Arm 54 Chapter 3

Front 1

The Casualty Actuarial Society (CAS) defines hazard risk as these risks:

Back 1

• Fire and other property damage
• Windstorm and other natural perils
• Theft and other crime, personal injury
• Business interruption
• Disease and disability (including work-related injuries and diseases)
• Liability claims

Front 2

What are the three categories of hazard risk?

Back 2

• Personnel risk—uncertainty related to the loss to a firm due to death, incapacity, loss of health, or prospect of harm to or unexpected departure of key employees
• Property risk—uncertainty related to loss of wealth due to damage or destruction of property
• Liability risk—uncertainty related to financial responsibility arising from bodily injury (including death) or loss of wealth that a person or an entity causes to others

Front 3

What can be said about time periods relative to liability losses?

Back 3

Unlike the net income losses associated with property losses, no definite time period is associated with liability losses. There is no way to set a reasonable time period to restore a business’s reputation and its related income after such a liability loss in a similar manner to the restoration of a business’s property.

Front 4

Frequency

Back 4

Number of losses

Front 5

Severity

Back 5

The size of a loss

Front 6

What are the two measures traditionally used for hazard risk exposures?

Back 6

Frequency and severity

Front 7

What techniques are used to prevent losses or reduce their frequency and/or severity?

Back 7

• Avoidance
• Separation
• Duplication
• Diversification
• Prevention
• Reduction

Front 8

Avoidance

Back 8

A technique that involves ceasing or never undertaking an activity so that the possibility of future gains or losses occurring from that activity is eliminated

Front 9

Separation

Back 9

A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss

Front 10

Duplication

Back 10

A risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve

Front 11

Diversification

Back 11

A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions

Front 12

What are the most common techniques used by risk managers?

Back 12

The most common techniques used by risk managers are prevention and reduction, often in combination.

Front 13

Insurance

Back 13

A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer

Front 14

Explain which exposures should be retained or transfered, depending on freqency (low to high) and severity (minor to major).

Back 14

low frequency & low severity = retain
high frequency & low severity = often retained, because aggregate results are usually fairly predictable
low frequency & high severity = often transferred
high frequency & high severity = usually avoided

Front 15

What are the advantages of risk transfer?

Back 15

The principal advantage of risk transfer is that it provides an offset to an organization’s exposure to large losses. Additionally, risk transfer can lessen the variability of the cash flows of an organization.

Front 16

Peril

Back 16

The cause of a loss

Front 17

Wrongful act

Back 17

Any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty

Front 18

Legal liability

Back 18

The legally enforceable obligation of a person or an organization to pay a sum of money (called damages) to another person or organization

Front 19

Errors and omissions (E&O)

Back 19

Negligent acts (errors) committed by a person conducting insurance business that give rise to legal liability for damages; a failure to act (omission) that creates legal liability

Front 20

Exclusion

Back 20

A policy provision that eliminates coverage for specified exposures

Front 21

Policy limits

Back 21

The maximum that can be paid on the claim, regardless of the actual value of the property damaged

Front 22

Business income insurance

Back 22

Insurance that covers the reduction in an organization's income when operations are interrupted by damage to property caused by a covered peril

Front 23

Directors and officers (D&O) liability insurance

Back 23

Insurance that covers a corporation's directors and officers against liability for their wrongful acts covered by the policy and also covers the sums that the insured corporation is required or permitted by law to pay to the directors and officers as indemnification

Front 24

Environmental hazard

Back 24

Any hazardous condition beyond the control of the property owner that might give rise to a covered loss

Front 25

What estimated percentage of operational risk losses does insurance provide coverage for?

Back 25

Some estimates indicate that insurance provides coverage for only 20 to 30% of operational risk losses.

Front 26

Loss exposure

Back 26

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs

Front 27

What are the three elements of a loss exposure?

Back 27

Every loss exposure has three elements:
• An asset exposed to loss
• Cause of loss (also called a peril)
• Financial consequences of that loss

Front 28

Identify types of assets that could be loss exposures for an organization.

Back 28

Assets owned by organizations can include property (such as buildings, automobiles, and office furniture), investments, money that is owed to them, and cash. In addition to these are assets that are often overlooked, including intangible assets (such as patents, copyrights, and trademarks) and human resources.

Front 29

Identify types of assets that could be loss exposures for an individual.

Back 29

Individuals may have many of the same assets as organizations . In addition, individuals may have intangible assets such as professional qualifications, a unique skill set, or valuable experience.

Front 30

Describe the four classifications of hazards.

Back 30

• Moral hazard
• Morale hazard
• Physical hazard
• Legal hazard

Front 31

Hazard

Back 31

A condition that increases the frequency or severity of a loss.

Front 32

Moral hazard

Back 32

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss

Front 33

Morale hazard (attitudinal hazard)

Back 33

A condition of carelessness or indifference that increases the frequency or severity of loss

Front 34

How does a moral hazard differ from a morale hazard?

Back 34

A moral hazard results from a deliberate act; a morale hazard results from carelessness or indifference. Examples of a moral hazard include intentionally causing, fabricating, or exaggerating a loss.

Front 35

Physical hazard

Back 35

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss

Front 36

Legal hazard

Back 36

A condition of the legal environment that increases loss frequency or severity

Front 37

What factors do the financial consequences of a loss depend on?

Back 37

• Type of loss exposure
• Cause of loss
• Loss frequency and severity

Front 38

What are the four types of loss exposures?

Back 38

• Property loss exposures
• Liability loss exposures
• Personnel loss exposures
• Net income loss exposures

Front 39

Property loss exposure

Back 39

A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest

Front 40

Tangible property

Back 40

Property that has a physical form

Front 41

Real property (realty)

Back 41

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land

Front 42

Personal property

Back 42

All tangible or intangible property that is not real property

Front 43

Intangible property

Back 43

Property that has no physical form

Front 44

Elements of property loss exposures: Asset exposed to loss

Back 44

• Tangible property
• Real property, such as offices and warehouses
• Personal property, such as office furniture and office equipment
• Intangible property, such as patents, copyrights, trademarks, trade secrets, and customer goodwill

Front 45

Elements of property loss exposures: Cause of loss

Back 45

Some of the more frequent causes of loss include the following:
• Lighting or hail
• Tornadoes or high wind
• Water from failure of indoor appliances; heavy rain or flooding; or sewers or drains
• Theft
• Snow or ice
• Fire
• Mold

Front 46

Elements of property loss exposures: Financial consequences of loss

Back 46

Maximum financial consequence of a property loss is limited by the value of the property. However, a property loss may also have an effect on the financial consequences of liability, personnel, or net income losses.

Front 47

Elements of liability loss exposures: Asset exposed to loss

Back 47

The asset exposed to loss for a liability loss exposure is money.
Payments that may be required include the following:
• Damages to the plaintiff if the claim is not successfully defended
• Settlement costs if the claim settles out of court
• Legal fees
• Court costs

Front 48

Elements of liability loss exposures: Cause of loss

Back 48

The making of a claim or suit against the particular organization by another party seeking damages or some other legal remedy.
Even the threat to make such a claim or suit can cause a liability loss in the form of costs incurred to investigate and settle the threatened liability claim or suit.

Front 49

Elements of liability loss exposures: Financial consequences of loss

Back 49

• In theory: limitless
• In practice: limited to the total wealth of the person or organization
• Can result in the loss of most or all of a person or organization’s assets, as well as in a claim on future income.

Front 50

Personnel loss exposure

Back 50

A condition that presents the possibility of loss caused by a person’s death, disability, retirement, or resignation that deprives an organization of the person’s special skill or knowledge that the organization cannot readily replace

Front 51

Personal loss exposure

Back 51

Any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment

Front 52

Elements of personnel loss exposures: Asset exposed to loss

Back 52

The value the key person adds to the organization

Front 53

Elements of personnel loss exposures: Cause of loss

Back 53

Circumstances that can lead to a personnel loss exposure include:
• Death
• Disability
• Retirement
• Voluntary separation, such as resignation
• Involuntary separation, such as layoff or firing

Front 54

Elements of personnel loss exposures: Financial consequences of loss

Back 54

Vary based on cause of loss; can be partial or total, temporary or permanent. Example: death of key employee = total, permanent loss. If caused by disability, may be only partial, may be only temporary.

Front 55

Net income loss exposure

Back 55

A condition that presents the possibility of loss caused by a reduction in net income

Front 56

How is net income calculated?

Back 56

Revenues – (expenses + income taxes)

Front 57

Elements of net income loss exposures: Asset exposed to loss

Back 57

Future stream of net income cash flows of the individual or organization

Front 58

Elements of net income loss exposures: Cause of loss

Back 58

Circumstances that can lead to a net income loss exposure include:
• Property loss
• Liability loss
• Personnel loss
• Losses stemming from business risks; e.g., losses resulting from poor strategic planning

Front 59

Elements of net income loss exposures: Financial consequences of loss

Back 59

Vary based on the cause of loss – a reduction in revenues, increase in expenses, or combination of the two can have financial consequences.
Worst-case scenario: revenues decrease to zero and expenses increase significantly for a prolonged period

Front 60

Indirect loss

Back 60

A loss that results from, but is not directly caused by, a particular cause of loss; e.g., loss of revenue due to fire damage to a building

Front 61

Property-casualty insurance

Back 61

One of the two main sectors of the insurance industry, encompassing numerous types of insurance, most of which cover the financial consequences of damage to one's own property or legal liability to others.

Front 62

Property

Back 62

The real estate, buildings, objects or articles, intangible assets, or rights with exchangeable value of which someone may claim legal ownership.

Front 63

Liability

Back 63

A legal responsibility for the consequences of an act or omission. Line of business A general classification of insurance, such as commercial property, commercial general liability, commercial crime, or commercial auto.

Front 64

Commercial property insurance

Back 64

Insurance that covers commercial buildings and their contents against various types of property loss.

Front 65

Line of business

Back 65

A general classification of insurance, such as commercial property, commercial general liability, commercial crime, or commercial auto.

Front 66

Monoline policy

Back 66

Policy that covers only one line of business.

Front 67

Package policy

Back 67

Policy that covers two or more lines of business.

Front 68

Named peril

Back 68

A specific cause of loss listed and described in an insurance policy. Also used to describe policies containing named perils.

Front 69

Direct physical loss

Back 69

A loss that is physical (not just financial) and results immediately from the occurrence.

Front 70

All-risks policy

Back 70

An insurance policy that covers any risk of physical loss unless the policy specifically excludes it.

Front 71

Bailees' customers policy

Back 71

A policy that covers damage to customers' goods while in the possession of the insured, regardless of whether the insured is legally liable for the damage.

Front 72

Replacement cost

Back 72

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.

Front 73

Actual cash value

Back 73

A method in valuing property which is calculated as the cost to replace or repair property min us depreciation, the fair market value, or a valuation determined by the broad evidence rule.

Front 74

Insurance-to-value provision

Back 74

A provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to, or close to. the value of the covered property.

Front 75

Coinsurance clause

Back 75

A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property's value.

Front 76

Business income insurance

Back 76

Insurance that covers the reduction in an organization's income when operations are interrupted by damage to property caused by a covered peril.

Front 77

Dependent property exposure

Back 77

The possibility of incurring business income loss because of physical loss occurring on the premises of an organization that the insured depends on for materials, products, or sales.

Front 78

Principal

Back 78

The party to a surety bond whose obligation or performance the surety guarantees.

Front 79

Surety

Back 79

The party (usually an insurer) to a surety bond that guarantees to the obligee that the principal will fulfill an obligation or perform as required by the underlying contract, permit, or law.

Front 80

Obligee

Back 80

The party to a surety bond that receives the surety's guarantee that the principal will fulfill an obligation or perform as promised.

Front 81

Breach of contract

Back 81

The failure, without legal excuse, to fulfill a contractual promise.

Front 82

Tort

Back 82

A wrongful act or an omission, other than a crime or a breach of contract, that invades a legally protected right.

Front 83

Insuring agreement

Back 83

A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service.

Front 84

Occurrence

Back 84

An accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Front 85

Indemnify

Back 85

To restore a party who has sustained a loss to the same financial position that party held before the loss occurred.

Front 86

Claims-made coverage form

Back 86

A coverage form that provides coverage for bodily injury or property damage that is claimed during the policy period.

Front 87

Occurrence coverage form

Back 87

A coverage form that covers bodily injury or property damage occurring during the policy period.

Front 88

Entity coverage

Back 88

Coverage extension of D&O liability policies for claims made directly against a corporation (the "entity") for wrongful acts covered by the policy.

Front 89

Claims-made coverage trigger

Back 89

The event that triggers coverage under a claims-made coverage form; the first making of a claim against any insured during either the policy period or an extended reporting period.\

Front 90

Fiduciary liability insurance

Back 90

Insurance that covers the fiduciaries of an employee benefit plan against liability claims alleging breach of their fiduciary duties involving discretionary judgment.

Front 91

Perils of the sea

Back 91

Accidental causes of loss that are peculiar to the sea and other bodies of water.

Front 92

Name three potential net income losses

Back 92

• Loss of goodwill
• Failure to perform
• Missed opportunities

Front 93

Name three advantages of the publication and use of common forms (such as a public liability or commercial auto policy).

Back 93

• Makes it easier for risk managers to understand the coverage provided for typical exposures
• This makes it simpler to compare different insurers’ products
• Makes it simpler to address gaps in coverage

Front 94

What is the difference between a named-peril policy and direct physical loss coverage?

Back 94

Named-perils policies provide coverage only for perils that are specifically named in the policy, while direct physical loss policies provide coverage for all perils that are not specifically excluded.

Front 95

What was the previous term used for direct physical loss coverage?

Back 95

All-risks coverage

Front 96

What is the more-common name for consequential loss insurance?

Back 96

Business income insurance

Front 97

What does business income insurance cover?

Back 97

• Loss of business income
• If necessary, extra expenses incurred while repairs are made after a covered loss (“time element losses” or “business interruption losses”)

Front 98

Name three risks or characteristics not faced by most organizations which builders’ risk coverage addresses.

Back 98

• Value of building under construction increases as construction progresses
• Usually several different insured interests (building owner, contractor, subcontractors)
• Additional exposure of building under construction (increased susceptibility to theft because construction materials are left in the open; vulnerability to windstorm or fire during early stages of construction)

Front 99

What distinguishes liability loss exposures from other types of loss exposures?

Back 99

The concept of legal liability

Front 100

Do general liability policies cover indirect expenses?

Back 100

No, coverage is not provided under general liability policies for indirect expenses incurred as a result of an actual or alleged liability.

Front 101

What are the two “sides” of D&O coverage?

Back 101

Coverage A (“Side A”) insures individual directors and officers. Coverage B (“Side B”) insures the corporation for the amounts that it is lawfully permitted or required to pay to defend or settle claims against the directors or officers.

Front 102

Name three common elements of aviation loss exposures that distinguish them from other types of loss exposures.

Back 102

• Potential for catastrophic loss
• Limited spread of risk
• Diversifying factors that distinguish the loss exposures of each individual aircraft and pilot