PC1 - A1-5 Flashcards
Possibility vs probability
Possibility says there is a risk but no quantity
Probability says how likely the risk is from 0 to 1
Pure vs Speculative Risk
Pure - Loss or no loss
Speculative - possibly chance of gain (price risk and credit risk are here)
Risk Quadrants
Hazard (Pure Risk) - most insurance, property and liability
Operational (Pure Risk) - failure in process or system or IT
Financial (Spec Risk) - market force on financials or price
Strategic (Spec Risk) - change in economy/politics
3 financial consequences of risk
1) Expected cost of loss, hidden/indirect costs
2) Expenditures on risk management, aka buying insurance
3) Cost of residual uncertainty - cost of worrying over the risk
What is risk management?
Assessing, controlling, and financing risk
Any activity taken to deal with risk
A loss exposure has 3 elements..
An asset exposed to loss, a cause of loss, and a financial consequence
4 types of loss
Property - tangible or intangible
Liability - results from a claim, even if you win it costs money
Personnel - key person’s death
Net Income - reduction in revenue due to a loss, or increase in expenses
Pre-loss Risk Goals (4)
Economy of Operation
Tolerable Uncertainty
Legality
Social Responsibility
Post Loss Risk Goals (6)
Survival -operations not permanently halted
Continuity of Operations - know what can stop and for how long
Profitability - if this is important often buy more insurance
Earnings Stability
Growth
Social Responsibility
Risk Management steps (6)
1 - Identify loss exposures
2 - Analyze loss exposures - severity, total losses, frequency
3 - Examine feasibility of techniques
4 - select appropriate technique
5 - Implement selected technique
6 - Monitor results
What is risk control?
Minimizing freq. or severity of loss. Or make more predictable
Steps to Monitor Risk Management Implementation
1 - Establish standard of performance
2) Compare effort w/ standard
3) Correct substandard performance
4) Evaluate standards that were exceeded
6 Risk Control Techniques
Avoidance (reduces freq)
Loss Prevention (reduces freq)
Loss Reduction (disaster recovery here) (reduce severity)
Separation (reduce severity)
Duplication (reduce severity)
Diversification
Risk Control Goals (4)
1) Implement effective and efficient measures
2) Comply w/ Legal
3) Promote life safety
4) Business continuity
Best risk control by loss type
Property - Avoidance, prevention, reduction, separation
Liability - mostly prevention and reduction
Personnel - prevention and reduction
Net Income - separation, duplication, diversification
Business Continuity Management (6 steps)
1 - Identify Critical functions
2 - identify risks to those
3 - evaluate effect of risk
4 - develop strategy
5- develop a plan
6 - monitor/revise
What is a business continuity plan?
Activities that happen if operations are interrupted. List roles/duties of people, response for safety, plan for PR
Retention
Can be economical, but most exposed to cash flow uncertainty
Can be planned or unplanned
Often called the ‘default strategy’
Transfer
most are limited are not pure transfer
also doesn’t eliminate legal responsibility - if insurer out of business, you have to pay
reduces cash flow uncertainty
Best for low freq, high severity loss
What is guaranteed cost insurance?
Premium and limit specified in advance
Good for all lines
Might need multiple (umbrella, excess)
Self-insurance
Good for losses paid out over time
QC, GL, Auto
Sometimes excess coverage but not always
Good for lots of small claims but requires you provide services (claims)
Large Deductible plans
similar to self-insurance but w/ excess coverage
Insurer pays all claims and is then reimbursed
Captive Insurer
owned by one or more parents
operates like transfer of risk
Benefit is investment income on reserves
Can insure tough to insure things
Selects a domicile that is friendly
Some even write 3rd party insurance
Special Group Captives (3 types)
RRG - risk Retention Group (liability)
rent-a-captive - captive without the startup cost
PCC - protected cell company, same as rent-a-captive but you get credits and profits. Member is assured their capital is only theirs
Finite Risk Insurance Plan
premiums go into a fund
Insurer takes some but all profits are shared
Usually for very hazardous things
very high premium
Pools
A group that insures each others losses
Less formal than captive
Get savings by scale - admin/claims/reinsurance
Retrospective Rating Plans
buy insurance but premium is adjusted after term based on losses, any extra is billed
Encourages risk control
Capital market solutions
Expensive to implement, only for big companies
use for cat risks
securitization - marketable investment securities from insurance (cat bonds)
Hold harmless
non-insurance, transfers liability
Hedging
purchase sale of one asset to offset the risks of another (often a contract)
Good for price risk
Think contract for buying oil at a set price
Contingent capital arrangements
pre-loss agreement that enables you to raise cash
sell stock on prearranged terms after a loss
pay a capital commitment fee
no risk transfer, just money
Tech specs of pooling
More members in the pool, less cost to each one
the pool’s standard deviation goes up, but member’s goes down
won’t reduce loss freq, but makes loss value less uncertain
risk sharing
6 characteristics of ideal insurable loss
Pure Risk
Fortuitous (random)
Definite and measurable (time, cause, location)
Large number of similar exposures
independent and not catastrophic
Economically feasible premium
Govt Insurance Programs
Can be one of 3 types:
Exclusive insurer - by law or just no one else, Work Comp sometimes
Partner w/ private insurer - terrorism, flood
Competitor
Federal - flood, terror, federal crop
State - WC, beach/wind, residual auto, fair access (property)
