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CPCU510
Chapter 03
| Question | Answer |
|---|---|
| What are the types of internal documents an organization can use to analyze loss exposures? | Financial statements, accounting records, contracts, insurance policy and procedure manuals, flowcharts and organizational charts, and loss histories. |
| What are the types of external documents an organization can use to analyze loss exposures? | Questionnaires, checklists, surveys, Web sites, news releases, and reports from external organizations. |
| Describe advantages of using questionnaires in assessing loss exposures. | They capture more descriptive information than checklists about amounts or values exposed to loss. |
| Describe disadvantages of using questionnaires in assessing loss exposures. | They typically require considerable expense, time, and effort to complete and may still not recognize all loss exposures. |
| Describe how an organization uses the financial statements to identify loss exposures. | Balance sheets, income statements, statement of cash flows, and supporting statements help identify major categories of current and past loss exposures and can be used to identify future plans that could lead to new loss exposures. |
| Describe how an organization uses contracts to identify loss exposures. | Contracts can help identify property and liability exposures assumed or transferred by contract and help determine who has assumed responsibility for which loss exposure. |
| Describe how an organization uses insurance policies to identify loss exposures. | Policies can reveal many of the organization's insurable loss exposures. |
| Describe how an organization uses organizational policies and records to identify loss exposures. | Corporate by-laws, board minutes, employee manuals, procedure manuals, mission statements, and risk management policies may identify existing loss exposures and indicate impending changes that may create new loss exposures. |
| Describe how an organization uses flowcharts and organization charts to identify loss exposures. | Flowcharts show the nature and use of resources involved in an organization's operations and the sequence of and relationships between the operations. They may also reveal bottlenecks where loss could have substantial effects of business operations. |
| Describe how an organization uses loss histories to identify loss exposures. | An organization's loss history, or that of a comparable organization, can indicate current or future loss exposures. |
| Describe how compliance review may facilitate the identification of loss exposures. | Compliance review determines an organization's compliance with local, state, and federal statues and regulations and can therefore help the organization minimize or avoid liability loss exposures associated with noncompliance. |
| Identify relevant data an organization may use to assess property loss. | Data detailing the property's repair or replacement cost at the time it is to be restored. |
| Identify relevant data an organization may use to assess liability loss. | Data related to past claims that are substantially the same as the potential future claims being assessed. |
| Identify relevant data an organization may use to assess personnel loss. | Data related to personnel with similar experience and expertise as those being considered as future loss exposures. |
| Identify relevant data an organization may use to assess net income loss. | Data involving similar reductions in revenue and similar additional expenses. |
| Describe how complete data can aid a risk management professional in loss exposure assessment. | Helps isolate causes of each loss and enables the risk management professional to make reasonably reliable estimates of the dollar amounts of the future losses. |
| Identify two factors in past loss data that must be consistent to avoid underestimating or overestimating loss projections. | 1. Data must be collected on a consistent basis (same accounting methods) for all recorded losses 2. Data must be expressed in constant dollars |
| Explain empirical probabilities. | Empirical probabilities, based on actual experience, are estimates whose accuracy depends on the size and representative nature of the samples being studied. |
| Explain theoretical probabilities. | Theoretical probabilities, based on theoretical principles, are constant as long as the physical conditions that generate them remain unchanged. |
| Identify two conditions in which probability analysis is effective for projecting losses. | Probability analysis is effective for projecting losses in an organization that has a substantial volume of data on past losses and that have fairly stable operations. |
| List three criteria necessary to accurately forecast future events based on the law of large numbers. | 1. Occurred in the past under same conditions 2. Can be expected to occur in the future under the same, unchanging conditions 3. Have been, and will continue to be, both independent of one another and sufficiently numerous |
| Identify outcome characteristics common to all (both theoretical and empirical) possibility distributions. | The outcomes are mutually exclusive and collectively exhaustive. |
| List two requirements to construct an empirical probability distribution. | 1. To provide mutually exclusive, collectively exhaustive list of outcomes, loss categories must be designated so all losses can be included. 2. The distribution must define the probabilities associated with each of the possible categories. |
| What are two forms of probability distributions? | Discrete probability distribution and continuous probability distribution. |
| Describe how discrete probability distribution is used in analyzing future losses. | Discrete probability distributions have a finite number of possible outcomes and are typically used to analyze how often something will occur (frequency). |
| Describe how continuous probability distribution is used in analyzing future losses. | Continuous probability distributions have an infinite number of possible outcomes and are typically used for severity distributions. |
| Explain why a risk management professional considers measures of both central tendency and dispersion when assessing loss exposures. | To compare the characteristics of both probability distributions. Central tendency indicates the best guess (expected loss) while dispersion indicates the variation among the values in a distribution. |
| What are the common measures of central tendency? | Mean, median, mode. |
| What is mean? | Mean is the numeric average, often used by a risk management profession as the single best guess to forecast future events. |
| What is median? | Median is the value at the midpoint of a sequential data set with an odd number of values, or the mean of the two middle values. Can be used in selecting retention levels or in selecting upper limits of insurance coverage. |
| What is mode? | Mode is the most frequently occurring value in a distribution. It enables risk management professionals to focus on the outcomes that are the most common. |
| What are the measures of dispersion? | Standard deviation and coefficient of variance. |
| What is standard deviation? | Standard deviation indicates how widely dispersed the values in a distribution are. It provides a measure of how sure an insurance or risk management professional can be in projecting the frequency or severity of loss. |
| What is coefficient of variation? | Coefficient of variation is used to compare two distributions with different means. It could help an underwriter determine which account to offer coverage. |
| Describe a normal distribution and why it is useful to a risk management professional in forecasting loss exposures. | A normal distribution is a probability distribution that, when graphed, generates a bell-shaped curve. It is useful to a risk management professional in accurately forecasting the variability around the mean of many physical phenomena. |
| In a normal distribution, what percentage of outcomes is within two standard deviations above or below the mean? | In a normal distribution, 95.44 percent of outcomes are within two standard deviations above or below the mean. |
| Describe how the expected value and the standard deviation of a normal distribution can be helpful in making risk management decisions. | The characteristics of the expected value and standard deviation of a normal distribution can help management select an acceptable probability for loss and aid in scheduling maintenance or selecting retention levels on various loss exposures. |
| List four dimensions used in the analysis of loss exposure. | 1. Loss frequency 2. Loss severity 3. Total dollar loss 4. Timing |
| Explain how to estimate the probable maximum loss of an occurrence. | The probable maximum loss of an occurrence is typically estimated to be near the mean of a given loss severity distribution. |
| List the four categories of loss frequency used in the Prouty Approach. | 1. Almost nil 2. Slight 3. Moderate 4. Definite |
| List the three categories of loss severity used in the Prouty Approach. | 1. Slight 2. Significant 3. Severe |
| Describe two approaches a risk management professional may use when jointly analyzing the frequency and loss severity of a loss exposure. | 1. Prouty Approach identifies four categories of loss frequency and three categories of loss severity 2. Total claims distribution is created by combining the frequency and severity distributions |
| Explain why timing is an important consideration when analyzing loss exposures. | Time value of money. Money held in reserve can earn interest until the payment is made. In addition, when a loss is counted affects accounting and tax treatment. |
Created by:
ttran