

An asset exposed to loss
Cause of loss (also called a peril)
Financial consequences of that loss

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30
Q

Examples of assets owned by organizations

A

Property (such as buildings, automobiles, and office furniture), investments, money that is owed to them, and cash; also intangible assets (such as patents, copyrights, and trademarks) and human resources

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31
Q

Examples of assets owned by individuals

A

Individuals may have many of the same assets as organizations (property, investments, money investments, and so on); in addition, individuals may have intangible assets such as professional qualifications, a unique skill set, or valuable experience

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32
Q

The four classifications insurers typically use to define hazards

A

Moral hazard
Morale hazard
Physical hazard
Legal hazard

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33
Q

Hazard (definition)

A

A condition that increases the frequency or severity of a loss

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34
Q

Moral hazard (definition)

A

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss

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35
Q

Morale hazard (attitudinal hazard) (definition)

A

A condition of carelessness or a difference that increases the frequency or severity of loss

36
Q

This is the fundamental difference between moral hazard and morale hazard

A

Intent; a moral hazard results from a deliberate act while a morale hazard results from carelessness or difference

37
Q

Physical hazard (definition)

A

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss

38
Q

Legal hazard (definition)

A

A condition of the legal environment that increases loss frequency or severity

39
Q

These three elements determine the financial consequences of a loss

A

Type of loss exposure, cause of loss, and loss frequency and severity

40
Q

For insurance and traditional risk management purposes loss exposures are typically divided into these four types

A

Property loss exposures
Liability loss exposures
Personal loss exposures
Net income loss exposures

41
Q

Property loss exposure (definition)

A

A condition the presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest

42
Q

Tangible property (definition)

A

Property that has a physical form

43
Q

Real property (realty) (definition)

A

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land

44
Q

Personal property (definition)

A

All tangible or intangible property that is not real property

45
Q

Intangible property (definition)

A

Property that has no physical form

46
Q

Tangible property can be subdivided into these two types of property

A

Real property and personal property

47
Q

Liability loss exposure (definition)

A

Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party

48
Q

Personnel loss exposure definition

A

A condition that presents the possibility of loss caused by a person’s death, disability, retirement, or resignation that deprives an organization of the person’s special skill or knowledge that the organization cannot readily replace

49
Q

Personal loss exposure (definition)

A

Any condition or situation that presents the possibility of a financial loss to an individual or family by such causes as death, sickness, injury, or unemployment

50
Q

Net income loss exposure (definition)

A

A condition that presents a possibility of loss caused by a reduction in income

51
Q

Net income loss can be caused by these factors

A

A reduction in revenue, an increase in expenses, or a combination of the two

52
Q

Indirect loss (definition)

A

A loss that results from, but is not directly caused by, a particular cause of loss

53
Q

Potential income losses that may affect individuals or organizations include these three

A

Loss of goodwill, failure to perform, missed opportunities

54
Q

Property-casualty insurance (definition)

A

One of the two main sectors of the insurance industry, encompassing numerous types of insurance, most of which cover the financial consequences of damage to one’s own property or legal liability to others

55
Q

Property (definition)

A

The real estate, buildings, objects or articles, intangible assets, or rights with exchangeable value of which someone may claim legal ownership

56
Q

Liability (definition)

A

A legal responsibility for the consequences of an act or omission

57
Q

Line of business (definition)

A

A general classification of insurance, such as commercial property, commercial general liability, commercial crime, or commercial auto

58
Q

Explain the benefits of using common insurance policies or forms

A

Makes it easier for risk managers to understand the coverage provided for typical exposures; this makes it simpler to compare products and address gaps in coverage

59
Q

Commercial property insurance (definition)

A

Insurance that covers commercial buildings and their content against various types of property loss

60
Q

Monoline policy (definition)

A

Policy that covers only one line of business

61
Q

Package policy (definition)

A

Policy that covers two or more lines of business

62
Q

Named peril (definition)

A

A specific cause of loss listed and described in an insurance policy. Also used to describe policies containing named perils

63
Q

Direct physical loss (definition)

A

A loss that is physical (not just financial) and results immediately from the occurrence

64
Q

All-risks policy (definition)

A

An insurance policy that covers any risk of physical loss unless the policy specifically excludes it

65
Q

Bailee’s customers policy (definition)

A

A policy that covers damage to customers’ goods while in the possession of the insured, regardless of whether the insured is legally liable for the damage

66
Q

Replacement cost (definition)

A

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation

67
Q

Actual cash value (definition)

A

A method in valuing property which is calculated as the cost to replace or repair property minus depreciation, the fair market value, or a valuation determined by the broad evidence rule

68
Q

Insurance-to-value provision (definition)

A

A provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property

69
Q

Coinsurance clause (definition)

A

A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property’s value

70
Q

Business income insurance (definition)

A

Insurance that covers the reduction in an organization’s income when operations are interrupted by damage to property caused by a covered peril

71
Q

Dependent property exposure (definition)

A

The possibility of incurring business income loss because of physical loss occurring on the premises of an organization that the insured depends on for materials, products, or sales

72
Q

Principal (definition)

A

The party to a surety bond whose obligation or performance the surety guarantees

73
Q

Surety (definition)

A

The party (usually an insurer) to a surety bond that guarantees to the obligee that the principal will fulfill an obligation to perform as required by the underlying contract, permit, or law

74
Q

Obligee (definition)

A

The party to a surety bond that received the surety’s guarantee that the principal will fulfill an obligation or perform as promised

75
Q

Breach of contract (definition)

A

The failure, without legal excuse, to fulfill a contractual promise

76
Q

Tort (definition)

A

A wrongful act or an omission, other than a crime or a breach of contract, that invades a legally protected right

77
Q

Insuring agreement (definition)

A

A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service

78
Q

Occurrence (definition)

A

An accident, including continuous or repeated exposure to substantially the same general harmful conditions

79
Q

Indemnify (definition)

A

To restore a party who has sustained a loss to the same financial position that party held before the loss occurred

80
Q

Claims-made coverage form (definition)

A

A coverage form that provides coverage for bodily injury or property damage that is claimed during the policy period

81
Q

Occurrence coverage form (definition)

A

A coverage form that covers bodily injury or property damage occurring during the policy period

82
Q

Entity coverage (definition)

A

Coverage extension of D&O liability policies for claims made directly against a corporation (the “entity”) for wrongful acts covered by the policy

83
Q

Claims-made coverage trigger (definition)

A

The event that triggers coverage under a claims-made coverage form; the first making of a claim against any insured during either the policy period or an extended reporting period

84
Q

Fiduciary liability insurance (definition)

A

Insurance that covers the fiduciaries of an employee benefit plan against liability claims alleging breach of their fiduciary duties involving discretionary judgment

85
Q

Perils of the sea (definition)

A

Accidental causes of loss that are peculiar to the sea and other bodies of water

ARM 54 (5 decks)

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