Module 2 Flashcards
Pure Risk
a chance of loss or no loss, but no chance of gain
Law of Large Numbers
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
Explain what is assumed in quantative analysis when analyzing the data of past losses
losses that occurred in the past will occur in the future
Describe what estimating losses qualitatively draws upon from practitioners in relevant fields
the education, training and expertise of the practitioners to make judgements about the probabilities that certain losses will occur in the future
Explain how the level of risk can be used in budgeting
The org should include in the budget a sufficient amount to pay the portion of expected losses that it plans to retain
Describe the diversification benefit of hazard risk
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
Loss Reserve
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
Loss adjustment expense reserves
Estimates of the future expenese that an insurer will incur to investigate, defend, and settle claims for losses that have already occurred
incurred losses
paid losses + loss reserves + loss adjustement reserves
loss development
the increase or decrease of incurred losses over time
Loss payout pattern
a listing of incurred loss payments over time
Exposure unit
a fundamental measure of the loss exposure assumed by an insurer
Increased limit factor table
a table used by insurers to price layers of coverage in excess of the insurer’s base limit
trend factor
an adjustment to loss data for a change in general economic conditions, such as inflation
loss development factor
an actuarial means for adjusting losses to reflect future growth in claims due to (1) increases in incurred losses and (2) IBNR losses
ultimate loss development factor
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
loss triangle
A table of successive years of loss data
identify the four steps a RM professional should complete to prepare an estimate of hazard losses
Collect and organize past data
Limit individual losses
Apply trend and loss development factors to the data
Forecast the losses
identify the past lost data required to determine incurred losses
Paid losses
loss reserves
loss adjustment expense reserves
Explain why RManagers limit losses
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.
Explain why the ultimate loss development factors bear an inverse relationship to the age of each accident year
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)
Explain why an org’s estimated ultimate incurred losses and exposure base data must be adjusted for inflation to the forecasted year.
in order for the data to be comparable
Increased limit factor
a factor applied to the rates for basic limits to arrive at an appropriate rate for higher limits
Explain why insurance advisory org’s develop increased limit factors from aggregated insurer data
few insurers would have sufficient claims in high-limit layers to make conclusive loss forecasts
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
subtracting the expected losses of the lower layers from the average expected losses for all layers
Explain how an org can use the knowledge of the total average expected losses up to a $1 Million limit
- 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
- assess whether the premium charged by its insurer for $1 Million of coverage is reasonable when considering the amount of the total expected losses
severity probability distribution
a representation that shows the probability of various sizes of each individual loss
total loss probability distribution
a represenation that shows the proability of total loss outcomes for a given period
combines the frequency and severity probability distributions
expected value
the weighted average of all possible outcomes of a probability distribution or its mean
identify the three types of proabability distributions used to estimate the probability of atnernate totl loss outcomes
Frequency probability Distribution
Severity probability Distribution
Total probability Distribution
Explain how the expected value of the losses of an org’s frequency distribution is determined
multiplying each possible outcome by probabilityy and summing the result
Explain what it means when a positively skeweed curve is superimposed over an org’s frequency probability distribution
indicates loss frequencies are concentrated at low-frequency levels to the left of the curve
As severity increases, frequency decreases.
explain how the mean or average severity of an org’s losses in a severity probability distribution can be determined
by multiplying the average severity outcome in each range by the probability of losses falling within that range
describe what a probability interval represents
shows the probability of outcomes falling within certain ranges of a probability distribution
frequency probability distribution
a representation that shows the probability of various numbers of losses over a certain period, such as a calendar year
