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43 Cards in this Set
- Front
- Back
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Pool
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An association of persons or organizations that combine their resources to economically finance recovery from accidental losses
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Law of large numbers
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A mathematical principle stating that when the number of similar, independent exposure units increases, the relative accuracy of predictions about future outcomes based on these exposure units also increases.
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Risk Charge
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An amount over and above the expected loss component of the premium to conpensate the insurer for taking the risk that losses may be higher than expected.
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Counterparty risk
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The risk that the other party to an agreement will default
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Identiy the circumstances in whichpooling reduces risk
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Pooling reduces risk when the pooled losses are independent. Losses are independent if they are not subject to a common cause of loss.
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Describe the effect of pooling on an organization's expected accidental losses
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Pooling does not change accidental frequency or severity, but does reduce the distribution of losses facing the organization and reduces the probability of extreme outcomes.
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Describe the typical distribution of positively correlated losses
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Losses that are positively correlated result in a distribution of losses with greater variability. Consequently, losses are less predictable.
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Identify two ways that insurance and pooling differ
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(1) insurance transfers risk from the insured to the insurer in exchange for premiums.
(2) The insurer has additional financial resources from which it can fund losses. |
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Describe the services, in addition to risk transfer, that are often provided by insurers
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(1) Risk control services - assessing and controling risk.
(2) Claim and legal services |
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List 6 characteristics of an ideally insurable loss exposure
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1. Pure risk - involves pure, not speculative risk.
2. Fortuitous losses - subject to fortuitous loss from the insured organization's standpoint. 3. Definite and measurable - subject to losses that are definite in time, cause and location. 4. Homogenous - one of a large number of similar exposure units. 5. Independent and not catastrophic - not subject to a loss that would simultaneously affect many other similar loss exposures; loss would not be catastrophic. 6. Affordable - premiums are economically feasible |
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Pool
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An association of persons or organizations that combine their resources to economically finance recovery from accidental losses
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Law of large numbers
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A mathematical principle stating that when the number of similar, independent exposure units increases, the relative accuracy of predictions about future outcomes based on these exposure units also increases.
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Risk Charge
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An amount over and above the expected loss component of the premium to conpensate the insurer for taking the risk that losses may be higher than expected.
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Counterparty risk
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The risk that the other party to an agreement will default
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Identiy the circumstances in whichpooling reduces risk
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Pooling reduces risk when the pooled losses are independent. Losses are independent if they are not subject to a common cause of loss.
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Identify 6 characteristics of an ideally insurable loss exposure.
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1. Pure risk - involves pure, not speculative risk.
2. Fortuitous losses - subject to fortuitous loss from the insured organization's standpoint. 3. Definite and measurable - subject to losses that are definite in time, cause, and location. 4. Homogenous - one of a large number of similar exposure units. 5. Independent and not catastrophic - not subject to a loss that would simultaneously affect many other similar loss exposures; loss would not be catastrophic. 6. Affordable - premiums are economically feasible. |
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Describe characteristics and insurability of each of pure risk and speculative risk.
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Pure risk - is a chance of loss or no loss, but no chance of gain.
Is generally insurable. Speculative risk - is a chance of loss, no loss, or gain. Not insurable |
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Indentify ways in which an insurer may minimize the financial effect of potential catastrophic losses.
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Limiting the accumlated value of insured properties in a particular area.
Purchase reinsurance Product diversity |
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6 Characteristics of an ideally insurable loss exposure to evaluate the commercial insurability of loss caused by flood.
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Pure Risk - Flood involves pure risk; that is, there is no means to benefit from the occurrence of a flood.
Fortuitous losses - Flooding is often fortuitous, such as when rain causes a river to overflow in banks. However, flooding may be caused when a dam fails, which may not be accidental from the insured's perspective. Certain areas are prone to flooding, while others definitely are not. (3) Definite and measurable - flooding is an event that is obvious when it occurs. (4) Homogenous - Preoperty that is subject to damage by flooding is relatively homogenous or can be made more so through a classification scheme. (5) Independent and not catastrophic - Flooding does cause catastrophic loss. This is the primary reason that property exposed to flood is considered to be uninsurable. (6) Affordable - Because flood zones, or areas prone to flooding, are easily recognizable, unsubsidized property pricing for flood is usually not affordable. |
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Describe the coverage forms that may be used to insure commercial property.
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Building, personal property and businessowners form.
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Explain why risk management professionals are interested in covered causes of loss and exclusions.
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Risk management professionals need to understand the coverage provided by insurance. They are interested in covered causes of loss and exclusions because exclusions can create coverage gaps.
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2 versions of ISO Commercial General Liability Coverage Form.
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1. Occurence coverage form - covers bodily injury or property damage that occurs during the policy period, regardless of when claim is actually made against the insured organization.
(2) Claims-made coverage form - covers bodily injury or property damage that occurs after the retroactive date stated in the policy, but only if claim for the injury or damage is first made at some time during the policy period. |
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Coverages provided using the corresponding ISO commercial auto coverages form.
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(a) Business Auto Coverage Form.
(b) Garage Coverage Form - designed to meet the special needs of automobile dealers and to privode garagekeepers coverage. (c) Truckers Coverage Form - designed to insure auto liability and physical damage loss exposures of individuals or orgainzations in the business of transporting the property of others.. |
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Identify the main policy form used by NFIP to provide flood insurance on commercial buildings and contents.
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Standard Flood Insurance Policy
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Decribe the two insuring agreements traditionally contained in directors and officers liability policies
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Covers directors and officers of the insured corporation for their personal liability resulting from a "wrongful act".
covers the sums that the insured is required or permitted by law to pay to the directors and officers as indemnification. |
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Indentify the 3 main purposes of commercial umbrella liability policy
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1. Provide additional amount of insurance when damages for which the insured is held liable exceed the per occurrence limit in an underlying liability policy
(2) To pay liability claims that are not covered in full by an underlying policy because the aggregate limit has been deleted or exhausted. 3. To cover claims that are outside the scope of the coverage of underlying policies. |
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Describe the roles of the following parties invloved in a surety bond.
(a) Obligee (b) Principal (c) Surety |
(a) Obligee - the party to whom the principal and surety are obligated.
(b) Principal - Obligated to perform in some way for the benefit of the obligee. (c) Surety - Guarantees to the obligee that the principal will fulfill the underlying obligations. |
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4 major categories of surety bonds:
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1. Contract bonds - guarantee the performance of public or private contracts
2. License and permit bonds - required by federal, state or municipal governments as prerequisites to engaging in certain business activities. 3. Court bonds - prescribed by statute. 4. Miscellaneous bonds - often support private relationships and unique business needs. |
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Decribe the attributes of nonfiled commercial inland marine insurance.
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Non-filed inland marine insurance uses forms and rates that are not filed with regualtory authorities. Allows insurers to tailor inland marine forms and rates to fit particular loss exposures that are not adequately insured under other property forms
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Explain how crime insurance complements commercial property insurance.
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most commercial property forms exclude coverage from money and securities.
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Identify what some organizations consider to be the most valuable aspect of equipment breakdown insurance
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Loss control services
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Describe the purpose for which difference in conditions insurance is usually purchased.
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Difference in conditions insurance was designed as means of providing "all risks" coverage to organizations whose property insurance provided only basic or broad form causes of loss. More often, it is purchased to provide the following:
Flood and earthquake coverage for loss exposures that are not covered in other property policies. Excess limits over flood and earthquake coverages included in other property policies. Coverage for loss exposures not covered in other property policies. Coverage for oversease property. |
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Advangtages of using insurance as a risk financing technique inlcude the following:
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Reduces financial uncertainty from accidental losses.
Provides access to claim handling services. Offers access to risk control services. Satisfies creditor requirements. Satisfies legal requirements. Satisfies business requirements. Offers tax-deductible premiums. Is flexible in design Is easy to exit. |
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Disadvantages of using insurance as a risk financing technique include the following:
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Insurance premiums include insurer expenses, profits, and risk changes.
Insurance premiums diminish cash flows. Insurance coverage is not a complete transfer of hazard risk. Insurnace price and availability at desired terms and conditions fluctuate. |
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The value of insurance services commonly provided to policy holders includes:
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a. Claim-handling expertise has value because insurers are adept at handling volumes of claims, complex claims, and claims requiring special expertise. In addition, insurer claim-handling services are considered to be impartial.
(b) Risk control efforts have value and might result in expense savings for an organization because an insurer's efforts are aimed at reducing the frequency or severity of losses or making losses more predictable. |
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Underwriting cycles indicate the following 2 trends in insurance pricing and availability:
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1. A soft market underwriting cycle is characterized by low rates, relaxed underwriting, and underwriting losses for insurers.
(b) A hard market underwriting cycle is characterized by high riates, restrictiv e underwriting, and underwriting gains for insurers. |
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Insurance binder:
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A temporary oral or written agreement to provide insurance coverage until a formal written insurance policy is issued.
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Monoline policy
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Covers a single type of insurnace.
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Package policy
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covers more than one insurance policy
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Coverage part
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One or more forms that, together, provide coverage for a type of insurance.
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Self contained policy
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A single document that contains all of the agreements between the insured and insurer that forms the complete policy.
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Endorsement
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A document that ammends an insurance policy.
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Modular policy
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An insurance policy that consists of several different documents, none of which itself forms a complete insurance policy.
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