Chapter 2

Question 1

Risk Management

Answer 1

A systematic process for treating risks based on risk identification, risk measurement, choice and use of methods of treatment, and administration

Question 2

Risk Control

Answer 2

Risk control refers to risk management

techniques used to minimize the frequency and severity of losses

Question 3

Risk Financing

Answer 3

Risk financing refers to techniques used to pay for any losses that do occur, such as risk retention in various ways and risk transfer, including insurance

Question 4

Risk Avoidance

Answer 4

A risk control method that involves not incurring certain types of risks or elimination existing risks

Question 5

Loss Prevention

Answer 5

Loss prevention refers to risk control measures intended to lower the probability of loss or the frequency with which a given type of loss occurs.

Question 6

Loss Reduction

Answer 6

Loss reduction refers to risk control measures that aim to reduce the severity of loss.

Question 7

Noninsurance Transfer

Answer 7

The contractual transfer of risk by a contract other than an insurance contract. Subcontracting is an example.

Question 8

Risk Retention

Answer 8

Risk retention is the risk financing method that is used when a person or organization keeps, or retains, the financial burden of any losses that occur rather than transferring them to an insurer or some other party. Risk retention may be either planned or unplanned.

Question 9

Deductible

Answer 9

The initial amount or portion of covered losses that is borne by the insured, rather than by the insurance company

Question 10

Self- Insurance

Answer 10

A formal program of risk retention usually characterized by factors necessary for a sound insurance enterprise, including funding based on actuarial calculations

Question 11

Captive Insurer

Answer 11

An insurance company owned by a parent corporation and formed primarily to insure the loss exposures of the parent corporation

Question 12

Risk Transfer

Answer 12

Risk transfer is the loss financing method that shifts as much as possible of the financial consequences of a risk to some other party. Individuals and organizations use risk transfer because they cannot reasonably retain the financial consequences of some risks

Question 13

Hold-Harmless Agreement

Answer 13

A hold-harmless agreement is a common type of noninsurance transfer in which the transferee agrees to hold the transferor harmless in case of legal liability to others

Question 14

Insurance Equation

Answer 14

An equation that shows that an insurance company’s sources of income (premiums, investment earnings, and other income) equal its cost factors (covered losses, cost of doing business, and profit)

Question 15

Credibility

Answer 15

The degree of reliability one can place on past results as an indicator of likely future results

Question 16

Mortality

Answer 16

The relative incidence of death

Question 17

Morbidity

Answer 17

The relative incidence of disease

Question 18

Risk Identification

Answer 18

The first step in the risk management process, involving the careful and systematic discovery of all the risks that confront a household or organization

Question 19

Maximum Possible Loss

Answer 19

The worst loss that could happen

Question 20

Maximum Probable Loss

Answer 20

The worst loss that is likely to happen

Question 21

Third-Party Administrator (TPA)

Answer 21

A firm that administers self-insurance programs for a fee

Question 22

Voluntary Benefits

Answer 22

A plan offered to employees under which they may purchase insurance overages with premiums paid through payroll deductions. The employer does not share in the premium cost.

Question 23

Cafeteria Plan

Answer 23

An employee benefit plan under which an employee can use a specified amount of employer funds and/or salary reductions to design his or her own benefit package from an array of available benefits

Question 24

Premium-Conversion Plan

Answer 24

A cafeteria plan provision that allows employees to elect a before-tax salary reduction to pay for their contributions to an employee-sponsored health or certain other types of employee benefits

Question 25

Flexible Spending Account (FSA)

Answer 25

A cafeteria plan provision that allows an employee to fund certain types of unreimbursed medical expenses on a before-tax basis.