Vcu Fire 333 Test 1

Front 1

Uncertainty

Back 1

Involves having two potential outcomes for an event or situation.

Front 2

Risk

Back 2

The uncertainty about a future outcome, particularly the consequences of a negative outcome, which can be behavioral, psychological, or financial

Front 3

Role of Risk in Decision making

Back 3

Risk permeates the spectrum of decision making from goals of value maximization to goals of insolvency minimization.

Ignoring risk represents mismanagement of risk in the opportunity-seeking context.

Managing risks associated with the context of minimization losses has succeeded more than managing risks when we use an objective of value maximization

Front 4

Risk Management

Back 4

The essence of it is to manage the negative consequences of the uncertain future.

Front 5

Risk Averse

Back 5

Someone who shies away from risk.

Economists and risk management professionals consider most people to be risk averse.

Front 6

Risk Seeker

Back 6

Will enter into an endeavor as long as a positive long run return on the money is possible, however unlikely.

Front 7

Risk Neutral

Back 7

One's risk preference lies between the extremes of risk averse and risk seeking.

Most widely held or public companies are risk neutral.

Front 8

Diversification

Back 8

Take actions that are seemingly not related or have opposite effects

To invest in as many possible unrelated products or entities such that the impact of any one event decreases the overall risk.

Front 9

Anticipated Variability

Back 9

An expected deviation of an occurrence from what they expect - also known as anticipated variability.

Front 10

Exposure

Back 10

The enterprise, property, person or activity facing a potential loss

Front 11

Categories of Exposure

Back 11

1) Risks of Nature
2) Risks related to human nature(theft,embezzlement,fraud)
3) Man-made risks
4) Risks associated with data and knowledge
5) Risks associated with the legal system (liability)
6) Risks related to large systems: governments, armies, large business organizations, political groups
7) Intellectual Property

Front 12

Pure Risk

Back 12

Features some chance of loss and no chance of gain (ex fire risk, flood risk, etc)

Front 13

Speculative risks

Back 13

Feature a chance to either gain or lose (ex investment risk, reputational risk, strategic risk)

Front 14

Hedging

Back 14

Activities that are taken to reduce or eliminate risks

Front 15

Securitization

Back 15

Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security.

Front 16

Risk retention

Back 16

When a firm retains its risk, self-insuring against adverse contingencies out of its own cash flows.

Front 17

Enterprise risk management (ERM)

Back 17

the simultaneous consideration of all risks and the management of risks in an enterprise-wide (and risk-wide) context.

Front 18

Consequential or indirect losses

Back 18

nonphysical losses such as loss of business (ex a firm losing clients because of street closure)

Front 19

Property loss exposures

Back 19

Associated both with real property (buildings or automobiles) and the contents of a building

Due to accidents or catastrophes such as floods or hurricanes

Front 20

Liability Loss

Back 20

Caused by a third party who is considered at fault.

Responsible party may become legally obligated to pay for injury to persons or damage to property.

Front 21

Catastrophic risk

Back 21

Concentration of strong, positively correlated risk exposures.

Front 22

Non-accidental risk

Back 22

A loss that is catastrophic and includes a large number of exposures in a single location is considered a nonaccidental risk

Front 23

Fundamental risk or systematic risk

Back 23

Pervasive and affect the whole economy, as opposed to accidental risk for an individual

Systematic and nondiversifiable

Front 24

Diversifiable risks

Back 24

Risks whose adverse consequences can be mitigated simply by having a well-diversified portfolio of risk exposures

Front 25

Idiosyncratic

Back 25

Views as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified

Front 26

E-risk

Back 26

Generated by the extensive use of computers, e-commerce and the internet

Front 27

Perils

Back 27

"The cause of loss"

Front 28

Natural perils

Back 28

Causes of losses over which people have little control

Front 29

Human perils

Back 29

Causes of losses that lie within individual's control

Front 30

Economic perils

Back 30

Causes of losses resulting from the state of the economy

Front 31

Noninsurable perils

Back 31

May be considered catastrophic to an insurer

Front 32

Hazards

Back 32

Conditions that increase the cause of loss

Front 33

Frequency

Back 33

The number of losses during a specified period

Front 34

Severity

Back 34

The average dollar value of a loss per claim

Front 35

Physical hazards

Back 35

Tangible environmental conditions that affect the frequency and/or severity of loss (ex slippery roads, old wiring)

Front 36

Intangible Hazards

Back 36

Attitudes and nonphysical cultural conditions can affect loss probabilities and severities of loss

Front 37

Moral Hazard

Back 37

Hazards that involve behavior that can be construed as negligence bordering on criminal

Front 38

Morale Hazards

Back 38

Hazards that involve attitudes of carelessness and lack of concern

Front 39

Fair value

Back 39

The numerical average of the experience of all possible outcomes; also called the "expected value."

Front 40

Expected value

Back 40

=(probability) x (respective gain or loss)

Front 41

Range

Back 41

Distance between the highest possible outcome value to the lowest in a distribution

Front 42

Variance

Back 42

calculated by individually squaring the deviation of each possible outcome from the expected value, and multiplying this result by its respective probability or likelihood of occurring, and then summing up the resulting products.

Front 43

Standard deviation

Back 43

=square root of variance

Front 44

Coeffecient of variation

Back 44

standard deviation of a distribution divided by its mean

Front 45

Semivariance

Back 45

average square deviation of values in a distribution

Front 46

Value at Risk (VaR)

Back 46

defines as the worst-case scenario dollar value loss.

Front 47

CAPM's Beta Measure of Nondiversifiable Portfolio Risk

Back 47

provides a measure of how the return on an asset systematically varies with the variations in the market, and consequently a measure of systematic risk

Front 48

rf

Back 48

risk free return

Front 49

β

Back 49

Beta; indicates how the stock moves with the general market

Front 50

Rm – rf

Back 50

Indicates the current state of the market

Front 51

ε

Back 51

random factor

Front 52

βA*(Rm - rf )

Back 52

Risk premium

Front 53

The variation of asset returns with respect to the market returns is assumed to be linear and so the general framework is expressed as

Back 53

RA= rf + βA*(Rm - rf ) + ε

Front 54

Risk Management

Back 54

Includes the process of identifying, assessing, measuring, and evaluating alternative ways to mitigate risks

Front 55

Risk map

Back 55

A visual tool that profiles all the risks

Front 56

Self-insuring

Back 56

Retaining risks within the firm and paying claims in-house requires additional personnel within the risk management function

Front 57

Functions of CRO or financial risk managers

Back 57

1) Integrating the firm's silos, or separate risks, into a holistic framework
2) Insurance and loss control
3) Using specialized tools to keep cash flow in-house
4) Addressing the entire risk map in the realm of nonpure risks
5) Creating the risk management guideline for the firm

Front 58

Risk Management Process

Back 58

1) Identifying risks
2) Assessing them
3) Forecasting future frequency and severity of losses
4) Mitigating risks
5) Finding risk mitigation solutions
6) Creating plans
7) Conducting cost-benefit analyses
8) Implementing programs for loss control and insurance

Front 59

Risk Profiling

Back 59

Evaluates all the risks of the organizations and measures the frequency and severity of each risk

Front 60

Risk Mapping

Back 60

displays the results of risk profiling graphically, involves charting entire spectrums of risk, not individual risk silos from each seperate business unit

Frequency is on the X axis, Severity on the Y

Front 61

Four basic risk categories

Back 61

Hazard Risks, Financial Risks, Business Risks, and Operational Risks

Front 62

Hazard Risks

Back 62

Natural and man-made risks

Found in the low frequency/high-severity quadrant

Front 63

Financial Risks

Back 63

Arise from changing market conditions involving prices, volatility, liquidity, credit markets, currency exchange, and general market conditions.

Front 64

Business Risks

Back 64

Like reputation risk

Found in the high frequency/high severity quadrant

Front 65

Operational Risks

Back 65

Those relating to the ongoing day to day business activities of the organization

Found in the low-frequency/low-severity quadrant

Front 66

Risk Management Matrix

Back 66

Provides alternative financial action to undertake for each frequency/severity combination

Front 67

Forecasting

Back 67

Involves projecting the frequency and severity of losses into the future based on current data and statistical assumptions

Front 68

Cash Flow Analysis

Back 68

The analysis that looks at the amount of cash that will be saved and brings it into today's present value

Front 69

Risk Management Information Systems

Back 69

Appropriate data systems to allow them to quantify the organization's loss history

Help to slice and dice the data for further assessment

Maximize a firm's risk/reward tradeoff

Front 70

Data Warehousing

Back 70

A system of housing large sets of data for strategic analysis and operations

Risk data allows decision makers to evaluate multiple dimensions of risk as well as overall risk.

Front 71

Traditional Risk Management Matrix

Back 71

Pure Risk Solution
Low Frequency High Frequency
of Losses of Losses

Low Severity Retention Retention with
(Self Insurance) loss control- risk
reduction

High Transfer- AVOIDANCE
Severity Insurance

Front 72

Transfer of risk

Back 72

Displacement of risk to a third, unrelated party to an insurance company

Paying someone else to bear some or all of the risk of certain financial losses that cannot be avoided, assumed, or reduced to acceptable levels

Front 73

Methods of risk transfer

Back 73

Formation of a corporation with limited liability for its stockholders
Contractual arrangements, including insurance

Front 74

Contractual Agreements

Back 74

Some risks are transferred by a guarantee included i the contract of sale (ex. warranty provided to a car buyer,leases and rental agreements, hold-harmless clauses, and surety bonds)

Insurance is a common form of planned risk transfer

Front 75

Low Frequency and Low Severity

Back 75

Retention of risk through self insurance

Front 76

Risk Retention Group

Back 76

Provides risk management and retention to a few players in the same industry who are too small to act on their own

Front 77

High Frequency and Low Severity

Back 77

Shows retention with loss control

If frequency is significant, risk managers may find efforts to prevent losses useful

Front 78

Loss Prevention

Back 78

Seek to reduce the probability of a loss occurring

Front 79

Loss Reduction

Back 79

Efforts to lessen loss severity

Front 80

High Frequency and High Severity

Back 80

Avoidance

Front 81

Objectives of Risk Mapping

Back 81

1) To aid in the identification of risks and their interrelations
2) To provide a mechanism to see clearly what risk management strategy would be the best to undertake
3) To compare and evaluate the firm’s current risk handling and to aid in selecting appropriate strategies
4) To show the leftover risks after all risk mitigation strategies are put in place
5) To easily communicate risk management strategy to both management and employees

Front 82

Risk Management Process

Back 82

Continuous requiring constant monitoring of the program to ensure that:
- the decisions implemented were correct and have been implemented appropriately
- the underlying problems have not changed

Front 83

Enterprise Risk Management (ERM)

Back 83

Headed by the CRO and handles the risk management decision with specific coordinators

Front 84

Six Sigma

Back 84

A business strategy widely adopted by many corporations to improves processes and efficiency, within which firms have embedded ERM

Front 85

ERM includes:

Back 85

Every aspect of risk within the corporation, including labor negotiation risks, innovation risks, ignoring market condition risks, managing self-interest and greed risks, and so forth.

Front 86

Stockholders' Wealth

Back 86

Value of equity held by the owners of a company plus income in the form of dividends

Front 87

Market Value

Back 87

Price of the stock times the number of shares outstanding

Front 88

Efficient-markets hypothesis

Back 88

Actual market value includes all the elements and information available to the market

Front 89

Corporate Governance

Back 89

Satisfying the needs of all the stakeholders

Front 90

Brand Equity (Franchise Value)

Back 90

The value created by a company with a good reputation and good products

Front 91

Sustainability

Back 91

The capacity to maintain a certain process or state

Front 92

Balance Sheet

Back 92

Provides a snapshot of a firm's assets and liabilities

Front 93

Capital Structure

Back 93

How a firm decides to finance large purchases. Debt vs equity from investors.

Front 94

Covenants

Back 94

Details of the contracts and promises between the debt contract parties

Front 95

Financial Risk Managers

Back 95

Managers responsible for managing the risk of the investments and assets of a firm

Front 96

Underwriting

Back 96

The process of evaluating risks, selecting which risks to accept, identifying potential adverse selection, and reserving liabilities

Front 97

Reserving Liabilities

Back 97

Calculation of the amount that the insurer needs to set aside to pay future claims

Front 98

Asset Allocation

Back 98

The mix of assets held by an insurer, to achieve the best rate of return on the assets entrusted to the insurer by the policyholder seeking the security.

Front 99

Asset-liabilities Matching

Back 99

Allocation of assets that is necessary to meet the timing of the claims obligations

Front 100

Actuaries

Back 100

Individuals who specialize in forecasting the losses and developing the losses' potential future impact on the insurers

Front 101

Mortality Tables

Back 101

Indicate the percent of expected deaths for each age group

Front 102

Life Expectancy

Back 102

Shows the length of life expected for people born in each year

Front 103

Due Diligence

Back 103

Examines every action and items in the financial statement of companies to ensure the data reflect true value

Front 104

Derivatives

Back 104

The financial Securities whose value is derived from another underlying asset.

Front 105

Forwards

Back 105

Agreement that obligates the owner of the instrument to buy or sell an asset for a specified price at a specified time in the future

Traded in the over the counter market

Contract characteristics can be tailored to meet specific consumer needs

Front 106

Basis

Back 106

The amount of money above and beyond the futures price

Front 107

Futures

Back 107

Agreements that obligate the owner of the instrument to buy or sell an asset for a specified price at a specified time in the future

Trade on an exchange with standardized contract specifications

Front 108

Swaps

Back 108

Agreements to exchange or transfer expected variable-price purchases of a commodity or foreign exchange contract for a fixed contractual rpice today

Front 109

Options

Back 109

Agreements that give the right (but not the obligation) to buy or sell an underlying asset at a specified price at a specified time in the future

Front 110

Call Option

Back 110

Grants the right to buy at the strike price

Front 111

Put Option

Back 111

Grants the right to sell at the strike price

Front 112

Securitization

Back 112

Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security

Front 113

Counterparty risk

Back 113

allows to reduce credit risk exposure

Front 114

Insurance-Linked Securities (ISL)

Back 114

Securitization instruments including catastrophe bonds, catastrophe equity puts (Cat-E-Puts), and contingent surplus notes, collaterialized debt obligations (CDOs), weather derivatives

Front 115

Catastrophe Bonds (CAT bonds)

Back 115

seek to protect the insurance industry from catastrophic events

Front 116

Catastrophe Equity Puts (Cat-E-Puts)

Back 116

Gives an insurer the option to sell equity at predetermined prices, contingent upon the catastrophic event

Front 117

Contingent Surplus Notes

Back 117

Options to borrow money in case of a specific event

Front 118

Collateralized Debt Obligations (CDOs)

Back 118

Securities backed by a pool of diversified assets

Front 119

Weather derivatives

Back 119

Derivative contracts that pay based on weather-related events

Front 120

Insurance

Back 120

A social device in which a group of individuals transfer risk to another party such that the third party combines or pools all the risk exposures together

Front 121

Law of Large Numbers

Back 121

As a sample of observations increases in size, the relative variation about the mean declines

Front 122

Insureds

Back 122

Individuals who transfer risk to a third-party

Front 123

Insurer

Back 123

Third party that accepts the risks transferred by the insured

Front 124

How Insurance Works

Back 124

o Transfer of risk from an individual or entity (insured) to a third party (insurer);
o Pooling of all the risk exposures together to compute potential future losses with some level of accuracy by the third party (insurer); using various forecasting techniques, depending on the distribution of losses;
o Overall reduction of risk in society due to pooling of the risk;
o Pooling of similar risk exposures together to compute their own risk of missing the prediction by the insurers, and
o Discriminating via underwriting—the process of evaluating a risk and classifying it with similar risks by insurers.

Front 125

Insurer assumes risk

Back 125

Promises to pay whatever loss may occur as long as it fits the description given in the policy and is not larger than the amount of insurance sold

Front 126

Finite risk programs

Back 126

financial methods that can be construed as financing risk assumptions.

Front 127

Risk Pooling (Loss Sharing)

Back 127

Premium received by the insurer is used to compensate those who incur covered losses

Front 128

Adverse Selection

Back 128

the phenomena of selecting an insurer that charges lower rates for specific risk exposure

Front 129

Mass

Back 129

Implies large numbers of exposure units being involved.

Front 130

Similarity

Back 130

The loss exposures to be insured must have similarities

Front 131

Accidental losses

Back 131

Insurable losses must be accidental or fortuitous-matter of chance.

Front 132

Small Possibility of Catastrophe

Back 132

Higher probabilities can make it uninsurable

Front 133

Definite Losses

Back 133

Losses must be definite in time, place, and amount for two reasons: to determine the coverage and accumulate data for future predictions

Front 134

Determinable Probability Distribution

Back 134

For an exposure to loss to be insurable the expected loss be calculable

Front 135

Economic Feasability

Back 135

The size of the loss can't be too big and the cost of insurance must be small compared to the potential loss

Front 136

Personal Insurance

Back 136

Insurance that is purchased by individuals and families for their risk needs (ex. life, health, disability, auto, homeowner, and long term care)

Front 137

Group Insurance

Back 137

Insurance provided by the employer for the benefit of employees (life, disability, health, and pension plans)

Front 138

Commercial Insurance

Back 138

Property/casualty insurance for businesses and other organizatons

Front 139

Life/Health Insurance

Back 139

Covers exposures to the perils of death, medial expenses, disability, and old age

Front 140

Property/casualty insurance

Back 140

Covers property exposures such as direct and indirect losses of property caused by perils (fire, windstorm, theft, and includes insurance to cover the possibility of being held legally liable to pay damages to another person)

Front 141

Private or Government Insurance

Back 141

Provide the bulk of property/casualty insurance

Government provides more personal insurance than the private sector

Front 142

Voluntary or Involuntary Insurance

Back 142

Some are purchased voluntarily and others are required.

Front 143

Stock Insurers

Back 143

Organized in the same way as other privately owned corporations created for making a profit and maximizing the value of organization for the benefit of the owners.

Front 144

Mutual Insurers

Back 144

owned and controlled in theory if not in practice by policyowners, have no stockholders and issue no capital stocks.

Profits are shared with owners as policyowners' dividends

Front 145

Lloyd's of London

Back 145

Oldest insurance organization in existence, supervised by two governing committees- one for market management and another for regulation of financial matters

Individual members of Lloyd's called Names accept exotic insurance risks by providing capital to an underwriting syndicate.

Each syndicate is made up of many Names and accepts risks through one or more brokers

Front 146

Responsibilities of Names

Back 146

o Make deposits of capital with the governing committee
o Put premiums into a trust fund
o Make additional contributions, in case of losses
o Assume part of one large exposure
o Reinsure each other to provide more risk sharing; currently ceased

Front 147

Captive Insurance Company

Back 147

Provides insurance coverage to its parent company and other affiliated organizations.

Front 148

Risk Retention Group

Back 148

Provides risk management and retention to a few players in the same industry who are too small to act on their own.

Front 149

Government Risk Pools

Back 149

Formed for governmental entities to provide group self-insurance coverage

Front 150

Agents

Back 150

Legally represent the company

Front 151

Broker

Back 151

Represents the buyer and in half of the states also represents the insurer

Front 152

Producer

Back 152

Another name for both agents and brokers

Front 153

Life/Health insurance

Back 153

Sold through agents, brokers, or producers

Front 154

General Agent

Back 154

an independent businessperson rather than an employee of the insurance company is authorized by contract with the insurer to sell insurance in a specified territory and recruits and trains subagents or agents or special agent

Front 155

Personal Producing General Agent

Back 155

Sell for one or more insurers, often with a higher-than-normal agent’s commission and seldom hires other agents.

Front 156

Branch Manager

Back 156

Who is a company employee compensated by a combination of salary, bonus, and commissions related to the productivity of the office, employs and trains agents with the consent of the company.

Front 157

Owns the X-Date

Back 157

An independent agent owns the x-date; that is, he or she has the right to contact the customer when a policy is due for renewal.

Front 158

Redlining

Back 158

Occurs when an insurer designates a geographical area in which it chooses not to provide insurance, or to provide it only at substantially higher prices.

Front 159

Service

Back 159

The ultimate indicator on which the quality of the product provided by insurance depends

Front 160

Engineering and Loss Control

Back 160

Methods of prevention and reduction of loss whenever the efforts required are economically feasible.

Front 161

Actuarial Analysis

Back 161

A highly specialized mathematic analysis that deals with the financial and risk aspects of insurance, takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge

Front 162

Actuary

Back 162

Determines the proper rates and reserves, certifies financial statements, participates in product development and assists in overall management and planning

Front 163

Loss Development

Back 163

Calculation of how amounts paid for losses increase (or mature) over time for the purpose of future projection

Front 164

Incurred losses

Back 164

Both paid losses plus known but not yet paid losses

Front 165

Incurred but not Reported (IBNR) Losses

Back 165

Estimated losses that insureds did not claim yet but are expected to materialize in the future

Front 166

Mortality Curve

Back 166

Illustrates the relationship between age and the probability of death

Front 167

Capital and Surplus

Back 167

a highly specialized mathematic analysis that deals with the financial and risk aspects of insurance, takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge

Front 168

Reinsurance

Back 168

An arrangement by which an insurance company (ceding insurer) transfers all or a portion of its risk under a contract of insurance to another company (assuming reinsurer) thus seeking protection

Front 169

Three types of reinsurance

Back 169

Treaty, facultative, and a combination of these

Front 170

Treaty

Back 170

The original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance

Front 171

Facultative

Back 171

Both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract;

Front 172

Proportional (pro rata) reinsurance

Back 172

The reinsurer assumes a prespecified percentage of both premiums and losses

Front 173

Ceding Commission

Back 173

A fee paid by the reinsurer to the original insurer

Front 174

Nonproportional Reinsurance

Back 174

Obligates the reinsurer to pay losses when they exceed a designated threshold

Front 175

Excess-loss reinsurance

Back 175

Requires the reinsurer to accept amounts of insurance that exceed the ceding insurer's retention limit

Front 176

Aggregate Reinsurance Policy

Back 176

Can be purchased for coverage against potentially catastrophic situations faced by the primary insurer

Front 177

Claims Adjusting

Back 177

The process of paying insureds after they sustain losses

Front 178

Claim Adjuster

Back 178

Represents the insurer when the policyholder presents a claim for payment

Front 179

Company Adjuster

Back 179

They handle larger claims

Front 180

An Independent Adjuster

Back 180

An employee of an adjusting firm that works for several different insurers and receives a fee for each claim handled

Front 181

Claim adjuster's job

Back 181

o investigating the circumstances surrounding a loss;
o determining whether the loss is covered or excluded under the terms of the contract;
o deciding how much should be paid if the loss is covered;
o paying valid claims promptly, and
o resisting invalid claims.