Foundations of Risk Management and Insurance
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| is the uncertainty about the types and/or timing of outcomes | Risk
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| is the lack of a determinate outcome. | uncertainty
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| is the chance that something could happen. | possiblity
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| is the likelihood that an event will occur. | probability
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| is measurable | probability
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| is not measurable | possbility
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| involves loss or no loss (Fire, death and tornado) | Pure Risk
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| involves loss, no loss or gain (stock market investing and gambling) | Speculative Risk
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| is the uncertainty over unanticipated change in costs of inputs or the prices of products | Price Risk
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| Is the chance that a debtor will not pay his obligations as they come due. | Credit Risk
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| Is the chance that the purchasing power of invested dollars will decline. | Inflation Risk
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| Is the degree of uncertainty associated with an investment’s expected return. | Financial Risk
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| Is the relative inability to convert an asset into cash with little inconvenience, cost or risk of loss. | Liquidity Risk
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| Is the variability in an investment’s return resulting from the changes in the overall market. | Market Risk
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| Is the perceived amount of risk, which is based on a person’s opinion about risk | Subjective Risk
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| Refers to the measureable variation in outcomes based on facts and data. | Objective Risk
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| is when people tend to underestimate familiar risks and to overestimate dramatic, unfamiliar risks. | Familiarity
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| People who feel in ________________ tend to underestimate the level of risk. | Control
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| People tend of overestimate _____________ and to underestimate _______________ events. | low-frequency events/high-frequency events
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| Exposes just one or a few people to the same loss exposure (dwelling fire or car theft) | Diversifiable Risk
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| Exposes many peope to the same loss exposure (war, terrorism, flood and earthquake) | Non-Diversifiable Risk
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| Insurance is designed to address___________________ risk by not _____________ risk. | Diversifiable/Non-Diversifiable
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| ________ risks are considered the responsibility of _________ & often addressed by ________. | Non-Diversifiable/Society/Government
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| _________________are pure risks associated with accidental losses, such as loss of a factory by fire. | Hazard Risks
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| _________________are pure risks associated with an organization’s operations, such as adequacy of utilities and reliability of suppliers. | Operation Risks
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| _________________are speculative risks associated with an organization’s financial activities, such as changes in the cost or availability of capital | Financial Risks
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| _________________are speculative risks directly linked to management decisions and the business plan, such as planning and product design. | Strategic Risks
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| ________________Represents the extent to which an organization’s value has been reduced by its risks. | The Cost of Risk
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| Equals the loss frequency times expected average loss severity | Expected cost of loss
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| Includes the costs of loss control, loss financing and risk reduction | Cost of risk management
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| Includes the effects of uncertainty on the prices of the firm’s products and on the price of the firm’s stock. | Cost of residual uncertainty
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| __________________Is the systematic, problem solving process used to identify and treat the pure loss exposures of an individual (or family) or an organization. | Risk Management
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| ___________________________ Addresses losses caused by pure, rather than speculative risks. | Traditional RIsk Management
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| ______________________ Is a comprehensive approach to managing all an organization’s risks to maximize shareholder value | Enterprise Risk Management
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| ______________________Is risk inherent in an organization’s operations (chance of loss, no loss, or gain) | Business Risk (Speculative Risk)
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| ______________________Is risk of accidental loss (Loss or no loss) | Hazard Risk (Pure Risk)
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| A person has an ____________ in a possible occurrence if its actual occurrence would cause him financial loss or physical injury. | Insurable Interest
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| _________________Are created when one party to a contract has a claim against the other party, but not against any specific property belonging to that person. (credit card debt) | Contractual Rights against Persons
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| _________________Are created when one party to a contract has a claim against specific property owned by the other party. (mortgage or car loan) | Contractual Rights against Property
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| _____________________ Exists when a party experiences economic advantage if the event does not occur or economic harm if the event does occur. | Factual Expectancy
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| ___________________One person who represents another can have an insurable interest based on their relationship Ex: agent/trustee/bailee can insure property in his own name for the benefit of the principal/trust/bailor. | Representative Status
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| __________________ Is an equal, shared interest that passes to the other tenants upon any owner’s death. | Joint Tenancy
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| ___________________ Is a joint tenancy between only a husband and his wife. Each tenant has an insurable interest equal to the property’s full value. | Tenancy by the entirety
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| _____________________ Is a shared interest that maybe sold or willed. The parties do not have survivorship rights. Each party’s insurable interest is limited to that owner’s share of the property’s value. | Tenancy in common
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| _____________________ Is the joint ownership of a partnership property. Both the partnership entity & the individual partners have insurable interests in the property | Tenancy in Partnership
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| ____________________ Require the insured to carry at least as much property insurance as the maximum possible loss or stated percentage of the maximum possible loss. | Insurance-to-Value Provisions
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| ___________________ Require the insured to bear a fixed proportion of any loss if he does not carry at least as much insurance as is required by the coinsurance provision. | Coinsurance Provisions
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| ____________________(insurance carried/insurance required)X loss then minus the deductible | Coinsurance Formula
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| ________________ Establishes agreed coinsurance values in advance of any loss | Agreed Value Optional Coverage
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| _______________ Increases coverages daily by a predetermined fixed percentage | Inflation Guard Protection
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| _______________Adjusts policy limits based on specified schedules that reflect predicted seasonal fluctuations in inventories & sales. | Peak Season Endorsement
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| _________________The insurer and insured agree on the insured object’s value. | Agreed Value Approach
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| _________________Payment is limited to the repair or replacement cost using current repair practices up to market value | Functional Value
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| ___________________ Appropriate for older buildings and electronics. | Functional Value
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| ___________________ Is a contractually specified or determinable amount that is subtracted from the loss settlement otherwise due the insured. | Deductible
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| Higher _______ result in lower rates and lower premiums and vice versa. | Deductibles
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| The goal of insurance is to ______________ people who have suffered losses | Indemnify
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| The ______________ states that an insured can only recover up to the extent or amount of his loss, that he may not profit from any insured loss | Principle of indemnity
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| A _____________ is an insurance policy that pays a pre-determined amount in the event of a total loss and is not a contract of indemnity | Valued Policy
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| Under the ________________ a tortfeasor must pay the amount of his victim’s loss | Collateral Source Rule
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| _____________ Means occurring by chance or accident and neither expected nor intended by the insured. | Fortuitous
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| Insurance is a ____________ because it is written by one party and then offered to the other on a ‘take it or leave it’ basis. | Contract of Adhesion
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| _____________ requires courts to interpret policies to include coverages that the reasonable person would expect them to include regardless of their actual provisions or exclusions. | The Doctrine of Reasonable Expectations
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| Insurance contracts involve _______________ because they depend on uncertain circumstances | Exchange of Unequal Amounts
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| __________ project expected loss costs and expenses for each policy so insurers can charge premiums commensurate with each insured’s loss exposures. | Insurance Rating Plans
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| ____________ imposes a penalty on any insured who fails to insure the full value of his property | Coinsurance in Property Insurance
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| ____________ supports the principle of indemnity by preventing the insured from profiting from his loss. | Subrogation
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| ___________ often require pre-approval of insurance rates. | Insurance Regulations
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| ___________ involves imposing systems designed to redistribute wealth. Distributes insurance costs based on the ability to pay rather than on actuarial equity. | Social Equity
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| ___________ distribute the cost of auto-related injuries to the insurers of the injured parties rather than to the insurers of the at-fault drivers. | No-Fault Insurance Laws
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| ___________ is a single document containing all agreements between the applicant and the insurer. | Self Contained Policy
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| ___________ is a mix and match policy designed around a basic document with combinations of other available documents. | Modular Policy
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| __________ is drafted and tailored to meet a particular need of a particular insured. | Manuscript
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| ___________ contains the insured’s representations and other information that is included in the declarations page. | The Completed Application
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| ___________ add to, delete from, replace or modify other documents in the policy. It supersedes any conflicting terms in the policy. | Endorsements
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| __________ contain information unique to the particular policy, such as the policy number, inception and expiration dates, etc. | Declarations
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| __________Assign meaning to policy terms | Definitions
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| __________ State that under some circumstances the insurer will make a payment or will provide a service. | Insuring Agreements
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| __________ provide broad coverage that is clarified and limited by definitions and exclusions. | Comprehensive insuring agreements
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| __________ policies insure against those perils not specifically excluded. | Special Form Coverage
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| ____________ restrict coverage to only those causes of loss listed in the policy. | Named Peril Coverage policies
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| ___________ extends the coverage to property or a loss that would not otherwise be covered. | Coverage Extension
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| ___________ qualify an otherwise enforceable promise of the insurer. Ex The insured’s duties to pay premiums, report losses promptly, document losses and cooperate with the insurer. | Conditions
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| ___________ include any policy provision that eliminates coverage for a specified loss exposure. | Exclusions
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| ___________do not qualify as declarations, definitions, insuring agreements, conditions or exclusions | Miscellaneous Provisions
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| __________ involve examination of the organization’s internal and external documents to identify loss exposures. | Document Analysis
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| ___________ evaluates the organizations compliance with local, state and federal laws and helps the organization minimize liability loss exposures related to non-compliance. | Compliance Review
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| ___________ evaluate property and operations for unexpected loss exposures | Personal Inspections
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| __________ have special knowledge of the organization or its specific loss exposures (company attorneys, insurance experts) | Experts
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| _________ reveals potential losses by identifying conditions that increase expected loss frequency and/or loss severity. | Hazard Analysis
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| ____________ are created by the organization and are directly connected to its operations. | Internal Documents
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| ___________ shows the organization’s financial condition on a specified date | Balance Sheet
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| ____________ lists revenues and expenses over a specified period of time | Income Statement
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| _____________ list cash receipts and payments over a specified period of time | The Statement of Cash Flows
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| ______________ reveals large property values exposed to loss & financial obligations that would continue even after a shut down. | The Balance Sheet
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| _____________ are legally enforceable agreements between two or more parties. | Contracts
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| ____________ detailed charts of a firm’s operations that reveal production bottlenecks where small direct damage losses can cause large indirect damage losses. | Flowcharts
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| ____________ are charts of a firm’s organization’s management structure that reveal key employees whose loss would compromise the organizations ongoing success. | Organizational Charts
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| _____________ are standardized forms used to collect data on an organization’s property, activities and other sources of possible loss. | Questionnaires/checklists
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| Loss data should be ___________ , ____________, ______________ & ______________ | Relevant/Complete/Consistent/Organized
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| ____________ measures the expected frequency of an event over time in a stable environment. | Probability
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| _________applies to firms with stable operations & a substantial amount of data on past losses. | Probability analysis
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| _________ can be calculated without actual trials (coin flips, dice throws, card draws, etc) | Theoretical Probability
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| __________ is computed from historical data from study samples (mortality rates, battery lives) | Empirical Probability
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| As the number of similar but independent exposure units increases, forecasts of future events become more reliable. | Law of Large Numbers
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| __________ is a list or display of probabilities that provides a statistical representation of likelihood of occurrence of particular event or outcome. | Probability Distribution
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| ____________ have a finite number of possible outcomes | Discrete Probability Distributions
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| ____________ have an infinite number of possible outcomes | Continuity probability distributions
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| ____________ are descriptive statistics that indicate the middle or center of a set of values | Measures of Central Tendency
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| ____________ equals the weighted average of all the possible outcomes of a theoretical probability distribution. | Expected Value
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| ___________ equals the sum of all observed values divided by the total number of observations. | Mean
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| ___________ is the most frequently occurring value in a data set. | Mode
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| __________ measures the degree of variability among the values in a data set. | Dispersion
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| ______________ indicates the variability between each value in a data set and the data set's mean. | Standard deviation
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| _____________ compares the degree of dispersion between two data sets with substantially different means | Coefficient of Variation
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| Equals the standard deviation divided by the mean | Coefficient of variation
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| ______________ is a balanced probability distribution that, when graphed creates a bell-shaped curve. | Normal Distribution
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| _______________ have identical standard deviation percentages | Normal Distributions
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| ________________ is the number of losses within a specified period | Loss Frequency
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| _______________ is the number of losses relative to the number of exposure units | Relative Frequency
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| ______________ is the amount of a loss, measured in dollars | Loss Severity
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| ______________ is the largest loss that could occur | Maximum Possible Loss
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| _____________ is the total dollar amount of all losses within a specified period | Total Dollar Losses
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| ______________ is when losses occur and when payments are made | Timing
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| ______________ evaluates the significance of a particular loss exposure in terms of possible combinations of expected loss frequency and loss severity. | The Prouty Approach
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| _________, __________, ___________ & ___________ are Prouty's four categories of loss frequency. | Almost nil, Slight, Moderate, Definite
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| _________, ___________ & ____________ are Prouty's three categories of loss severity. | Slight, Significant and Severe
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| _____________ considers all possible combinations of the frequency and severity distributions. | Total claims distribution
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| _____________ measures the ability to use available loss data to predict future losses | Credibility
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| _____________ reduce the estimated frequency and/or severity of accidental losses | Risk Control Techniques
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| ___________ reduces the chance of loss to zero as potential loss exposure is avoided. | Avoidance
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| _________ reduces loss frequency (wearing a backup parachute) | Loss Prevention
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| __________ Reduces loss severity (installing a sprinkler system) | Loss reduction
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| __________ disperses assets or activities over several locations | Separation
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| ___________ reduces effective loss frequency or severity by creating back-ups. | Duplication
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| ___________ reduces loss severity for speculative (business) risks b spreading loss exposures over different categories of risks | Diversification
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| ___________ reduces unnecessary spending on risk control & provides a consistent basis for comparing all value - maximizing decisions. | Cash Flow Analysis
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