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65 Cards in this Set
- Front
- Back
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Paid losses
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Losses that have been paid to, or on behalf of insureds during a given period.
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Loss reserves
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A liability on an insurer's balance sheet that shows the estimated amount that will be required to settle claims that have occurred but have not yet been paid.
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Loss adjustment expense reserves
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Estimates of the future cost of defending and settling claims for losses that have already occurred
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Incurred losses
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The sum of paid loss reserves, and loss adjustment expense reserves.
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Loss development
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The increase or decrease of incurred losses over time
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Loss payout pattern
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A listing of incurred loss payments over time.
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Exposure unit
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A fundemental measure of an exposure that correlates the possibility of a loss with its likely amount.
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Trend factors
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Percentages that are applied to current dollar amounts that restate dollar amounts for the forecasted year.
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Loss development factors
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Percentages applied to aggregate past losses for each year in order to add an amount for the possibility of both late-reported claims and a future increase in the incurred amount for reported claims
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Ultimate loss development factor
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A numeric factor that is applied to the most recent estimate of incurred loss for a specific accident year to estimate the ultimate incurred loss value for that year.
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Frequency probability distribution
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A representation that shows the probability of the various numbers of losses over a certain period, usch as a calender year.
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Severity probability distribution
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A representation that shows the probability of various sizes of each individual loss.
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Total probability distribution
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A representation that shows the probability of total loss outcomes for a given period, such as a calender year, and is constructed by combining the frequency and severity probability distributions.
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Expected value
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The weighted average of all the possible outcomes of a probability distribution
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Describe 3 parts of the accidental loss forecasting process an organization uses to forecast and budget its risk financing costs.
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1. Part 1 - Forecast expected losses by calculating an estimate of the expected losses for the upcoming year based on past data.
2. Forecase probable variation from expected losses by using probability distributions and probability intervals. 3. Estimate cash flow needs by estimating the timing of loss payments. |
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4 steps a risk management professional should complete to prepare a fore cast of expected losses.
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1. Collect and organize past data.
2. Limit individual losses. 3. Apply loss development and trend factors to the data. 4. Forecast losses. |
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Identify the past loss data required to make an accurate loss forecast.
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paid losses, loss reserves, and loss adjustment reserves.
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Explain the purpose of limiting losses when forecasting expected losses
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Individual losses are limited so that the analysis focuses on the layer of losses that have sufficient frequency to be predictable and therefore retainable.
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3 types of probability distributions the analysis of an organization's past loss frequency and severity outcomes yields
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1. Frequency probability distribution - shows the probability of various numbers of losses over a certain period of time.
2. Severity probability distribution - shows the probability of various sizes of each individual loss. 3. Total loss probability distribution - shows the probability of particular total loss outcomes for a given period. |
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Describe how an organization may use probability distributions to measure the effectiveness of a risk control technique
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Effective risk control techniques should reduce actual loss frequency and severity compared to the probable loss frequency and severity indicated in the probablity of particular total loss outcomes for a given period.
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Decribe how to calculate the following when developing forecasts from past losses
a. Expected value b. Mean severity c. Mean total loss distribution. |
a. Expected value - multiply each possible outcome by its probability and sum the results.
b. Mean severity - Multiply each possible outcome by its probability and sum the results. c. Mean of a total loss distribution - To calculate, multiply the mean of the frequency distribution by the mean of the severity distribution. |
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Identify the elements an organization should consider when developing a projection of its cash flow needs
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An organization should consider the estimated total cost of a risk financing plan and the expected timing of cash payments when developing a projection of its cash flow needs.
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Identify the data used by an organization to devlop loss payout patterns
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loss payout patterns are projected based on an organization's own past payout patterns, industry data, or a combination of the two.
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Identify how an organization may use present value analysis
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- To reflect the interest that the budgeted funds will earn until losses are paid.
- When evaluating alternative retention levels. - When evaluating the reasonableness of the insurer's premium charge. - When evaluating accounting reserves placed on past retained losses. |
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Indentify how a risk management professional may use the information generated by loss forecasts
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To budget for retained losses.
To evaluate alternative retention levels. To evaluate insurer premium charges. To update accounting reserves for retained losses that occurred in the past. |
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Identify the assumptions on which accurate loss forecast calculations depend.
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Having past data that are considerable in quantity and relevant.
That the future will essentially be like the past. |
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Explain why a risk charge is often built into an insured's premium
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Risk charge is often built into an insured's premium because insured losses are subject to more variability than retained losses. The risk charge is built into the premium amount to cover any contingencies.
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Self insurance
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A form of retention under which an organization records its losses and maintains a formal system to pay for them
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Informal retention
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A form of retention by which an organization pays for its losses with its cash flow and/or current (liquid) assets but does not anticipate losses and consequently, does not involve formal payment procedures or methods for recording losses.
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Individual self insurance plan
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A retention plan that involves only one organization.
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Group self insurance plan.
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An organization of several similar employers that have formed a not-for-profit association or corporation to which they pay premiums to manage self-insurance of their workers' compensation and healthcare benefits loss exposures.
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Third-party administrator
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An organization that settles claims on another organization's behalf.
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Frequency probability distribution
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A representation that shows the probability of various numbers of losses over a certain period, usch as a calender year.
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Severity probability distribution
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A representation that shows the probability of various sizes of each individual loss.
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Total probability distribution
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A representation that shows the probability of total loss outcomes for a given period, such as a calender year, and is constructed by combining the frequency and severity probability distributions.
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Expected value
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The weighted average of all the possible outcomes of a probability distribution
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Describe 3 parts of the accidental loss forecasting process an organization uses to forecast and budget its risk financing costs.
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1. Part 1 - Forecast expected losses by calculating an estimate of the expected losses for the upcoming year based on past data.
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How does self insurance contrast with informal retention
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because self insurance is a loss retention plan in which an organization has decided to retain losses and requires that the organization keep records of its losses and maintain a formal system to pay for them. Informal retention is a type of retention in which an organization pays for its losses with its cash flow and/or current assets and does not involve formal payment procedures or methods for recording losses
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Explain why an organization using self insurance usually also purchases excess liability insurance
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An organization using self-insurance usually also purchases excess liability insurance to limit the insured organization's exposure to loss to an acceptable level
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Identify characteristics of organizationsfor which self-insurance is appropriate
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An organization for which self-insurance is appropriate are those committed to risk control, able to tolerate risk retention, and those that are willing to devote captial and resources to the program's financing and administration.
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Identify loss exposures for which a self-insurance plan is well suited
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Self insurnce is well suited for financing losses that are paid out over time because it provides a cahs flow benifit to the organization retaining its losses. Loss exposures that are well suited for a self-insurance plan include the following:
Worker's comp General liability Auto liability Auto physical damage Professional liability Flood Earthquake Healthcare benefits |
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2 types of self insurance plans
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1. Individual self insurance - used to address a number of loss exposures.
2. Group self-insurance - used only to address worker's comp loss exposures and healthcare benefits |
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Decribe conditions under which an organiztion can self insure its loss exposure
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An organzation is able to self-insure its loss exposures provided the state in which it operates permits self-insurance plans, and that the organization satisfies the state's requirements for self-insurers
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Describe how a group self-insurance plan helps an organzation manage its cost of risk
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A group self insurance plan helps an organzation manage its cost of risk through economies of scale in administration, claims handling, and the purchase of excess liability insurance (or reinsurance)
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Identify the activities involved in the adminstreation ofa n individual self insurance plan.
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Activities involved in the administration of a self-insurance plan include funding, recordkeeping adjusting claims, reserving losses, managming litigation, making regulatory fillings, paying taxes, assessments, and fees; and maintaining excess insurance.
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List the activities that may be performed by a claim representative in the process of claim settlement
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Investigate an accident scene
Verify a claimant's statement of salary with the claimant's employer Compare claimant's statement of the circumstances surrounding an accident with the police report's. |
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Identify the conditions set forth by generally accepted accounting principles that requre the establishment of a loss reserve.
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1. The loss occurred before the date of the financial statements.
2. The amount that will be paid on the loss can be reasonably estimated. |
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List the major advantages of self-insurance plans
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Control over claims
Risk control Long-term cost savings. Cash flow benefits |
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Explain how the use of a self-insurance plan encourages risk control
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Using a self-insureance plan encourages risk control because the organiztion directly pays the cost of its own losses and therefore has an incentive to prevent and reduce them.
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Explain why an organization's long-run costs using self-insurance tend to be lower than the cost of transfer
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An organiztion's long-run costs using self-insurance tend to be lower than the cost of transfer because the organization does not have to contribute to an insurer's overhead ocsts and profits, does not have to pay an insuer's risk charge, and avoids premium taxes and residual market loadings.
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List the major disadvantages of self insurance
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Uncertainty of retained loss outcomes.
Administrative requrements. Deferral of tx deductions. Contractural requrements |
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Describe how the following bases of loss retention affect self insured retention limits.
a. Per occurrence basis. b. Per accident basis c. Aggregate stop-loss basis |
a. Per occurrence basis - A limit applies to the amount that the self insured organization will pay for each loss occurrence, regardless of the number of lcaims arising from a single occurrence.
b. Per accident basis - A limit applies to the maount that the self insured organization will pay for each or accident, regardless of the number of claims (losses) arising from a single accident. c. Aggregate stop-loss-basis - A limit applies to the amount that the self-insured organization will pay in total for all loss occurrences or accidents that take place during a perid of time. |
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Single parent captive or pure captive
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A captive insurer owned by one company that insures all or part of the loss exposures of that company.
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Group captive
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A captive insurer owned by a group of compaines, usually operating similar business, rather than a single parent.
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Association captive
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A group captive that is sponsored by an association
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Risk retention group
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A group captive formed under the requirements of the U.S. Liability Risk Retention Act of 1986 to provide liability coverage
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Agency captive
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A type of group captive that is owned by insurance agents or brokers rather than by the organiztions insured
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Rent-a-captive
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An arrangement in which an organiztion rents capital from a captive insurer, to which it pays premium and receives reimbursement ofr its losses.
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Protected cell comapny
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A group captive in which each participant pays premiums and receives reimbursement for its losses from, as well as credit for, underwriting profits and investment income, similar to a rent-a-captive
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Risk shifting
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The transfer of risk of loss to an insurer.
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Risk distribution
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The sharing of risk by an insurer among its insureds
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Brother sister relationship
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The relationship that exists when subsidaries are owned by the same parent company
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Third party business
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Business that is not directly related to the captive's parent(s) or its subsidiaries.
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Fronting comapny
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A licensed insurer that issues an insurance plicy and reinsures the loss exposres back to a captive insurer owned by the insured organiztion.
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Direct writing captive insurer
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A captive that issues policies directly to its parent(s) and affiliates and does not use a fronting company.
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