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PBIO > RMIN Exam 1 > Flashcards

RMIN Exam 1 Flashcards

1
Q

risk

A

a calculated possibility of a negative income

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2
Q

calculated possibility

A

a probabilistic outcome (chance/likelihood of loss) that is known or estimated, ranges from 0-1

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3
Q

highest calculated possibility risk

A

0.5, most uncertainty, could go either way

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4
Q

negative loss

A

loss, must be quantifiable

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5
Q

frequency

A

the number of losses (fire, theft, collision) that occur within a specific time period, probability of loss

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6
Q

severity

A

the dollar amount of loss for a specific peril (fire, theft, collision)

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7
Q

frequency equation

A

frequency = number of losses / number of exposures

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8
Q

severity equation

A

severity = total losses ($) / number of losses

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9
Q

expected loss equation

A

expected loss = frequency x severity

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10
Q

peril

A

cause of loss (ex: fire, tornado, collision, burglary)

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11
Q

hazard

A

condition that creates or increases the frequency and/or severity of a loss, does not cause a loss

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12
Q

physical hazard

A

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

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13
Q

moral hazard

A

the presence of insurance changes the behavior of the insured (ex: exaggerating the value of insured property, using a hammer to create “hail” damage to a roof)

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14
Q

morale (attitudinal) hazard

A

carelessness or indifference to a loss which increases the frequency and/or severity of a loss (ex: leaving keys in an unlocked car, neglecting a tree limb growing over roof)

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15
Q

legal hazard

A

characteristics of legal system or regulatory environment that increase the frequency and/or severity of a loss (ex: juries in some areas are more sympathetic than other areas)

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16
Q

risk classifications

A

pure vs speculative risk, diversifiable risk, nondiversifiable risk, systemic risk

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17
Q

pure risk

A

2 states: loss or no loss (ex: fire, cancer, dog bites a visitor)

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18
Q

speculative risk

A

3 states: loss, no loss/no gain, gain (ex: investment, gambling, drinking)

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19
Q

can you buy insurance for pure risks?

A

yes

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20
Q

can you buy insurance for speculative risks?

A

no

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21
Q

diversifiable risk

A

affects only individuals or small groups, can be reduced/eliminated through diversification, risks aren’t correlated (fire, theft, collision)

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22
Q

nondiversifiable risk

A

affects the entire economy or large numbers of groups, cannot be reduced/eliminated through diversification, government assistance may be needed to insure, risks are correlated (inflation, unemployment)

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23
Q

systemic risk

A

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

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24
Q

Bridge in London

A

example of systemic risk - wind and people stepping the same way caused the bridge to sway

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25
Q

major types of pure risks

A

personal risk, property risk, liability risk, loss of business income, cybersecurity

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26
Q

which pure risks are relevant to individuals and families?

A

personal risk, property risk, cybersecurity

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27
Q

which pure risks are relevant to businesses?

A

property risk, liability risk, loss of business income, cybersecurity, personal risk

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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, disability, injury, poor health, inadequate retirement income

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30
Q

property risk

A

the 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 damaged by a peril

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32
Q

indirect loss

A

financial loss resulting as a consequence of a direct loss (ex: fire damages your home, you have to pay to live elsewhere while it’s repaired)

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33
Q

liability risk

A

legal liability (financial consequences) resulting from injuries or damages you caused to come else, no upper limit, liens can be placed on income / assets seized (ex: defense costs for lawyer)

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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, it is unable to generate an income

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35
Q

risk control

A

techniques to reduce the frequency or severity of losses

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36
Q

risk financing

A

techniques for funding losses

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37
Q

risk control

A

loss prevention, loss reduction, duplication, separation, diversification, avoidance

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38
Q

risk financing

A

retention, non insurance transfer, insurance

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39
Q

risk management

A

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

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40
Q

loss exposures

A

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

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41
Q

steps in risk management process

A

identify loss exposures, measure and analyze the loss exposures, consider and select the appropriate risk management techniques, implement and monitor the chosen techniques

42
Q

identify loss exposures

A

what assets needs to be protected? what perils are those assets exposed to? most important step, sources: loss history, financial statements, other firms, surveys, inspections

43
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

44
Q

maximum possible loss

A

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

45
Q

probable maximum loss (PML)

A

the worst loss that is likely to happen

46
Q

consider and select the appropriate risk management techniques

A

techniques: avoidance, loss prevention, loss reduction, duplication, separation, diversification

47
Q

risk control - avoidance

A

a certain loss exposure is never acquired (proactive) or an existing loss exposure is abandoned (reactive), frequency is reduced to 0 but may not always be possible and has an opportunity cost

48
Q

risk control - loss prevention

A

measures that reduce the frequency of a particular loss, does not completely eliminate risk (ex: TSA security)

49
Q

risk control - loss reduction

A

measures that reduce the severity of a loss, no effect on the frequency of a loss (ex: recall of products, storm shelter)

50
Q

risk control - duplication

A

having backups or copies of important documents or property available in case a loss occurs (ex: flash drive, spare tire/keys)

51
Q

risk control - separation

A

dividing the assets exposed to loss to minimize the harm from a single event (ex: firewalls in buildings, companies with multiple warehouses)

52
Q

risk control - diversification

A

reducing the change of loss by spreading the loss exposure across different parties, securities, or transactions (ex: having multiple suppliers and customer types)

53
Q

risk financing techniques

A

retention, non insurance transfer, insurance

54
Q

risk financing - retention

A

a firm or individual retains part or all of losses that can occur from a given risk, deductible
retention level: the dollar amount of losses that the individual/firm will retain

55
Q

types of retention

A

unfunded retention: low severity/frequency, not putting money away for retention, just taking money out of checking or net income when needed
funded reserve: setting money aside for risks, for higher frequency risks
deductible: portion of the losses that you pay for out of pocket
captive insurer, self insurance, risk retention group

56
Q

risk financing - retention (captive insurer)

A

insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures
advantages: can help a firm when insurance is expensive or difficult to obtain, lower costs, easier access to reinsurance market, lower tax rate, favorable regulatory environment

57
Q

risk financing - retention (self insurance)

A

a special form of planned retention by which part or all of a given loss exposure is retained by the firm, does not involve forming your own insurance company, part of funded reserve

58
Q

risk financing - retention (risk retention group)

A

group captive that can write any type of liability coverage except employers’ liability, workers compensation, and personal lines; exempt from many state insurance laws (ex: medical malpractice)

59
Q

advantages of risk financing -retention

A

save on loss costs, save on expenses, encourage loss prevention, increase cash flow

60
Q

disadvantages of risk financing - retention

A

possible higher losses, possible higher expenses, possible higher taxes

61
Q

risk financing - non insurance transfer

A

methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party (ex: contracts, leases, hold harmless agreements)
advantages: can transfer some losses that are not insurable, less expensive, can transfer loss to someone who is in a better position to control losses
disadvantages: contract language may be ambiguous, firm is still responsible for loss if the other part fails to pay, insurers may not give credit for transfers

62
Q

risk financing - insurance

A

appropriate for low frequency, high severity loss exposures
advantages: firm is indemnified for losses, uncertainty is reduced, firm may receive valuable risk management services, premiums are income tax deductible
disadvantages: premiums may be costly, negotiation of contracts takes time and effort, the risk manager may become lax in exercising loss control

63
Q

risk financing - insurance (deductible)

A

a specified amount subtracted from the loss payment otherwise payable to the insured

64
Q

risk financing - insurance (excess insurance)

A

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

65
Q

risk financing - insurance (manuscript policy)

A

a policy specially tailored for the firm

66
Q

high frequency, low severity

A

funded reserve (retain), loss prevention

67
Q

low frequency, low severity

A

unfunded reserve

68
Q

high frequency, high severity

A

avoidance, captive or risk retention group, loss prevention/reduction

69
Q

low frequency, high severity

A

insurance, loss reduction

70
Q

hard market

A

insurer profitability is declining, underwriting standards are tightened, premiums increase, and insurance is hard to obtain (usually in this type of market)

71
Q

soft market

A

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

72
Q

implement and monitor the chosen techniques

A

risk management policy statement, RM program should be periodically reviewed and evaluated to determine whether the objectives are being attained

73
Q

risk management policy statement

A

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

74
Q

benefits of risk management

A

enables a firm to attain its pre loss and post loss objectives more easily, society benefits because both direct and indirect losses are reduced, can reduce a firm’s cost of risk

75
Q

insurance

A

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

76
Q

law of large numbers

A

the greater the number of exposures, the more closely the actual results will approach the probable results expected from an infinite number of exposures

77
Q

pooling of losses

A

the spreading of losses incurred by a few over the entire group, reduce variation which reduces uncertainty
standard deviation: average distance from the mean

78
Q

payment of fortuitous losses

A

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

79
Q

risk transfer

A

a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position (ex: car insurance, fire, life/health insurance)

80
Q

indemnification

A

the insured is restored to its approximate financial position prior to the occurrence of the loss (not trying to profit from a loss, restore them back to their original position)

81
Q

characteristics of an ideally insurable risk

A

large number of exposure units: enables the insurer to predict average loss based on the Law of Large Numbers
loss be accidental and unintentional: loss should be outside of insured’s control
loss must be determinable and measurable
loss should not be catastrophic to the insurer
change of loss must be calculable: must be able to calculate average frequency and severity
premium must be economically feasible

82
Q

adverse selection

A

the tendency of people with a higher than average chance of loss to seek insurance at standard rates, which, if not controlled by underwriting, results in higher than expected loss levels (insuring high risk individuals usually due to asymmetric information)

83
Q

asymmetric information

A

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

84
Q

credit based insurance score

A

utilizes a consumer’s credit history to predict the likelihood of future financial losses, ranges from 0 to 1000, the higher the score the less likely to have an insurance loss

85
Q

how to avoid adverse selection

A

eliminate asymmetric information by collecting all of the information that may be relevant to the pricing and adjust the pricing based on this

86
Q

types of private insurance

A

life and health, property and liability

87
Q

private insurance - life insurance

A

pays death benefits to beneficiaries when the insured dies

88
Q

private insurance - health insurance

A

covers medical expenses because of sickness or injury

89
Q

private insurance - property insurance

A

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

90
Q

private insurance - liability insurance

A

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

91
Q

private insurance - casualty insurance

A

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

92
Q

government insurance - social insurance programs

A

financed entirely or in large part by contributions from employers and/or employees, benefits are heavily weighed in favor of low income groups (ex: Social Security, unemployment, Medicare, Medicaid)

93
Q

other government insurance programs

A

FDIC: insures up to $250,000 in the bank
National Flood Insurance Program (NFIP, Fair Access to Insurance Requirements Plans (FAIR), Beach and Windstorm Plans

94
Q

traditional risk management

A

risks evaluated in a “silo” (the unwillingness to share information or knowledge between employees or across different departments within a company) approach

95
Q

evolution of traditional risk management

A

many companies began expanding their risk management programs to include speculative financial risks in the 1990s, some organizations have now gone further in their risk management programs to consider all risks faced by the organization

96
Q

enterprise risk management (ERM)

A

a strategic business discipline that supports 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, considers all risks an organization faces across the entire enterprise, holistic/interconnected view of risk, typically headed by Chief Risk Officer (CRO) and used in large organizations, creates a “risk culture” within the organization in which everyone is responsible for identifying and managing risk

97
Q

ERM - hazard risk

A

tradition risk, management types of risk (pure risks)
RM techniques: insurance, non insurance risk transfer, retention, loss prevention/reduction

98
Q

ERM - operational risk

A

risks arising from day to day business operations: supply chain, manufacturing defects, customer service, cybersecurity, employment practices
RM techniques: multiple suppliers, employee training, customer surveys, dual factor authentication, firewalls, HR department, background checks, employee interview

99
Q

ERM - financial risk

A

risks arising from changing conditions within financial markets: commodity prices, interest rates, foreign exchange rates
RM techniques: buy products in bulk, take advantage when interest rates decrease

100
Q

ERM - strategic risk

A

uncertainty regarding an organization’s goals and objectives, and the organization’s strengths, weaknesses, opportunities, and threats (SWOT), long term

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