Arm 54 Section A Vocabulary

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Law of large numbers

Back 1

A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.

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Volatility

Back 2

Frequent fluctuations, such as in the price of an asset.

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Value at risk

Back 3

A threshold value such that the probability of loss on the portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in the portfolio.

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Credit risk

Back 4

The risk that customers or other creditors will fail to make promised payments as they come due.

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Correlation

Back 5

A relationship between variables.

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Risk profile

Back 6

A set of characteristics common to all risks in a portfolio.

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Time horizon

Back 7

Estimated duration.

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Exposure

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

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Liquidity risk

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The risk that an asset cannot be sold on short notice without incurring a loss.

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Subjective risk

Back 10

The perceived amount of risk based on an individual's or organization's opinion.

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Systematic risk

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The potential for a major disruption in the function of an entire market or financial system.

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Market risk

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Uncertainty about an investment's future value because of potential changes in the market for that type of investment.

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Cost of risk

Back 13

The total cost incurred by an organization because of the possibility of accidental loss.

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Pure risk

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A chance of loss or no loss, but no chance of gain.

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Objective risk

Back 15

The measurable variation in uncertain outcomes based on facts and data.

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Diversifiable risk

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A risk that affects only some individuals, businesses, or small groups.

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Hazard risk

Back 17

Risk from accidental loss, including the possibility of loss or no loss.

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Speculative risk

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A chance of loss, no loss, or gain.

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Nondiversifiable risk

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A risk that affects a large segment of society at the same time.

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Risk criteria

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Reference standards, measures, or expectations used in judging the significance of a given risk in context with strategic goals.

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Risk management framework

Back 21

A foundation for applying the risk management process throughout the organization.

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Modeling

Back 22

In data analysis, a system of calculating known outcomes based on current data and then applying these calculations to new data to predict future outcomes.

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Framework

Back 23

A structure, including elements such as concepts, methods, procedures, and metrics, that supports the risk management process.

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Residual risk

Back 24

Risk remaining after actions to alter the risk's likelihood or impact.

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Inherent risk

Back 25

Risk to an entity apart from any action to alter either the likelihood or impact of the risk.

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Risk-based capital (RBC)

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Amount of capital an insurer needs to support its operations, given the insurer's risk characteristics.

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Risk governance

Back 27

Integration of the management principles governing the organization with the risk management process.

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Risk management standard

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A document published by a recognized authority that includes principles, criteria, and best practices for risk management.

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Employment Practices Liability Exposures (EPL)

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Arise from laws that protect employees against discrimination, sexual harassment, unfair wage practices, and other prohibited employer practices.

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Professional Liability or Errors and Omissions Insurance

Back 30

Often referred to as E&O or Malpractice insurance.

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Insurance-to-value provision

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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.

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Real property (realty)

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

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Insuring agreement

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

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Coinsurance clause

Back 34

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

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Business income insurance or Consequensial Loss Insurance

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

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Indemnify

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

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Severity

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The size of a loss.

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Morale Hazard (attitudinal hazard)

Back 38

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

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Personal Loss Exposure

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

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Monoline Policy

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Policy that covers only one line of business.

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Tort

Back 41

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

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Legal Hazard

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A condition fo the legal environment that increases loss frequency or severity.

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Liability

Back 43

A legal responsibility for the consequences of an act or omission.

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Property loss exposure

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A condition that present 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.

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Property

Back 45

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

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Personnel loss exposure

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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.

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Line of business

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

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Loss exposure

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

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Direct physical loss

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

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All-risks policy

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

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Named peril

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

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Breach of contract

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

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Occurrence

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

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Insurance-to-value provision

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

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Claims-made coverage trigger

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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.

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Package policy

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Policy that covers two or more lines of business.

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Claims-made coverage form

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

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Dependent property exposure

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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.

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Principal

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

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Bailees' customers policy

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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.

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Separation

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

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Duplication

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

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Property-casualty insurance

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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.

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Hazard

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

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Avoidance

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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.

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Intangible property

Back 66

Property that has no physical form.

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Personal property

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All tangible or intangible property that is not real property.

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Replacement cost

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

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General Liability Insurance (sometimes called public liability insurance)

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Provides coverage when the insured becomes legally obligated to pay damages. Insureds may become legally obligated to pay damages as the result of a legal wrong for which the applicable civil law provides a remedy in the form of damages. These typically include a tort or breach of contract.

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Perils at sea

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

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Moral hazard

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

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Frequency

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Number of losses.

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Net income loss exposure

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

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Liability loss exposure

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Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.

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Entity coverage

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

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Tangible property

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Property that has a physical form.

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Obligee

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

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Diversification

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

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Surety

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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.

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Occurrence coverage form

Back 80

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

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Fiduciary liability insurance

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

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Actual cash value

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

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Commercial property insurance

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

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Physical hazard

Back 84

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

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Demographics

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The statistical characteristics of human populations.

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Intrest rate risk

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The risk that a security's future value will decline because of changes in interest rates.

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Equity capital

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Preferred stock, surplus, common stock, undivided profits and capital reserves, and net unrealized holding gains (or losses) on securities that are not available for sale.

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Root cause

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The event or circumstance that directly leads to an occurrence.

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Conditional value at risk

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A model to determine the likelihood of a loss given that the loss is greater than or equal to the VaR.

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Capital

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The accumulated assets of a business or an owner's equity in a business.

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Political risk

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Any action by a government that favors domestic over foreign organizations or poses a threat to foreign organizations.

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Call option

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An option to buy a set amount of the underlying security at any time within a specified period.

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Cash flow

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Cash inflow minus cash outflow.

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Market value surplus

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The fair value of assets minus the fair value of liabilities.

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Earnings at risk

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The maximum expected loss of earnings within a specific degree of confidence.

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Monte Carlo simulation

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A computerized statistical model that simulates the effects of various types of uncertainty

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Hedging

Back 97

A financial transaction in which one asset is held to offset the risk associated with another asset.

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Zero-coupon bond

Back 98

A corporate bond that does not pay periodic interest income.

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Commodity futures contract

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A contract either to make or to accept delivery of a specified quantity of a commodity on a given date.

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Comodity price risk

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The risk associated with a change in the prices of commodities that are necessary to an organization's operations.

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Process Risk

Back 101

Best managed through a framework of procedures and a mechanism to identify nonconforming practices.

Front 102

Exposure indicator

Back 102

A metric used to identify risk inherent to an organization's operations.

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Equity price risk

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The risk that changes in the price of a stock of another security will increase or decrease.

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Swap

Back 104

An agreement between two organizations to exchange payments based on changes in the value of an asset, yield, or index over a specific period.

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Operational Risk

Back 105

According to Basell II, is any risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

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Enterprise risk management (ERM)

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An approach to managing all of an organization's key business risks and opportunities with the intent of maximizing shareholder value.

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Risk optimization

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A state whereby risk and return are balanced so that a maximum return is achieved for the level of risk accepted by an organization.

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Tariff

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A tax that shields domestic producers from foreign competition.

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Statutory accounting principles (SAP)

Back 109

The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow.

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Loss ratio

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A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.

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Put option

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An option giving the holder the right to sell a set amount of the underlying security at any time within a specified period.

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Price risk

Back 112

The potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input.

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Key risk indicator (KRI)

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A financial or nonfinancial metric used to help define and measure potential losses.

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Reinvestment risk

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The risk that the rate at which periodic interest payments can be reinvested over the life of the investment will be unfavorable.

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Leverage

Back 115

The practice of using borrowed money to invest.

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Generally accepted accounting principles (GAAP)

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A common set of accounting standards and procedures used in the preparation of financial statements to ensure consistency of presentation and reported results.

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Control indicator

Back 117

A metric used to identify an organization's management of risk.

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Cash matching

Back 118

The process of matching an investment's maturity value with the amount of expected loss payments.