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CPCU 500

Foundations of Risk Management and Insurance

is the uncertainty about the types and/or timing of outcomes Risk
is the lack of a determinate outcome. uncertainty
is the chance that something could happen. possiblity
is the likelihood that an event will occur. probability
is measurable probability
is not measurable possbility
involves loss or no loss (Fire, death and tornado) Pure Risk
involves loss, no loss or gain (stock market investing and gambling) Speculative Risk
is the uncertainty over unanticipated change in costs of inputs or the prices of products Price Risk
Is the chance that a debtor will not pay his obligations as they come due. Credit Risk
Is the chance that the purchasing power of invested dollars will decline. Inflation Risk
Is the degree of uncertainty associated with an investment’s expected return. Financial Risk
Is the relative inability to convert an asset into cash with little inconvenience, cost or risk of loss. Liquidity Risk
Is the variability in an investment’s return resulting from the changes in the overall market. Market Risk
Is the perceived amount of risk, which is based on a person’s opinion about risk Subjective Risk
Refers to the measureable variation in outcomes based on facts and data. Objective Risk
is when people tend to underestimate familiar risks and to overestimate dramatic, unfamiliar risks. Familiarity
People who feel in ________________ tend to underestimate the level of risk. Control
People tend of overestimate _____________ and to underestimate _______________ events. low-frequency events/high-frequency events
Exposes just one or a few people to the same loss exposure (dwelling fire or car theft) Diversifiable Risk
Exposes many peope to the same loss exposure (war, terrorism, flood and earthquake) Non-Diversifiable Risk
Insurance is designed to address___________________ risk by not _____________ risk. Diversifiable/Non-Diversifiable
________ risks are considered the responsibility of _________ & often addressed by ________. Non-Diversifiable/Society/Government
_________________are pure risks associated with accidental losses, such as loss of a factory by fire. Hazard Risks
_________________are pure risks associated with an organization’s operations, such as adequacy of utilities and reliability of suppliers. Operation Risks
_________________are speculative risks associated with an organization’s financial activities, such as changes in the cost or availability of capital Financial Risks
_________________are speculative risks directly linked to management decisions and the business plan, such as planning and product design. Strategic Risks
________________Represents the extent to which an organization’s value has been reduced by its risks. The Cost of Risk
Equals the loss frequency times expected average loss severity Expected cost of loss
Includes the costs of loss control, loss financing and risk reduction Cost of risk management
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
__________________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
___________________________ Addresses losses caused by pure, rather than speculative risks. Traditional RIsk Management
______________________ Is a comprehensive approach to managing all an organization’s risks to maximize shareholder value Enterprise Risk Management
______________________Is risk inherent in an organization’s operations (chance of loss, no loss, or gain) Business Risk (Speculative Risk)
______________________Is risk of accidental loss (Loss or no loss) Hazard Risk (Pure Risk)
A person has an ____________ in a possible occurrence if its actual occurrence would cause him financial loss or physical injury. Insurable Interest
_________________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
_________________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
_____________________ Exists when a party experiences economic advantage if the event does not occur or economic harm if the event does occur. Factual Expectancy
___________________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
__________________ Is an equal, shared interest that passes to the other tenants upon any owner’s death. Joint Tenancy
___________________ 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
_____________________ 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
_____________________ Is the joint ownership of a partnership property. Both the partnership entity & the individual partners have insurable interests in the property Tenancy in Partnership
____________________ 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
___________________ 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
____________________(insurance carried/insurance required)X loss then minus the deductible Coinsurance Formula
________________ Establishes agreed coinsurance values in advance of any loss Agreed Value Optional Coverage
_______________ Increases coverages daily by a predetermined fixed percentage Inflation Guard Protection
_______________Adjusts policy limits based on specified schedules that reflect predicted seasonal fluctuations in inventories & sales. Peak Season Endorsement
_________________The insurer and insured agree on the insured object’s value. Agreed Value Approach
_________________Payment is limited to the repair or replacement cost using current repair practices up to market value Functional Value
___________________ Appropriate for older buildings and electronics. Functional Value
___________________ Is a contractually specified or determinable amount that is subtracted from the loss settlement otherwise due the insured. Deductible
Higher _______ result in lower rates and lower premiums and vice versa. Deductibles
The goal of insurance is to ______________ people who have suffered losses Indemnify
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
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
Under the ________________ a tortfeasor must pay the amount of his victim’s loss Collateral Source Rule
_____________ Means occurring by chance or accident and neither expected nor intended by the insured. Fortuitous
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
_____________ 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
Insurance contracts involve _______________ because they depend on uncertain circumstances Exchange of Unequal Amounts
__________ project expected loss costs and expenses for each policy so insurers can charge premiums commensurate with each insured’s loss exposures. Insurance Rating Plans
____________ imposes a penalty on any insured who fails to insure the full value of his property Coinsurance in Property Insurance
____________ supports the principle of indemnity by preventing the insured from profiting from his loss. Subrogation
___________ often require pre-approval of insurance rates. Insurance Regulations
___________ involves imposing systems designed to redistribute wealth. Distributes insurance costs based on the ability to pay rather than on actuarial equity. Social Equity
___________ 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
___________ is a single document containing all agreements between the applicant and the insurer. Self Contained Policy
___________ is a mix and match policy designed around a basic document with combinations of other available documents. Modular Policy
__________ is drafted and tailored to meet a particular need of a particular insured. Manuscript
___________ contains the insured’s representations and other information that is included in the declarations page. The Completed Application
___________ add to, delete from, replace or modify other documents in the policy. It supersedes any conflicting terms in the policy. Endorsements
__________ contain information unique to the particular policy, such as the policy number, inception and expiration dates, etc. Declarations
__________Assign meaning to policy terms Definitions
__________ State that under some circumstances the insurer will make a payment or will provide a service. Insuring Agreements
__________ provide broad coverage that is clarified and limited by definitions and exclusions. Comprehensive insuring agreements
__________ policies insure against those perils not specifically excluded. Special Form Coverage
____________ restrict coverage to only those causes of loss listed in the policy. Named Peril Coverage policies
___________ extends the coverage to property or a loss that would not otherwise be covered. Coverage Extension
___________ 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
___________ include any policy provision that eliminates coverage for a specified loss exposure. Exclusions
___________do not qualify as declarations, definitions, insuring agreements, conditions or exclusions Miscellaneous Provisions
__________ involve examination of the organization’s internal and external documents to identify loss exposures. Document Analysis
___________ evaluates the organizations compliance with local, state and federal laws and helps the organization minimize liability loss exposures related to non-compliance. Compliance Review
___________ evaluate property and operations for unexpected loss exposures Personal Inspections
__________ have special knowledge of the organization or its specific loss exposures (company attorneys, insurance experts) Experts
_________ reveals potential losses by identifying conditions that increase expected loss frequency and/or loss severity. Hazard Analysis
____________ are created by the organization and are directly connected to its operations. Internal Documents
___________ shows the organization’s financial condition on a specified date Balance Sheet
____________ lists revenues and expenses over a specified period of time Income Statement
_____________ list cash receipts and payments over a specified period of time The Statement of Cash Flows
______________ reveals large property values exposed to loss & financial obligations that would continue even after a shut down. The Balance Sheet
_____________ are legally enforceable agreements between two or more parties. Contracts
____________ detailed charts of a firm’s operations that reveal production bottlenecks where small direct damage losses can cause large indirect damage losses. Flowcharts
____________ are charts of a firm’s organization’s management structure that reveal key employees whose loss would compromise the organizations ongoing success. Organizational Charts
_____________ are standardized forms used to collect data on an organization’s property, activities and other sources of possible loss. Questionnaires/checklists
Loss data should be ___________ , ____________, ______________ & ______________ Relevant/Complete/Consistent/Organized
____________ measures the expected frequency of an event over time in a stable environment. Probability
_________applies to firms with stable operations & a substantial amount of data on past losses. Probability analysis
_________ can be calculated without actual trials (coin flips, dice throws, card draws, etc) Theoretical Probability
__________ is computed from historical data from study samples (mortality rates, battery lives) Empirical Probability
As the number of similar but independent exposure units increases, forecasts of future events become more reliable. Law of Large Numbers
__________ is a list or display of probabilities that provides a statistical representation of likelihood of occurrence of particular event or outcome. Probability Distribution
____________ have a finite number of possible outcomes Discrete Probability Distributions
____________ have an infinite number of possible outcomes Continuity probability distributions
____________ are descriptive statistics that indicate the middle or center of a set of values Measures of Central Tendency
____________ equals the weighted average of all the possible outcomes of a theoretical probability distribution. Expected Value
___________ equals the sum of all observed values divided by the total number of observations. Mean
___________ is the most frequently occurring value in a data set. Mode
__________ measures the degree of variability among the values in a data set. Dispersion
______________ indicates the variability between each value in a data set and the data set's mean. Standard deviation
_____________ compares the degree of dispersion between two data sets with substantially different means Coefficient of Variation
Equals the standard deviation divided by the mean Coefficient of variation
______________ is a balanced probability distribution that, when graphed creates a bell-shaped curve. Normal Distribution
_______________ have identical standard deviation percentages Normal Distributions
________________ is the number of losses within a specified period Loss Frequency
_______________ is the number of losses relative to the number of exposure units Relative Frequency
______________ is the amount of a loss, measured in dollars Loss Severity
______________ is the largest loss that could occur Maximum Possible Loss
_____________ is the total dollar amount of all losses within a specified period Total Dollar Losses
______________ is when losses occur and when payments are made Timing
______________ evaluates the significance of a particular loss exposure in terms of possible combinations of expected loss frequency and loss severity. The Prouty Approach
_________, __________, ___________ & ___________ are Prouty's four categories of loss frequency. Almost nil, Slight, Moderate, Definite
_________, ___________ & ____________ are Prouty's three categories of loss severity. Slight, Significant and Severe
_____________ considers all possible combinations of the frequency and severity distributions. Total claims distribution
_____________ measures the ability to use available loss data to predict future losses Credibility
_____________ reduce the estimated frequency and/or severity of accidental losses Risk Control Techniques
___________ reduces the chance of loss to zero as potential loss exposure is avoided. Avoidance
_________ reduces loss frequency (wearing a backup parachute) Loss Prevention
__________ Reduces loss severity (installing a sprinkler system) Loss reduction
__________ disperses assets or activities over several locations Separation
___________ reduces effective loss frequency or severity by creating back-ups. Duplication
___________ reduces loss severity for speculative (business) risks b spreading loss exposures over different categories of risks Diversification
___________ reduces unnecessary spending on risk control & provides a consistent basis for comparing all value - maximizing decisions. Cash Flow Analysis
Created by: brad27127
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