Section 1 - Risk Financing Fundamentals Flashcards
What Risks are Insurable (Underwriter Perspective)
C N SUM (I’m seeing some risk here)
Calculable reasonably to the industry.
Not catastrophic (likely to affect many people at the same time)
Shared by Many
Unexpected / unintended, Fortuitous risk
MONEY: Generates enough premium by many to pay for losses by a few
What Risks Are Insurable (perspective of a risk manager)
SSCCA
Severity is crippling
Services provided by insurer more efficient
Calculating Risk is difficult
Cost of premium vs cost of retaining risk
Appetite is being exceeded
3 Risk Financing Options
Retention
Transfer Financial Responsibilities
Insurance
Retention - Two Types
Active Retention (Planned):
- Funding could come from reserves or the general budget
Passive Retention (Unplanned)
- Adding coverage or adjusting budget as a reaction to an event that happened (seeing someone else have a claim)
2 Ways to Transfer Financial Responsibility
Transfer control or responsibility of an exposure
Transfer indemnification or financial responsibility
ALAE Definition (Allocated Loss Expense)
All expenses directly assigned to or arising out of a particular claim
ULAE Definition (Unallocated Loss Expense)
Salaries / overhead
IBNR (Incurred but not reported) and its 2 Types
Claims not reflected in the case reserve
Pure IBRN: Claim occurred but hasn’t been reported
Broad / Bulk IBRN: Additional development in existing claim.
Incurred Losses Definition
= Paid + reserves
Written Premium Definition
Total premiums on all policies written during specific period of time.
Earned Premium
Amount of premium EXPIRED during the course of a policy
Unearned premium
Portion the insurance company possess but does not own.
Ultimate Losses
Final value of loss after reached settlement
Loss Reserve
Estimate on liability for unpaid claims that have occurred, including IBNR losses, losses due but not paid, and amounts not yet due
Case Reserve
Amount the claims adjuster puts on an individual claim that has not yet been paid; no provision for development or IBNR
Experience modifier
Difference between insured’s actual experience and the expected experience of someone in that class.
Budgeted Retention Definition
Portion of expected losses the org is willing and able to retain
Tolerance Corridor
the marginal retention beyond the budgeted retention an organization may also choose to retain. Everything above that is external financing.
Law of Large Numbers
Actual outcomes approach expected outcomes to more information is available.
What does loss distribution curve look like
Skewed distribution. Doesn’t appear as a typical bell curve.
Large number of small claims
Small number of large claims
3 Measures of Central Tendency
Mean
Median
Mode
2 Measures of Dispersion
Range: Difference between smallest and largest value in a dataset
Standard Deviation: Amount of variation or dispersion in a dataset. The more deviation the more risky the data set (unpredictable)
Central Limit Theorem
A sample can be treated as if it were drawn from a normal distribution if it uses an appropriately large number
The Empirical Rule for Normal Distributions
+/- 1 Deviation is 68% level of confidence
+/- 2 Deviations is 95% Level of confidence
Probability Weighted Mean Definition
Gives certain data points relative merit based on certain factors
