Chapter 2 - Risk Assessment

Question 1

Balance Sheet

Answer 1

The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date

Question 2

Income Statement

Answer 2

The financial statement that reports an organization’s profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues

Question 3

Statement of Cash Flows

Answer 3

The financial statement that summarizes the cash effects of an organization’s operating, investing, and financing activities during a specific period

Question 4

Hold-harmless Agreement

Or Indemnity Agreement

Answer 4

A contractual provision that obligates one of the parties to assume the legal liability to another party

Question 5

Indemnification

Answer 5

The process of restoring an individual or organization to a pre-loss financial condition

Question 6

Hazard Analysis

Answer 6

A method of analysis that identifies conditions that increase the frequency or severity of loss

Question 7

Data Requirements for Exposure Analysis

Answer 7

• Relevant data
• Complete data
• Consistent data
• Organized data

Question 8

Theoretical Probability

Answer 8

Probability that is based on theoretical principles rather than on actual experience

Question 9

Empirical Probability

A Posteriori Probability

Answer 9

A probability measure that is based on actual experience through historical data or from the observation of facts

Question 10

Probability Analysis

Answer 10

A technique for forecasting events, such as accidental and business losses, on the assumption that they are governed by an unchanging probability distribution

Question 11

Law of Large Numbers

Answer 11

A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases

Question 12

Probability Distribution

Answer 12

A presentation (table, chart, or graph) of probability estimates of particular set of circumstances and of the probability of each possible outcome

Question 13

Central Tendency

Answer 13

The single outcome that is the most representative of all possible outcomes included within a probability distribution

Question 14

Expected Value

Answer 14

The weighted average of all of the possible outcomes of probability distribution

Question 15

Mean

Answer 15

The sum of values in a data set divided by the number of values

Question 16

Median

Answer 16

The value at the midpoint of a sequential data set with an odd number of values, or the mean of the two middle values of a sequential data set with an even number of values

Question 17

Mode

Answer 17

The most frequently occurring value in a distribution

Question 18

Dispersion

Answer 18

The variation among values in a distinction

Question 19

Standard deviation

Answer 19

A measure of dispersion between values in a distribution and the expected value (or mean) of that distribution, calculated by taking the square root of the variance

Indicates how widely dispersed the values in a distribution are

Question 20

Coefficient of Variation

Answer 20

A measure of dispersion calculated by dividing a distribution’s standard deviation by its mean

Question 21

Normal Distribution

Answer 21

A probability distribution that, when graphed, generates a bell-shaped curve

Question 22

Loss Frequency

Answer 22

The number of losses that occur during a specific period

Four categories:

• almost nil
• slight
• moderate
• definite

Question 23

Loss Severity

Answer 23

Seriousness of a loss

Three categories:

• slight
• significant
• severe

Question 24

Four Dimensions of Loss Exposure

Answer 24

1) Loss frequency
2) Loss severity
3) Total dollar losses
4) Timing

Question 25

Identifying Loss Exposure

Answer 25

• Document analysis
• Compliance review
• Inspections
• Expertise within and beyond the organization