Cpcu 510 - Assignment 3

Front 1

Balance Sheet

Back 1

A statement of an organization's financial conditions showing assets, liabilities, and owner's equity as of a particular date.

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Central Tendency
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Back 2

************************************The one outcome that best represents all possible outcomes that are included in a probability distribution; 3 ways to measure the central tendency are mean, median and mode.
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Coefficient of Variation
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Back 3

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Quotient derived by dividing the standard deviation of a distribution by the mean of the distribution.
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Dispersion
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Back 4

************************************Extent to which values are varied and not concentrated around the distribution's expected value, or mean.
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Front 5

Empirical probability

Back 5

Estimated by studying the loss experience of a historical sample, the accuracy of the probability is affected by sample size and adequate representation.

Front 6

Expected Value

Back 6

The mean of an empirical distribution; weighted average of all probability distribution's possible results

Front 7

Hazard Analysis

Back 7

Identifying and analyzing conditions that make loss exposures more frequent or severe.

Front 8

Hold Harmless agreement / Indemnity Contract

Back 8

A contract in which one party (the indemnitor) agrees to assume the legal liability of a second party (the indemnitee)

Front 9

Income Statement

Back 9

A financial report showing profit or loss for a particular period; computes expenses incurred with revenues generated.

Front 10

Indemnification

Back 10

The process that restores a person or business to the financial condition he or it was in before the loss.

Front 11

Law of Large Numbers

Back 11

A mathematical principle that states that as there is an increase in the number of independent events, the actual relative frequency of each of the potential results more nearly approaches the relative frequency expected theoretically for that outcome.

Front 12

Maximum Possible Loss (MPL)

Back 12

An estimate of the largest possible loss that might occur from a single event or at one location

Front 13

Mean

Back 13

The average of numbers; the sume of the values in a sequence of value divided by the number of values

Front 14

Median

Back 14

The middle value of a sequence of values with an odd number of values; for a sequence of values with an even number of values, the mean of the 2 middle values.

Front 15

Mode

Back 15

The distribution value that occurs most often

Front 16

Normal Distribution

Back 16

Type of symmetrical probability distribution used to forecast the variability of events; on a graph, a normal distribution shows a bell-shaped curve.

Front 17

Probability Analysis

Back 17

A method used to forecast events that affect a company's operations such as business and accidental loss; the analysis is based on the assumption that the events are controlled by a constant probability distribution.

Front 18

Probability Distribution

Back 18

Table or graph presentation of all potential outcomes of a set of circumstances and the probability that each outcome will occur.

Front 19

Probable Maximum Loss (PML)

Back 19

The estimated value of the largest loss that is likely to occur.

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Standard deviation
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Back 20

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The average of the differences (i.e. deviations) between the potential results and the result's expected value (mean); the square root of the average of the squares.
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Front 21

Statement of cash flows/ Statement of sources and uses of funds

Back 21

A financial statement showing an organization's cash receipts and cash payments during a specific period for operating, investing, and financing activities.

Front 22

Theoretical Probability

Back 22

Projection of the probability of a particular outcome based on theoretical principles rather than actual observation of outcomes.

Front 23

************************************Methods of identifying Loss exposures
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************ ICED*****************
1) In-person inspection of facilities
2) Compliance reviews (conducted by accountants and Attorneys...can be expensive in terms of $ and time)
3. Experts inside and outside the organization can ID loss exposures, esp. in the area of Hazard Analysis
4. Document Analysis
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Front 24

What are the main types of documents used to ID loss exposures?

Back 24

Memory Aid: CO-FLAIR
1. Contracts
2. Organization's records and policies
3. Flowcharts and organizational charts
4. Loss histories
5. Accounting records and financial statements
6. Insurance policies
7. Risk assessment checklists and questionnaires

Front 25

Documents Examined to ID loss exposure: Contracts. How can contracts generate liability loss exposures?

Back 25

1. A business can accept another party's loss exposures thru a hold harmless areement
2. A business can fail to honor a valid contract (manufacturer fails to deliver contracted goods)

Front 26

Give a description of Flowcharts and Organizational charts, and how they aid in identifying loss exposures.

Back 26

1. Flowcharts - show flow of resources as well as relationships b/w operations - can indicate where loss exposures exist
2. Organizational Charts - personnel who may create personnel loss exposures. Allow us to track how info flows

Front 27

What is one disadvantage of using Loss Histories?

Back 27

They are incomplete because they only reflect past losses, and don't take into consideration any post-loss changes we may have made

Front 28

What can new or small organizations use to ID exposures?

Back 28

Loss histories for comparable organizations

Front 29

How can Accounting Records and Financial statements.
help us ID loss exposures?

Back 29

They ID current and past exposures that may indicate loss exposure in the future.

Front 30

List types of Accounting Records and Financial Statements.

Back 30

1. Balance Sheets
2. Income Statements
3. Statement of Cash Flows

Front 31

What is the main advantage of using Accounting Records and Financial Statements to ID loss exposures?

Back 31

They help us ID major areas of loss exposure (ex: Asset section of balance sheet can ID property loss exposures)

Front 32

What is the main disadvantage of using of using Accounting Records and Financial Statements to ID loss exposures?

Back 32

They ID most major categories of loss exposure (except personnel) but they do not ID INDIVIDUAL loss exposures (ex: property is ID'd a loss exposure, but we don't know which one specifically)

Front 33

Documents Examined to ID loss exposure: Risk Assessment Checklists and Questionnaires.
What are 2 disadvantages of Quesionnaires?

Back 33

1. Take time to fill out
2. May not recognize all loss exposures (if standardized, may miss loss exposures that apply to a specific industry)

Front 34

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What are the dimensions used to analyze a loss exposure? (considered jointly & separately)
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Back 34

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1. Loss frequency
2. Loss severity ($ amount of a specific loss)
3. Total dollar losses for all occurrences in a given period
4. Timing of losses and payments
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Front 35

Loss Frequency vs. Relative frequency

Back 35

*Loss frequency = the number of losses within a given period
*Relative frequency = number of losses occurring in a given period relative to number of exposure units.
*These 2 are the same with one exposure unit, but not with multiple units (ex: 50 veh accidents in a fleet of 5,000...loss freq = 50, but relative freq = 50/5,000 (.01 per veh per year)

Front 36

Relative frequency can be estimated based on ____________. Give examples.

Back 36

Previous experience
Example: Auto accidents per mile driven, injuries per person per hour (workers com)

Front 37

Accuracy of data for loss frequency is influenced by _____________________.

Back 37

The law of large numbers

Front 38

For low-frequency, high-severity incidents, how are predictions made, and are they useful?

Back 38

Even large organizations lack sufficient exposure units to make good prediction, but even predictions with a wide margin of error are better than none if we are aware of limitations.

Front 39

What 2 types of estimates are used to determine Loss Severity?

Back 39

1. Maximum Poss Loss (MPL): an estimate of the largest possible loss that might occur from a single event or at one location
2. Probable Maximum Loss (PML): The estimated value of the largest loss that is likely to occur.

Front 40

Which is usually lower, PML or MPL? Why?

Back 40

PML is usually much lower than MPL.
Ex: With fire damage, MPL is usually the total building and contents value, whereas PML is much less because of sprinkler systems and fire departments.

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The Prouty Approach
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Back 41

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A method of risk exposure analysis that tells us how to treat loss exposures by classifying loss frequency and severity into categories.
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Front 42

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The Prouty Approach: Loss frequency categories
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Back 42

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1. Almost nil (no possibility)
2. Slight (possible, not likely)
3. Moderate (occasional)
4. Definite (regular)
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Front 43

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The Prouty Approach: Loss severity categories
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Back 43

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1. Slight (loss easily absorbed)
2. Significant (must finance part of loss)
3. Severe (must finance most of loss to survive)
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Front 44

There is usually an __________ relationship between loss frequency and severity. What does this mean?

Back 44

Inverse
The most severe losses occur less often

Front 45

Activities with slight-value losses that most likely will occur will....

Back 45

not need to be avoided

Front 46

Activites with significant- or severe-value losses will tend to...

Back 46

be avoided even if they have almost no chance of occurring.

Front 47

Do minor, frequent losses that result in significant cumulative losses (ex: shoplifting) need risk managment attention?

Back 47

YES!
They need as much risk managment attention as large, infrequent losses (ex: fire)

Front 48

Define total dollar losses

Back 48

The total dollar amount of losses for all occurrences in a given period

Front 49

Why is timing of payments so important?

Back 49

1. When a loss is counted affects treatment for tax and accounting
2. Money held in reserve can earn interest

Front 50

When are property loss payments usually made?

Back 50

Soon after losses

Front 51

When are liability loss payments usually made?

Back 51

Can be delayed depending on litigation

Front 52

When are disability loss payments made?

Back 52

May be paid over an extended period.

Front 53

What does credibility of data refer to?

Back 53

The level of confidence that existing data will accurately indicate future losses

Front 54

What 2 issues affect data credibility?

Back 54

1. Age of data
2. Whether data are based on actual or estimated losses

Front 55

4 characteristics of data that make the discovery of patterns in past data possible

Back 55

CROC
1. Organized
2. Consistent
3. Relevant
4. Complete

Front 56

What does it mean for data to be organized?

Back 56

Loss data should be organized in an array (listed in decreasing or increasing value) to reveal clustering by severity, and to call attention to big losses

Front 57

In what 2 areas must data be consistent?

Back 57

1. Collection: must use the same technique or source (ex: rounding/estimating)
2. Must be adjusted for price level changes and expressed in constant dollars using a price index to account for inflation

Front 58

We use indexing factors on a/an _________ basis.

Back 58

Annual

Front 59

Can losses recorded in different periods without adjusting for inflation be compared? Why or why not?

Back 59

No...because inflation will cause similar losses to be recorded at very different amounts.

Front 60

Probability analysis is useful for organizations with what?

Back 60

*A large volume of data on past losses
*Stable operations

Front 61

What is the assumption of probability analysis?

Back 61

That future events will repeat past events to some degree.

Front 62

Probability

Back 62

The relative frequency with which an event is anticipated to occur over a long period in a stable environment

Front 63

4 characteristics of probabilities

Back 63

1. The probability of a comletely impossible event: 0
2. The probability of a definitely certain event: 1.0
3. The probability of every event that is neither definitely certain nor completely impossible: greater than 0 but less than 1.0.
4. Probabilities can be expressed as a %, fraction, or decimal.

Front 64

Compare empirical probability and Theoretical probability

Back 64

*Empirical - estimated by studying the loss experience of a historical sample
*Theoretical - projection of probability of an outcome based on theoretical principles not actual observations

Front 65

Example of Theoretical probability

Back 65

If a coin is tossed a number of times, there is a theoretical probability of an equal number of head and tails because one side is heads and the other side is tails.

Front 66

For probability analysis, what are the 3 data sources?

Back 66

1. Loss experience of own organization
2. Loss experience of similar organizations
3. National data from insurance rating organizations, insurance companies, and other national organizations.

Front 67

Rules of Probability Distribution

Back 67

1. The sum of probabilities must be 1.0
2. Mutually exclusive: only 1 possible outcome exists
3. Collectively exhaustive: possible outcomes are the only possible result...the outcomes exhaust all possibilities
4. Law of large numbers applies

Front 68

What 3 criteria must be met for the Law of Large Numbers to apply to future forecasts?

Back 68

1. The events have occurred at an earlier time under similar conditions and resulted from basic, unchanging forces
2. The event is anticipated to occur again at some point in the future under the same coditions
3. The events are numerous, independent of one another, and essentially identical.

Front 69

Sample Probability Distribution Table

Back 69

Front 70

Skewness

Back 70

Distribution is either symmetrical (hump in the center) or asymmetrical (hump to one side, and long tail on the other side)

Front 71

Symmetrical Distribution

Back 71

Front 72

Positively Skewed

Back 72

Front 73

Negatively Skewed

Back 73

Front 74

Negative skewed distribution happens__________. Give an example

Back 74

only rarely.
Example: unprotected properties where fire, flood or explosion losses are total

Front 75

What is the most frequent distribution pattern? Give an example

Back 75

Positive skewed distribution
Example: loss of protected property by fire, theft, or flood.

Front 76

What % of outcomes in a normal distribution are within 2 standard deviations above or below the mean?

Back 76

95.44%

Front 77

Mean vs. Expected Value

Back 77

*Mean is found by weighing each observed result by the frequency with which the result happens
*Expected value is found by weighing each possible result by its probability

Front 78

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List a normal distribution's standard deviation
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Back 78

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*68.26% of all outcomes are one standard deviation or less from the mean
*95.44% are 2 standard deviations or less from the mean
*99.74% are 3 standard deviations or less from the mean
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Front 79

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Continuous probability distributions for losses
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Back 79

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The number of possible outcomes can be any number within a certain range of numbers.
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Front 80

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Discrete probability distributions for losses
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Back 80

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A certain number of possible outcomes exists
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Front 81

Probability density functions

Back 81

Horizontal axis represents possible outcomes, where the vertical represents the probability of those outcomes.

Front 82

The probability density functions must equal _______

Back 82

one