Module 2

Question 1

Pure Risk

Answer 1

a chance of loss or no loss, but no chance of gain

Question 2

Law of Large Numbers

Answer 2

a mathematical principal stating that as the number of similar but independent exposure units increases the relative accuracy of predictions about future outcomes also increases

Question 3

Explain what is assumed in quantative analysis when analyzing the data of past losses

Answer 3

losses that occurred in the past will occur in the future

Question 4

Describe what estimating losses qualitatively draws upon from practitioners in relevant fields

Answer 4

the education, training and expertise of the practitioners to make judgements about the probabilities that certain losses will occur in the future

Question 5

Explain how the level of risk can be used in budgeting

Answer 5

The org should include in the budget a sufficient amount to pay the portion of expected losses that it plans to retain

Question 6

Describe the diversification benefit of hazard risk

Answer 6

Hazard risk is usually not correlated with other types of risk, which provides a diversification benefit.

A hazard loss does not increase the likelinhood of negative consequences from other types of risks

Question 7

Loss Reserve

Answer 7

the liabiliity on an insurers’s balance sheet that shows the estimated amount that will be required to settle claims that have occurred but not yet paid

Question 8

Loss adjustment expense reserves

Answer 8

Estimates of the future expenese that an insurer will incur to investigate, defend, and settle claims for losses that have already occurred

Question 9

incurred losses

Answer 9

paid losses + loss reserves + loss adjustement reserves

Question 10

loss development

Answer 10

the increase or decrease of incurred losses over time

Question 11

Loss payout pattern

Answer 11

a listing of incurred loss payments over time

Question 12

Exposure unit

Answer 12

a fundamental measure of the loss exposure assumed by an insurer

Question 13

Increased limit factor table

Answer 13

a table used by insurers to price layers of coverage in excess of the insurer’s base limit

Question 14

trend factor

Answer 14

an adjustment to loss data for a change in general economic conditions, such as inflation

Question 15

loss development factor

Answer 15

an actuarial means for adjusting losses to reflect future growth in claims due to (1) increases in incurred losses and (2) IBNR losses

Question 16

ultimate loss development factor

Answer 16

A factor that is applied ot the most recent estimate of incurred losses for a specific accident year to estimate the ultimate incurred loss for that year

Question 17

loss triangle

Answer 17

A table of successive years of loss data

Question 18

identify the four steps a RM professional should complete to prepare an estimate of hazard losses

Answer 18

Collect and organize past data

Limit individual losses

Apply trend and loss development factors to the data

Forecast the losses

Question 19

identify the past lost data required to determine incurred losses

Answer 19

Paid losses
loss reserves
loss adjustment expense reserves

Question 20

Explain why RManagers limit losses

Answer 20

to match the rage of losses or layers being forecast

stabilizes them - meaning that losses don’t vary significantly when losses that exceed a certain level are capped.

Question 21

Explain why the ultimate loss development factors bear an inverse relationship to the age of each accident year

Answer 21

because most loss development occurs early in the life of the claim.

(The higher the age of the claim, the lower the loss development factor)

Question 22

Explain why an org’s estimated ultimate incurred losses and exposure base data must be adjusted for inflation to the forecasted year.

Answer 22

in order for the data to be comparable

Question 23

Increased limit factor

Answer 23

a factor applied to the rates for basic limits to arrive at an appropriate rate for higher limits

Question 24

Explain why insurance advisory org’s develop increased limit factors from aggregated insurer data

Answer 24

few insurers would have sufficient claims in high-limit layers to make conclusive loss forecasts

Question 25

Explain how the average expected losses for an upper layer of limits is determined after the total average expected losses for all layers has been calculated

Answer 25

subtracting the expected losses of the lower layers from the average expected losses for all layers

Question 26

Explain how an org can use the knowledge of the total average expected losses up to a $1 Million limit

Answer 26

1. to assess whether it can comfortably afford to retain losses up to the amount of the total average expected losses. Raise deductible and retain losses
2. assess whether the premium charged by its insurer for $1 Million of coverage is reasonable when considering the amount of the total expected losses

Question 27

severity probability distribution

Answer 27

a representation that shows the probability of various sizes of each individual loss

Question 28

total loss probability distribution

Answer 28

a represenation that shows the proability of total loss outcomes for a given period

combines the frequency and severity probability distributions

Question 29

expected value

Answer 29

the weighted average of all possible outcomes of a probability distribution or its mean

Question 30

identify the three types of proabability distributions used to estimate the probability of atnernate totl loss outcomes

Answer 30

Frequency probability Distribution

Severity probability Distribution

Total probability Distribution

Question 31

Explain how the expected value of the losses of an org’s frequency distribution is determined

Answer 31

multiplying each possible outcome by probabilityy and summing the result

Question 32

Explain what it means when a positively skeweed curve is superimposed over an org’s frequency probability distribution

Answer 32

indicates loss frequencies are concentrated at low-frequency levels to the left of the curve

As severity increases, frequency decreases.

Question 33

explain how the mean or average severity of an org’s losses in a severity probability distribution can be determined

Answer 33

by multiplying the average severity outcome in each range by the probability of losses falling within that range

Question 34

describe what a probability interval represents

Answer 34

shows the probability of outcomes falling within certain ranges of a probability distribution

Question 35

frequency probability distribution

Answer 35

a representation that shows the probability of various numbers of losses over a certain period, such as a calendar year