Rmin 4000 Test 1 Ch. 1,2,3,5

Front 1

risk

ch.1

Back 1

uncertainty concerning the occurrence of loss

Front 2

Objective risk

Back 2

the relative variation of actual loss from expected loss
(it can be statistically calculated using dispersion, like standard deviations)

Front 3

Subjective risk

Back 3

defined as uncertainty based on a person's mental condition or state of mind (high subjective risk often results in conservative behavior)

Front 4

chance of loss

Back 4

probability that an event will occur

Front 5

objective probability

Back 5

refers to the long-run relative frequency of an event assuming an infinite number of observations and no change in the underlying conditions
(can be determined by deductive or inductive reasoning)

Front 6

subjective probability

Back 6

the individual's personal estimate of the chance of loss

Front 7

peril

Back 7

the cause of loss
(a collision in an auto accident)

Front 8

hazard

Back 8

condition that increases the chance of loss
-physical
-moral
-morale
-legal

Front 9

physical hazard

Back 9

condition that increases the chance of loss (icey roads)

Front 10

moral hazard

Back 10

dishonesty (faking accidents, inflatin claim amounts)

Front 11

morale hazard

Back 11

carelessness (leaving keys in car)

Front 12

Legal Hazard

Back 12

characteristic of the legal system (large damage awards in liability lawsuits)

Front 13

speculative risk

Back 13

which both profit or loss are possible (gambling)

Front 14

pure risk

Back 14

ther are only the possiblilites of loss or no loss (earthquake)

Front 15

fundamental risk

Back 15

entire economy or large numbers of persons or groups (hurrican) entire population

Front 16

particular risk

Back 16

affects only the individual(car theft)

Front 17

enterprise risk

Back 17

all major risks faced by a business firm, which include: pure risk, speculative, strtegic, operational risk and finacial risk

Front 18

personal risk

Back 18

involve possibility of a loss or reducton in income, extra expenses or depletion of finacial assets: premature death of bread bringer, involuntary unemployment, poor health

type of pure risk

Front 19

property risk

Back 19

possilility of losses associated with the destruction or theft of property

type of pure risk

Front 20

direct loss

Back 20

financial loss that relsults from the physical damage, destruction, or theft (fire damage)

type of pure risk

Front 21

indirect loss

Back 21

indirectly from the occurrence of a direct physical damage (lost profit due to inability to perate after a fire)

type of pure risk

Front 22

liability risk

Back 22

involve possibility of being held liable for bodily injury or property damage to someone else
liability=fault
type of pure risk

Front 23

Burden of Risk on Society

Back 23

1. In the absence of insurance, individuals would have to maintain a lare emergency funds

2. the risk of liability law suits would discourage innovation, depriving ppl of goods and services

3. risk causes worry and fear

Front 24

*Methods of handling risk

Back 24

- Avoidance- avoiding risk
- Loss control- controling how much loss there is
- retention
- noninsurance transfers
- insurance

Front 25

Loss control

Back 25

Loss prevention- refers to activites to reduce frequency of losses

Loss reduction- activities to reduce the severity of losses

Front 26

retention

Back 26

- an individual or firm retains all or part of a loss
- loss retention my be active or passive

Front 27

noninsurance transfers

Back 27

a risk may be transfered to another party through contracts, hedging, or incorporation
ex. purchasing a service contract for a new tv (incase something happens)

Front 28

insurance

Ch. 2

Back 28

the pooling of fortuitous losses by transfer of suck risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk

Front 29

basic characteristics of insurance

Back 29

- Pooling of losses
- Payment of fortuitous losses
- Risk transfer
- Indemnification

Front 30

pooling of losses

Back 30

spreading losses incurred bythe few over the entire group (based on law of large numbers)

Front 31

payment of fortuitous losses

Back 31

insurance pays for losses that are unforeseen, unexpected, and occur as a result of chance

Front 32

risk transfer

Back 32

pure risk is transferred from the insured to the insurer, who typically is in a stronger finacial postion

Front 33

indemnification

Back 33

insured is restored to his or her approximate finacial position prior to the occurrence of the loss

Front 34

Requirements of an Insurable risk

Back 34

- Large number of exposure units (predict average loss)

- Accidental and unitentional loss (control moral hazard, assure randomness)

- Determinable and measurable loss (facilitate loss adjustment or beable to determine if loss is covered)

- No catastrophic loss (allow pooling technique to work; managed by dispersing coverage over large geo area, using reinsurance)

-calculable chance of loss (statistical losses calculated; establish adequate premium)

- Affordable premium

Most personal, property and liability resks can be insured
-speculative risks (market,finactial, production and political risks) are difficult to insure

Front 35

adverse selection

Back 35

the tendency of persons w/ a higher that avg. chance of loss to seek insurance at avg rates

- if not controlled by underwirting, can result in higher than expected loss levels (skewed data)

Front 36

life insurance

Back 36

pays death benefits to beneficiaries when the insured dies

private insurance

Front 37

health insurance

Back 37

covers medical expenses because of sickness or injury

private insurance

Front 38

disability plans

Back 38

pay income benefits

private insurance

Front 39

property insurance

Back 39

indemnifies prop owners against the loss or damage of real or personal property

private insurance

Front 40

liability insurance

Back 40

covers the insured leagal liability arising out of property damage or bodily injury to others

priv insur

Front 41

casualty insurance

Back 41

insurance that covers whatever is not covered by fire, marine, and life insurance

priv insur

Front 42

personal lines

Back 42

coverage that insure the real estate and personal property of individuals and families or provide protection against legal liability
ex. homeowner insurance, umbrella liability insur

Front 43

commercial lines

Back 43

property and casualty coverages for business firms, nonprofit org, and govt agencies
ex. fire insurance, gerneral liability insur, commercial mulit-peril insur.

Front 44

risk management

ch.3

Back 44

process that identifies loss exposures

Front 45

loss exposure

Back 45

any situation or circumstance in which a loss is possible, regardless of whether a loss occurs (the potential for loss

Front 46

*Pre-loss objectives

Back 46

1. prepare for potential losses in the most economical way
2. reduction of anxiety
3. meet any legal obligations imposed

Front 47

*Post-loss objectives

Back 47

1.ensure survival of the firm
2.continue operations
3. stablize earnings
4. maintain growth
5. minimize effect that a loss will have on society

Front 48

*Risk Management Process

Back 48

1. Identify potential losses (most important step; if you dont identify the problem you cant fix it)
2. Evaluate potential losses
3. select the appropriate risk management technique
4. implement and monitor the risk management program
5. (added) adjust based on results

Front 49

Identify loss exposures (through)

Back 49

1. questionares
2. physical inspection
3. flow charts
4. finacial statments
5 historical loss data

Front 50

analyzing loss exposure (through)

Back 50

estimate...
-loss frequency- probable # of losses that may occur
-loss severity- probable size of loss that may occur

loss severity is more important
Max possible loss- worse loss that could happen over the firms life
Max probable loss- worse loss that likely to happen (partial fire loss rather than total destruction)

Front 51

Risk control

Back 51

technique that provides for the funding of losses

Front 52

RM technique; Methods of risk control

Back 52

avoidance, loss prevention, loss reduction

avoidance - certain loss exposure is never aquired or any existing loss is stopped b/c of risk

loss prevention- measures that reduce the frequency of same loss from happening

loss reduction- measure that reduces the severit of a loss thats occuring

Front 53

RM technique; Methods of risk financing

Back 53

retention, non-insurance transfers, comercial insurance

Front 54

retention

Back 54

the firm retains part or all of the losses that can result from a given loss

Front 55

Retention used in RM program Under these conditions:

Back 55

1. No other method of treatment is available
2. the worst possible loss is not serious (the damage will not bankrupt company)
3. Losses are highly predictable

Front 56

retention level

Back 56

the dollar amount of losses that the firm will retain

Front 57

Retention level conditions:

Back 57

1. a financially strong firm caan have a higher retention level than one with weaker financial position
2. a company can determine the max retention as a % of the firms net worth

Front 58

methods for paying retained losses:

Back 58

1. Current net income:
-losses treated as current expense
2. Unfunded reserve:
-losses deducted from bookkeeping account
3. funded reserve:
-losses taken from liquid fund
4. credit line:
- funds borrowed to pay losses as they occur

Front 59

captive insurer
(retention)

Back 59

insurer owned by a parent firm for the pupose of insuring the parent firm's loss exposures

ex. captives in the Caribbean,
-premiums paid to a captive may be taxdeductible

Front 60

Captive insurer reasons:
(retention)

Back 60

1. parent firm diffucult obtaining insurance
2. lower costs that regualar insurance
3. easier access to a reinsurer
4. formation of a profit center

Front 61

self-insurance
(retention)

Back 61

form of planned retention

Front 62

risk retention group

Back 62

group captive that can write any type of liability coverage except: employer liability, workers comp, personal lines

emplyers, trade groups, govt units... form retention groups

Front 63

advantages of retention

Back 63

- save money
- lower expenses
- encourage loss prevention
- increase cash flow

Front 64

disadvantages of retention

Back 64

-possible higher losses
- higher expense
- higher taxes

Front 65

Non-insurance transfer

Back 65

method other than insurance, which a pure risk and its potetial financial consequences are transfered to another party

ex. contract, leases, hold harmless clauses

Front 66

Non-insurance transfer advantages

Back 66

- transfers some losses that are not insurable
- save money
- transfer loss to someone in better positon to control losses

Front 67

Non-insurance transfer disadvantages

Back 67

- contract language may be ambiguous, transfer may fail
- if other party fails to pay, firm still responsible for losses
- insurers may not give credit for transfers

Front 68

Deductible
(insurance)

Back 68

a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured.

-used to eliminate small claims and administrative expense adjusting these claims

Front 69

excess insurance

Back 69

a plan which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain.

- used when insured has retention limit before inurance kicks in

Front 70

manuscirpt policy

Back 70

specially tailored insurance policy written for a firm

Front 71

advantages of insurance

Back 71

- firm is indemnified for losses
- uncertainty is reduced
- insurers can provide other RM services
-premiums are taxdeductible

Front 72

disadvantages of insurance

Back 72

-premiums may be costly
- negotiations of contracts takes time and effort
- reisk manager may become lax in exercising loss control

Front 73

Benifits of Risk Management implement:

Back 73

-objectives are attainable
- red. firms cost of risk
- red. pure loss exposures allowed
-society benefits b/c both direct and indirect losses are reduced

Front 74

Cost of risk

Back 74

1. premiums you pay
2. loss you retain
3. outsid risk man services
4. fiancial guarantees
5. administrative costs
6. taxes and fees

Front 75

Personal Risk Management

Back 75

identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks

Front 76

consolidation

ch. 5

Back 76

# of firms in financial service has declined over time b/c of mergers and aquisitions

Front 77

convergence

Back 77

finacial instiutions can now sell wider variety of finacial products that they counldn't before

Front 78

types of private insurers

Back 78

stock
mutual
reciprocal exchanges
lloyd's of london
blue cross blue sheild
health maintenance organizations (HMO)

Front 79

stock insurer

Back 79

corporation owned by stock holders
obj: - stockholders elect board
- stockholders bear all loss
- insurer cannot issure assessable policy

Front 80

mutual insurer

Back 80

corp owned by the policyowner
- owner elects board for effective management control

Front 81

Lloyd's of London

Back 81

not an insurer, but society of memebers who underwrite insurance syndicates (doesnt actually write insurance)
- own syndicates that insure client

Front 82

reciprocal exchange

Back 82

unincorporated mutual providing "no frills" coverage
(circular insurance, everyone insurse each other)

Front 83

Blue cross Blue shield

Back 83

orgnized nonprit, community oriented plans
- cross- for hospital services
- shield- for doctors fees
-sponsor HMO's and PPOs

Front 84

Agent

Back 84

someone who leagally represents the principal and has the authority to act on the principal's behalf

-property and casualty agent has the power to bind the insurer *life insurance agent normally does not

Front 85

Agent authority maybe

Back 85

EXPRESSED
- specified powers agent recived from insurer
IMPLIED
- agent has power to preform all incidental acts necessary to exercise the powers that are given
APPARENT
- authority public reasonably believes the agent possesses based on the actions of the principal

Front 86

Broker

Back 86

someone who legally represents the insured and:
- solicits applications
- paid a commission
- cannot bind the insurer

Front 87

surplus lines broker

Back 87

licened to place business with a nonadmitted insurer (outside the state

Front 88

agentcy building system
(life insurance)

Back 88

system which insurer builds its own agency force by recreiting, financing, training and supervising new agents

Front 89

nonbuilding agency system
(life insurance)

Back 89

marketing system which insurer sells it product through established agents (who dont recruit other agents)

Front 90

direct response system
(life insurance)

Back 90

insurance is sold directly to customers w/out the serices of an agent (via: tv,mail,radio)

Front 91

Independent agency
(prop and liability)

Back 91

business firm that usually represents several unrelated insurers
- agents paid on commission
- agency owns expiration and renewal rights to bus.

Front 92

exclusive agency system
(prop and liability)

Back 92

agent represents only one insurer or group of insurers under common ownership
- agents dont own expirations or renewal
- agents get lower commissions

Front 93

direct writer
(prop and liability)

Back 93

insurer which salesperson is employee of the insurer not an independent contractor
- employees paid salary

Front 94

direct response
(prop and liability)

Back 94

insurer sells directly to the comsumer by television or other media