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RMIN 4000 > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

what is risk management?

A

process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures

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2
Q

what is under pre loss?

A

efficient cost of risk
permits better decision making
meet legal obligations

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3
Q

what is under post loss?

A

survival of firm
business continuity, earnings, growth
societal

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4
Q

what are the steps in the risk management process?

A
  1. identify loss exposures
  2. measure and analyze the loss exposures
  3. consider and select the appropriate risk management techniques
  4. implement and monitor chose techniques
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5
Q

what questions do you ask when identifying loss exposures?

A
  1. what assets need to be protected?
  2. what perils are those assets exposed?
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6
Q

what are some important exposures?

A

property, liability, business income, Human Resources, crime

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7
Q

what are some sources for identifying loss exposures?

A

meeting with management including risk manager
financial statements
other firms/competitors

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8
Q

what do you do to measure and analyze the loss exposures?

A

estimate the frequency and severity of loss exposures
rank loss exposures according to relative importance

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9
Q

what is maximum possible loss? (MPL)

A

the worst loss that could happen to the firm during its lifetime

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10
Q

what is probable maximum loss? (PML)

A

the worst loss that is likely to happen

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11
Q

what are the techniques that reduce the frequency and severity of losses?

A
  • avoidance
  • loss prevention
  • loss reduction
  • duplication
  • separation
  • diversification
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12
Q

what is avoidance?

A

a certain loss exposure is never acquired or an existing loss exposure is abandoned

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13
Q

what is the advantage of avoidance?

A

frequency is reduced to 0

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14
Q

what are the disadvantages of avoidance?

A

may not be possible
usually has an opportunity cost
avoiding one loss exposure may create another

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15
Q

what is loss prevention?

A

measures that reduce the frequency of a particular loss

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16
Q

what is loss reduction?

A

measures that reduce the severity of a loss

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17
Q

what is duplication?

A

having back ups or copies of important documents or property available in case a loss occurs

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18
Q

what is separation?

A

dividing assets exposed to loss to minimize the harm from a single event

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19
Q

what is diversification?

A

reducing the change of loss by spreading the loss exposure across different parties, securities, or transactions

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20
Q

what is risk financing?

A

techniques that provide for the funding of losses

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21
Q

what are the techniques that provide for the funding of losses?

A

retention
non insurance transfer
commercial insurance

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22
Q

what is the retention level?

A

the dollar amount of losses that the individual/firm will retain

23
Q

what is active retention?

A

deliberately retaining risk

24
Q

what is passive retention?

A

unknowingly retaining risk

25
Q

when should risk be retained ?

A
  • no other option more attractive or available
  • worst possible losses are not serious (low severity)
  • losses are predictable (high frequency; not catastrophic)
26
Q

what are the retention types?

A
  • unfunded; cash flow
  • funded reserve
  • deductible
  • captive insurer
  • self insurance plan
    -risk retention group/ group captive
27
Q

what is a captive insurer?

A

an insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures

28
Q

how many people own a single parent captive?

A

one parent

29
Q

how many parents own an associate or group captive?

A

several parents

30
Q

what are the advantages to a captive insurer?

A
  • can help a firm when insurance is too expensive or difficult to obtain
  • lower costs
  • easier to access to reinsurance market
  • possibility tax advantages
  • possibility of favorable regulatory environment
31
Q

why do captive insurers have lower costs?

A
  • no agent or broker commissions
  • interest earned on invested premium
32
Q

what is a self insurance plan?

A

a special form of planned retention by which part or all of given loss exposure is retained by the firm

33
Q

who can write any type of liability coverage except employers liability, workers compensation and personal liens?

A

risk retention/ captive group

34
Q

what type of retention is exempt from many state insurance laws?

A

risk retention group / group captive

35
Q

what are the advantages of retention ?

A
  • save on loss costs
  • save on expenses
  • encourage loss prevention
  • increase cash flow
36
Q

what are the disadvantages of retention?

A
  • possible higher losses
  • possible higher expenses
  • possible higher taxes
37
Q

what are the advantages of non insurance transfer?

A
  • can transfer losses that are not insurable
  • less expensive
  • can transfer loss to someone who is in a better position to control
38
Q

what are the disadvantages of non insurance transfer ?

A
  • contract language may be ambiguous, so transfer may fail
  • if the other party fails to pay, firm is still responsible for loss
  • insurers may not give credit for transfer
39
Q

what type of risk financing is appropriate for low frequency, and high severity loss exposures?

A

insurance
loss reduction

40
Q

what areas must be emphasized for commercial insurance ?

A
  • selection of insurance coverages
  • selections of an insurer
  • negotiation of terms and services
  • dissemination of information concerning insurance coverages
  • periodic review of insurance program
41
Q

what are the advantages for commercial insurance?

A
  • firms is indemnified for losses; can continue to operate
  • uncertainty is reduced
  • firm may receive valuable risk management services
  • premiums are income- tax deductible
42
Q

what are the disadvantages of commercial insurance?

A
  • premiums may be more costly
  • negotiation of polices takes time and effort
  • most policies are annual
  • the risk manager may become lax in exercising loss control
43
Q

which techniques should be used for high frequency, low severity ?

A
  • funded reserve
  • loss prevention
44
Q

what techniques should be used for high frequency, high severity ?

A
  • captive or risk retention group
  • loss prevention/reduction
    -avoidance
45
Q

which techniques should be used for low frequency, low severity?

A
  • unfunded retention
46
Q

which techniques should be used for low frequency, high severity?

A
  • insurance
  • loss reduction
47
Q

what are the underwriting cycles?

A
  • hard and soft insurance market
48
Q

what is a hard insurance market?

A

insurer profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain

49
Q

what is a soft insurance market?

A
  • insurer profitability is improving, standards are loosened, premiums decline and insurance becomes easier to obtain
50
Q

how might the underwriting cycle affect the decision of a risk manager?

A

might decide in a tougher market, go to a different insurance company

51
Q

what is under step 4 under the risk management steps?

A

risk management policy statement

52
Q

what does the risk management policy statement outline?

A
  • the risk management objective of the firm
  • the company policy with respect to treatment of loss exposures
53
Q

what does the risk management policy statement provide?

A

provides standards for judging the risk manager’s performance

54
Q

what are the benefits of risk management?

A
  • Enables a firm to attain its pre-loss and post-loss objectives more easily
    • Society benefits because both direct and indirect losses are reduced
    • Can reduce a firm’s total cost of risk

RMIN 4000 (15 decks)

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