Chapter 2 - Risk Assessment Flashcards
Balance Sheet
The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date
Income Statement
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
Statement of Cash Flows
The financial statement that summarizes the cash effects of an organization’s operating, investing, and financing activities during a specific period
Hold-harmless Agreement
Or Indemnity Agreement
A contractual provision that obligates one of the parties to assume the legal liability to another party
Indemnification
The process of restoring an individual or organization to a pre-loss financial condition
Hazard Analysis
A method of analysis that identifies conditions that increase the frequency or severity of loss
Data Requirements for Exposure Analysis
- Relevant data
- Complete data
- Consistent data
- Organized data
Theoretical Probability
Probability that is based on theoretical principles rather than on actual experience
Empirical Probability
A Posteriori Probability
A probability measure that is based on actual experience through historical data or from the observation of facts
Probability Analysis
A technique for forecasting events, such as accidental and business losses, on the assumption that they are governed by an unchanging probability distribution
Law of Large Numbers
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
Probability Distribution
A presentation (table, chart, or graph) of probability estimates of particular set of circumstances and of the probability of each possible outcome
Central Tendency
The single outcome that is the most representative of all possible outcomes included within a probability distribution
Expected Value
The weighted average of all of the possible outcomes of probability distribution
Mean
The sum of values in a data set divided by the number of values
Median
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
Mode
The most frequently occurring value in a distribution
Dispersion
The variation among values in a distinction
Standard deviation
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
Coefficient of Variation
A measure of dispersion calculated by dividing a distribution’s standard deviation by its mean
Normal Distribution
A probability distribution that, when graphed, generates a bell-shaped curve
Loss Frequency
The number of losses that occur during a specific period
Four categories:
- almost nil
- slight
- moderate
- definite
Loss Severity
Seriousness of a loss
Three categories:
- slight
- significant
- severe
Four Dimensions of Loss Exposure
1) Loss frequency
2) Loss severity
3) Total dollar losses
4) Timing
Identifying Loss Exposure
- Document analysis
- Compliance review
- Inspections
- Expertise within and beyond the organization
