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A&P(1) > Risk Topic 3 > Flashcards

Risk Topic 3 Flashcards

1
Q

What is the law of large numbers

A

Over time the more data you collect or the more observations that occur - your results will get closer to the accurate result

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2
Q

What is step 2 in the risk management process

A

Measure and evaluate exposure to loss

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3
Q

What is another way of saying the probability of loss

A

The frequency of loss

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4
Q

How is the severity of loss determined

A

The dollar amount of losses that do occur

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5
Q

How is the expected outcome/loss measured?

A

EL = EF * ES

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6
Q

What are random variables?

A

When the outcome depends on some chance event

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7
Q

What are some examples of random variables?

A
  • Rolling dice
  • Coin flip
  • Car accidents
  • Property fires
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8
Q

What is the core of risk management decision-making

A

Measurement of expected outcome

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9
Q

What does it mean to self-insure?

A

A company or individual sets aside a pool of money to be used to remedy an unexpected loss

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10
Q

What happens if a firm’s actual losses exceed their estimates?

A

The firm’s capital will be drained

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11
Q

What serves as the basis for enterprise risk management decisions and insurance company pricing decisions?

A

Expected Outcome

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12
Q

What is gross premium?

A

The premium paid per unit of coverage to insure a particular risk

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13
Q

What 3 components is a gross premium made up of?

A

Pure premium, risk charge, administrative costs

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14
Q

What is the pure premium?

A

The portion of the gross premium calculated as being sufficient to pay for losses only (Expected Outcome)

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15
Q

What happens when you break even?

A

Actual losses (AL) = Expected Losses (EL)

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16
Q

What happens when you make a profit?

A

Actual losses (AL) < Expected Losses (EL)

17
Q

What happens when you have a loss?

A

Actual losses (AL) > Expected Losses (EL)

18
Q

What is the additional risk insurers face called?

A

Estimation risk

19
Q

Risk Charge

A

Extra charge accounting for the risk of the insurer

20
Q

What are two influences of the size of the risk charge?

A

1) Accuracy of the estimate of the guess
2) The level of confidence in the estimate of the guess

21
Q

How does lots of past information affect the risk charge?

A
  • Low need for risk charge
22
Q

What are some examples of when there would be a low need for a risk charge?

A

Auto and homeowner

23
Q

How does not having a lot of past information affect the risk charge?

A

There is a high need for a risk charge

24
Q

What are some examples of when there would be a high need for a risk charge?

A

If you insure things like terrorism, space shuttles, and the Olympics

25
Q

When would there be an intermediate need for a risk charge?

A

When there is some estimation of risk present

26
Q

What are some examples of times when there would be an intermediate need for a risk charge?

A

Natural disasters and floods

27
Q

What is the relationship type between the risk charge and confidence level in the estimate?

A

There is an inverse relationship (more confidence in the level of estimate means less risk charge)

28
Q

What percentage of the overall premium can administrative costs be?

A

They can be 20-40% of the overall risk charge

29
Q

What are some examples of administrative costs?

A
  • Wages and compensation
  • Marketing and advertising
30
Q

What are state premium taxes?

A

Sales taxes assessed on insurance premiums for policies issued in that state

31
Q

What are some measures of central tendency in insurance?

A

The mean, expected outcome (EO), Weighted average

32
Q

What is the COV

A

The coefficient of variation

33
Q

How is COV calculated?

A

Standard deviation divided by the mean

34
Q

How is Standard deviation calculated?

A

By taking the square root of the variance

35
Q

What does COV determine?

A

The level of risk

A&P(1) (17 decks)

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