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33 Cards in this Set
- Front
- Back
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Regression |
Loss forecasting method that characterizes a relationship between two or more variables |
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Coorelation |
Positive Correlation: two variables that tend to move in the same direction, the occurrence of one increases the probability of another Negative Correlation: Two variables that tend to move in opposite directions, the occurrence of one decreases to occurrence of another |
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Dependent Variable |
The variable that is being predicted, Y |
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Independent Variable |
The predicting variable, X |
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Adjusted R Square |
Indicates the goodness of faith in a model details the variation of Y that can be explained in the model |
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T-Stat and P-Value |
The two indicate whether X is a good Predictor for Y T-Stat measures how far Beta is away from zero T-Stat equal or greater than 2, X is a good predictor P-Value equal or greater than .5, X is a good predictor |
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Confidence Interval |
Describes how confident the model is in the Minimum and Maximum range of beta |
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Risk Control Strategies |
Avoidance, Prevention, Reduction, and Risk Control Transfer |
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Avoidance |
None of the risk is take (Proactive Avoidance) Completely giving up on the opportunity (Abandonment) |
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Risk Prevention |
Human behavior Approach: Changing ppls behavior through education or enforcement of policies Engineering Approach: Eliminating unsafe environments |
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Risk Reduction |
Segregation Approach: reduce the dependence on one asset (duplication, separation) Catastrophic Plans: Identify possible catastrophic events, develop emergency response plans Litigation Management: seaking alternatives outside of the courtroom (Alternative dispute Resolution, early settlement) Non-compete agreements Return to work programs |
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Risk control transfer |
Property or activity transfer (Incorporation, Selling property, contracting for service) Liability ( written waivers) Surety Agreements |
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Unplanned retention |
Occurs when a firm is not aware of an exposure or underestimates the potential loss severity |
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Planned retention |
Preferred during a hard market, deductible and self insured retention |
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Factors to consider with retention capacity |
Firm Size Correlation of potential losses Financial ratios Leverage ratio ( Total liability/Equity) - indicates a companies long term ability to pay debt, the lower the better Current ratio ( Current Assets/Current Liabilities) - measures the liquidity of a company, greater than 2 is good |
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Suggested retention ranges |
Working capital (current assets - current liabilities) - 10-25% Total Assets - 1-5% Sales or revenue - .05 - 2% |
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Funding Arrangements |
Designed to smooth financial statements Funded Reserves - Future losses marked on the liability side and an additional liquid asset account is created on the asset side to designate funds for the liability account Unfunded reserve - no asset account is created |
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Types of captive insurers |
Pure captive (wholly owned) Broad captive ( pure captive that provides coverage for other companies ) Group captive ( has more than one parent corporation, if they all belong to same industry it is an associate captive) |
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Fronting arrangements |
going through a license insurer who will cede 100 percent of coverage to the companies captive so that the captive does not need to licensed |
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Benefits of using a captive |
Reduce insurance cost Improve coverage Possible profit center possible tax deductions |
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occurrence policy |
cover losses that occur during the policy period |
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Claims made |
Covers losses for claims that are made during the policy but have occurred after the retroactive date |
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Experience rated policy |
determined by previous loss history |
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Retro rated policy |
Premium determined by that years losses. loss x some multiplier |
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Benefits of risk financing |
Services such as claims handling higher favorability with creditors Tax deductible compared to retention |
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Benefits of retention |
Saving on premiums due to loading During hard markets when premiums are higher than predicted losses |
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Progressive tax rate effect |
Because premiums are tax deductible, having insurance can put you into a lower tax bracket with a smaller tax rate |
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Catastrophe bonds |
Bonds where the investor agrees to forgive or defer payments of interest and/or principle in the event of a catastrophic loss |
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Option Contracts |
Gives the holder the right to either buy or sell and underlying asset at a predetermined price Call - Gives holder the right to buy Put - Gives holder the right to sell |
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Future contract |
Obligates the holder to buy or sell the asset at a predetermined price |
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Call spread |
Where one buys and sells call options with different strike prices at the same time Creates a layer of profit at a lower price |
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advantages and disadvantages to CAT bonds/call spreads |
Advantages Additional capital lower transaction costs Disadvantages Loss ratio can lead to imperfect hedging does not increase underwriting capacity difficulty attracting sellers |
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Integrated Risk management Programs |
Single Trigger Double Trigger |
