ERM - Lesson 3

Question 1

Have an interest in making informed estimates of the likely impact of losses in a budget year

Answer 1

Economic Entities

Question 2

2 key pieces of data for informed estimates

Answer 2

1. Mean frequency
2. Severity of losses

Question 3

Because __________ are random variables, some basic statistical concepts can be employed in making estimates of frequency and severity.

Answer 3

Losses

Question 4

Beginning step

Answer 4

Construction of probability distributions from data on losses.

Question 5

The construction of confidence intervals
around estimated means allows decisions about maximum risk to be handled by the firm. This technique is used by ________ in setting reinsurance requirements and is used by _______ to set limits on the amounts of risk that they will bear.

Answer 5

Insurance Companies
Self Insurers

Question 6

The 2 key task is to estimate the financial impact of losses.

Answer 6

1. Trying to gauge loss experience, so that budget decisions can be made
2. Estimating frequency and severity

Question 7

Two key statistical measures

Answer 7

1. Frequency with which losses occur
2. Their severity

Question 8

4 Basic Statistical Concepts

Answer 8

1. Random variables
2. Probability distributions
3. Expected value
4. Variance and standard deviation

Question 9

Probability distributions is based on _______ data.

Answer 9

Empirical or a Priori data

Question 10

Frequency times Severity

Answer 10

Expected value

Question 11

Average values come from __________ data.

Answer 11

Historical Data

Question 12

A process of charting all possible combinations of frequency and severity to establish the probable maximum loss.

Answer 12

Convolution

Question 13

Future value is not known with certainty.

Answer 13

Random Variable

Question 14

Shows all possible outcomes for a Random Variable.

Answer 14

Probability Distribution

Question 15

Sum of the multiplication of each possible outcome of the variable with its probability.

Answer 15

Expected Value

Question 16

The _______ the dispersion, the higher the risk

Answer 16

Wider

Question 17

The _______ the dispersion, the lower the risk

Answer 17

Narrow

Question 18

Is a measurement of risk

Answer 18

Standard Deviation

Question 19

Another measurement of risk aside from standard deviation

Answer 19

Data

Question 20

There is losses and gain in _______

Answer 20

Stock Investment

Question 21

Standard Deviation of _______

Answer 21

Returns

Question 22

Can be calculated by multiplying the expected losses with their probability and calculating the sum of all outcomes.

Answer 22

Expected Value

Question 23

Is a starting point for calculating an insurance premium or how much a firm should set aside each year to cover the losses.

Answer 23

Expected Value

Question 24

Formula for Estimating Loss Frequency

Answer 24

Total Amount of Losses / by Total Number of Accidents

Question 25

Formula for Loss Severity

Answer 25

Total Number of Accidents / by Total Units Analyzed

Question 26

Formula for Average Loss

Answer 26

Average Loss Frequency x Average Loss Severity

Question 27

Used in day-to-day

Answer 27

Working Capital or Revolving Capital

Question 28

Working Capital or Revolving Capital is placed in what type of investment?

Answer 28

Short-term investment

Question 29

Short-term investment is also called as? Meaning it is easy to pull out.

Answer 29

Money Market

Question 30

The _____________ the standard deviation the better

Answer 30

Lower

Question 31

Is the margin for error (in the estimated distribution).

Answer 31

Risk Charge

Question 32

Formula for Confidence Interval

Answer 32

Estimated mean +/– k standard deviations

Question 33

2 Practical considerations in Using Risk Pooling

Answer 33

1.Insurers
2. Self-insurers

Question 34

Specified number of standard deviations which reflect the uncertainty.

Answer 34

(k)