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RMIN 4000 > EXAM 1 > Flashcards

EXAM 1 Flashcards

1
Q

exposures

A

things of value (assets) that could be lost

examples: cars, health, life, money, future income

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2
Q

perils

A

things that could happen to these assets

examples: car accident, license revoked, breakdown, vandalism

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3
Q

risk management

A

things we can do to protect these assets or prevent/reduce losses

examples: drive safely, insurance, car alarm, lock vehicle

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4
Q

risk

A

calculated possibility of a negative outcome

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5
Q

calculated possibility

A

probabilistic outcome or chance of loss that is known or estimated

ranges from 0% to 100%

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6
Q

calculated possibility rain example

A

0% chance of rain = no risk
50% chance of rain = highest risk
100% chance of rain = no risk

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7
Q

negative outcome

A

a loss that must be quantifiable ($)

sometimes, loss cannot be quantifiable

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8
Q

frequency

A

how often does a loss occur

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9
Q

frequency equation

A

number of losses / number of exposures

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10
Q

severity

A

how much does it cost when a loss occurs

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11
Q

severity equation

A

total losses ($) / number of losses

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12
Q

expected loss equation

A

frequency x severity

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13
Q

hazard

A

a condition that creates or increases the frequency or severity of a loss

there are 4 types

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14
Q

4 types of hazards

A

physical
moral
morale
legal

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15
Q

physical hazard

A

physical condition that increases the frequency and/or severity of a loss

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16
Q

moral hazard

A

presence of insurance changes the behavior of the insured

example: when you have health insurance, you don’t think twice about going to check ups and getting strep tests, but if you don’t have health insurance, you think twice before spending your own money

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17
Q

morale hazard

A

carelessness or indifference to a loss which increases frequency and/or severity of a loss

example: leaving keys in an unlocked car

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18
Q

legal hazard

A

characteristics of legal system or regulatory environment that increase the frequency or severity of a loss

example: there are different juries in different places and at different times

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19
Q

pure risk

A

2 future states

loss or no loss

no chance of gain

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20
Q

speculative risk

A

3 future states

loss
no loss/no gain
gain

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21
Q

can you buy insurance for pure risk?

A

yes

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22
Q

can you buy insurance for speculative risk?

A

no

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23
Q

diversifiable risk

A

affects only individuals or small groups

can be reduced through diversification

risks ARE NOT correlated

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24
Q

nondiversifiable risk

A

affects the entire economy or large numbers of groups of people within the economy

cannot be reduced through diversification

risks ARE correlated

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25
Q

enterprise risk

A

encompasses all major risks faces by a business firm

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26
Q

systemic risk

A

risk of collapse of an entire system or entire market due to the failure of a single entity or group of entities that can result in a breakdown of the entire financial system

wobbly bridge video in class

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27
Q

major types of pure risk

A

personal
property
liability
loss of business income
cyber-security

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28
Q

personal risk

A

directly affects an individual or family, involves the possibility of loss of income, extra expenses, depletion of financial assets

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29
Q

what perils might be involved with personal risk?

A

death
unemployment
injury
inadequate retirement income

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30
Q

property risk

A

possibility of losses associated with the destruction or theft of property

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31
Q

direct loss

A

cost to repair or replace property damage by a peril

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32
Q

indirect loss

A

financial loss resulting as a consequence of a direct loss

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33
Q

liability risk

A

legal liability resulting from injuries or damages you caused to someone else

there is no upper limit that someone could sue you for

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34
Q

loss of business income

A

if a business has to shut down for a period of time due to a physical damage loss and it is unable to generate an income

indirect loss

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35
Q

risk control

A

techniques to reduce the frequency or severity of losses

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36
Q

loss prevention

A

trying to reduce frequency of a particular loss

example: airport security to reduce frequency of danger

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37
Q

loss reduction

A

reduces the severity of a loss

example: sprinklers reduce severity of fire

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38
Q

duplication

A

having multiple copies on important things in case of a loss

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39
Q

separation

A

keeping assets physically separated to minimize harm from a single event

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40
Q

diversification

A

spreading the loss exposure across different parties, securities, or transactions

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41
Q

avoidance

A

technique in which certain loss exposures is never acquired (proactive) or an existing loss exposure is abandoned (reactive)

42
Q

advantage of avoidance

A

frequency of loss is reduced to zero

43
Q

disadvantage of avoidance

A

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

44
Q

risk financing

A

techniques for funding losses

45
Q

retention

A

retaining part or all of losses that can occur from a given risk

46
Q

active retention

A

deliberately retaining risk

47
Q

passive retention

A

unknowingly retaining risk

48
Q

noninsurance transfer

A

transferring the risk from one party to another typically in a contract

49
Q

insurance

A

risk financing technique where you pay a small premium to agree to insure any of your loss exposures

50
Q

risk management

A

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

51
Q

loss exposure

A

any situation or circumstance in which a loss is possible, regardless of whether a loss actually occurs

52
Q

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 the chosen techniques
53
Q

identify loss exposures

A

what assets need to be protected?
what perils are those assets exposed to?

THIS IS THE MOST IMPORTANT STEP!

54
Q

sources for identifying loss exposures

A

loss history
financial statements
other firms/competitors
risk management consultants
surveys/questionnaires
inspections
contract analysis
flowcharts

55
Q

measure and analyze the loss exposures

A

measure:
estimate the frequency and severity of loss exposures

analyze:
rank loss exposures according to relative importance

56
Q

maximum possible loss

A

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

57
Q

probable maximum loss

A

the worst loss that is likely to happen

58
Q

consider and select the appropriate risk management techniques

A

risk control
1. avoidance
2. loss prevention
3. loss reduction
4. duplication
5. separations
6. diversification

risk financing
1. retention
2. noninsurance transger
3. insurance

59
Q

implement and monitor the chosen techniques

A

risk management policy statement outlines:
the risk management objectives of the firm
the company policy with respect to treatment of loss exposures

should be periodically reviewed and evaluated

60
Q

retention techniques

A

unfunded retention
funded reserve
deductible
captive insurer
self-insurance
risk retention group

61
Q

unfunded retention

A

not setting money aside for possible loss exposures

if the loss exposure is low risk and low severity

62
Q

funded reserve

A

putting money aside specifically for a loss exposure

63
Q

deductible

A

how much you pay out of pocket for a loss exposure

if your deductible is 1,000 this means you pay 1,000 before your insurance kicks in

64
Q

captive insurer

A

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

creating an insurance company for your company that only insures your company

65
Q

self-insurance

A

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

also called self-funded

66
Q

risk retention group

A

type of group captive that can write any type of liability coverage except employers’ liability, workers compensation, and personal lines

67
Q

advantages of retention

A

save os loss costs
save on expensese
encourage loss prevention
increase cash flow

68
Q

disadvantages of retention

A

possible higher losses
possible high expenses
possible higher taxed

69
Q

noninsurance transfer advantages

A

can transfer some losses that are not insurable
less expensive
can transfer loss to someone who is in a better position to control losses

70
Q

noninsurance transfer disadvantages

A

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

71
Q

excess insurance

A

plan in which the insurer pays only if the actual loss exceeds the amount a firm has decided to retain

72
Q

manuscript policy

A

a policy specially tailored for the firm

73
Q

high frequency high severity

A

avoidance
captive group
loss prevention/reduction

74
Q

high frequency low severity

A

funded reserve
loss prevention

75
Q

low frequency low severity

A

unfunded retention

76
Q

low frequency high severity

A

insurance
loss reduction

77
Q

hard markets

A

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

78
Q

soft markets

A

profitability is improving
standards are loosened
premiums decline
insurance becomes easier to obtain

79
Q

insurance

A

pooling of fortuitous (accidental) losses by transfer of such risks to insurers, who agree to indemnify (compensate) insureds for such losses, to provide other pecuniary (monetary) benefits on their occurrence, or to render services connected with the risk

80
Q

law of large numbers

A

the greater the number of exposures, the more closely the results will actually be to the true result

81
Q

pooling of losses

A

the spreading of losses incurred by a few over the entire group

purpose is to reduce variation (SD) which reduces uncertainty (risk)

82
Q

lower the standard deviation

A

the lower the risk

83
Q

fortuitous/accidental losses

A

unforeseen and unexpected by the insured and occurs as a result of chance

if you attempt to buy homeowners insurance when a hurricane is approaching, is a wind loss fortuitous?

no

84
Q

risk transfer

A

pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position

85
Q

indemnification

A

the insured is restored to its approximate financial position prior to the occurrence of a loss

86
Q

characteristics of an ideally insurable risk

A
  1. large number of exposure units
  2. loss must be accidental and unintentional
  3. loss must be determinable and measurable
  4. loss should not be catastrophic
  5. chance of loss must be calculable
  6. premium must be economically feasible
87
Q

large number of exposure units

A

enables the insurer to predict average loss based on the law of large
large number of similar exposure units is needed

88
Q

adverse selection

A

the tendency of persons with a higher than average chance of a loss to seek insurance at a standard average rates which results in higher than expected loss levels

89
Q

asymmetric information

A

occurs when one party has information that is relevant to a transaction that the other party does not have

90
Q

credit based insurance score

A

utlize a consumer’s credit history to predict the likelihood of future insurance losses

high number = less likely to have a loss

91
Q

types of private insurance

A

life insurance
health insurance
property insurance
liability insurance
casualty insurance

92
Q

life insurance

A

pays death benefits to beneficiaries when the insured dies

93
Q

health insurance

A

covers medical expenses because of sickness or injury

94
Q

property insurance

A

indemnifies property owners against the loss or damage of real or personal property

95
Q

liability insurance

A

covers the insured’s legal liability arising out of property damage or bodily injury to others

96
Q

casualty insurance

A

refers to insurance that covers whatever is not covered by fire, marine, and life insurance

97
Q

government insurance - social insurance programs

A

financed entirely or in large parts by contributions from employers and or employees

social security
unemployment
medicare

98
Q

evolution of traditional risk management

A

in the 1990s, many companies began expanding their risk management programs to include speculative financial risks

99
Q

Enterprise risk management

A

a strategic buisiness discipline that suports the achievement of an organization’s business objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an integrated risk portfolio

100
Q

types of risk within ERM

A

hazard risk
operational risk
financial risk
strategic risk

101
Q

hazard pure risk

A

traditional risk management types of risks - property, liability, etc

RMIN 4000 (1 decks)

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