Ch. 3: Hazard risk Flashcards
Casualty Actuarial Society describes these 6 risks as hazard risk
Fire & other property damage Windstorm & other natural perils Theft & other crime, personal injury Business interruption Disease & disability (incl. work-related injuries & diseases) Liability claims
3 categories of hazard risk
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
the two measures traditionally used for hazard risk exposure
Frequency and severity
frequency (definition)
Number of losses
severity (definition)
The size of a loss
the 6 techniques used to prevent loss or reduce frequency and/or severity
Avoidance Separation Duplication Diversification Prevention Reduction
avoidance (definition)
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
Separation (definition)
A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss
Duplication (definition)
A risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve
Diversification (definition)
A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions
The two most common techniques used by risk managers
Prevention and reduction, often in combination
Insurance (definition)
A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer
Losses with low frequency and low severity are typically ________
Retained
Losses with high frequency but low severity are typically _________ because ___________
Retained, because the aggregate results are usually fairly predictable
Losses with high severity but low frequency are typically ___________
Transferred
Losses with high frequency and high severity are typically __________
Avoided
The principal advantage of risk transfer
It provides an offset to an organization’s exposure to large losses, and can lessen the variability of cash flow
Peril (definition)
The cause of a loss
Wrongful act (definition)
Any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty
Legal liability (definition)
The legally enforceable obligation of a person or an organization to pay a sum of money (called damages) to another person or organization
Errors and omissions (E & O) (definition)
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
Exclusion (definition)
A policy provision that eliminates coverage for specified exposures
Policy limits (definition)
The maximum that can be paid on the claim, regardless of the actual value of the property damaged
Business income insurance (definition)
Insurance that covers the reduction in organizations income when operations are interrupted by damage to property caused by a covered peril
Directors and officers (D&O) liability insurance (definition)
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
Environmental hazard (definition)
Any hazardous condition beyond the control of the property owner that might give rise to a covered loss
Estimates indicate that insurance provides coverage for only ___ percent of operational risk losses
20% – 30%
Loss exposure (definition)
Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs
The three elements of every loss exposure
An asset exposed to loss
Cause of loss (also called a peril)
Financial consequences of that loss
Examples of assets owned by organizations
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
Examples of assets owned by individuals
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
The four classifications insurers typically use to define hazards
Moral hazard
Morale hazard
Physical hazard
Legal hazard
Hazard (definition)
A condition that increases the frequency or severity of a loss
Moral hazard (definition)
A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss
Morale hazard (attitudinal hazard) (definition)
A condition of carelessness or a difference that increases the frequency or severity of loss
This is the fundamental difference between moral hazard and morale hazard
Intent; a moral hazard results from a deliberate act while a morale hazard results from carelessness or difference
Physical hazard (definition)
A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss
Legal hazard (definition)
A condition of the legal environment that increases loss frequency or severity
These three elements determine the financial consequences of a loss
Type of loss exposure, cause of loss, and loss frequency and severity
For insurance and traditional risk management purposes loss exposures are typically divided into these four types
Property loss exposures
Liability loss exposures
Personal loss exposures
Net income loss exposures
Property loss exposure (definition)
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
Tangible property (definition)
Property that has a physical form
Real property (realty) (definition)
Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land
Personal property (definition)
All tangible or intangible property that is not real property
Intangible property (definition)
Property that has no physical form
Tangible property can be subdivided into these two types of property
Real property and personal property
Liability loss exposure (definition)
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
Personnel loss exposure definition
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
Personal loss exposure (definition)
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
Net income loss exposure (definition)
A condition that presents a possibility of loss caused by a reduction in income
Net income loss can be caused by these factors
A reduction in revenue, an increase in expenses, or a combination of the two
Indirect loss (definition)
A loss that results from, but is not directly caused by, a particular cause of loss
Potential income losses that may affect individuals or organizations include these three
Loss of goodwill, failure to perform, missed opportunities
Property-casualty insurance (definition)
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
Property (definition)
The real estate, buildings, objects or articles, intangible assets, or rights with exchangeable value of which someone may claim legal ownership
Liability (definition)
A legal responsibility for the consequences of an act or omission
Line of business (definition)
A general classification of insurance, such as commercial property, commercial general liability, commercial crime, or commercial auto
Explain the benefits of using common insurance policies or forms
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
Commercial property insurance (definition)
Insurance that covers commercial buildings and their content against various types of property loss
Monoline policy (definition)
Policy that covers only one line of business
Package policy (definition)
Policy that covers two or more lines of business
Named peril (definition)
A specific cause of loss listed and described in an insurance policy. Also used to describe policies containing named perils
Direct physical loss (definition)
A loss that is physical (not just financial) and results immediately from the occurrence
All-risks policy (definition)
An insurance policy that covers any risk of physical loss unless the policy specifically excludes it
Bailee’s customers policy (definition)
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
Replacement cost (definition)
The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation
Actual cash value (definition)
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
Insurance-to-value provision (definition)
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
Coinsurance clause (definition)
A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property’s value
Business income insurance (definition)
Insurance that covers the reduction in an organization’s income when operations are interrupted by damage to property caused by a covered peril
Dependent property exposure (definition)
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
Principal (definition)
The party to a surety bond whose obligation or performance the surety guarantees
Surety (definition)
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
Obligee (definition)
The party to a surety bond that received the surety’s guarantee that the principal will fulfill an obligation or perform as promised
Breach of contract (definition)
The failure, without legal excuse, to fulfill a contractual promise
Tort (definition)
A wrongful act or an omission, other than a crime or a breach of contract, that invades a legally protected right
Insuring agreement (definition)
A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service
Occurrence (definition)
An accident, including continuous or repeated exposure to substantially the same general harmful conditions
Indemnify (definition)
To restore a party who has sustained a loss to the same financial position that party held before the loss occurred
Claims-made coverage form (definition)
A coverage form that provides coverage for bodily injury or property damage that is claimed during the policy period
Occurrence coverage form (definition)
A coverage form that covers bodily injury or property damage occurring during the policy period
Entity coverage (definition)
Coverage extension of D&O liability policies for claims made directly against a corporation (the “entity”) for wrongful acts covered by the policy
Claims-made coverage trigger (definition)
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
Fiduciary liability insurance (definition)
Insurance that covers the fiduciaries of an employee benefit plan against liability claims alleging breach of their fiduciary duties involving discretionary judgment
Perils of the sea (definition)
Accidental causes of loss that are peculiar to the sea and other bodies of water
