CPCU 500 all
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| What are the steps in the risk management process? | show 🗑
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| show | The probability that a (loss) event will occur
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| Diversifiable risk | show 🗑
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| show | Also know as fundamental or market risk. A risk that affects an entire community or large numbers of persons or groups within the economy. There is significant correlation among those experiencing losses.
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| show | A term that encompasses all major risks faced by a business, including pure (hazard) risks, speculative risks, business and financial risks, even strategic risks.
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| show | 1. hazard risk 2. financial risk 3. operational risk 4. strategic risk
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| show | conditions that increase the frequency or severity of losses.
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| show | 1. Physical hazard 2. Moral hazard 3. Morale hazard 4. Legal hazard
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| Financial risk | show 🗑
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| Moral hazard | show 🗑
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| show | Also called attitudinal hazard. Carelessness or indifference to a loss because of the existence of insurance.
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| Physical hazard | show 🗑
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| show | The possibility that a change in laws will ultimately increase losses (especially for insurers).
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| What are three financial consequences of risk? | show 🗑
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| show | Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
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| Objective risk | show 🗑
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| Subjective risk | show 🗑
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| Peril | show 🗑
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| show | uncertainty regarding outcomes. Risk includes the uncertainty in the amount of the outcome and its timing. Also, one of the outcomes is negative
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| Pure risk | show 🗑
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| show | A situation in which either profit or loss are possible (two sided risk - win or lose)
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| What are the three elements of loss exposures? | show 🗑
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| What are four types of loss exposure? | show 🗑
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| show | Tangible property has a physical form and can be touched. Intangible property cannot be physically touched (e.g., goodwill or patents)
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| Property loss exposure | show 🗑
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| Liability loss exposure | show 🗑
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| Personnel loss exposures | show 🗑
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| Net income exposure | show 🗑
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| show | 1. preparation for loss in the most cost effective manner 2. Keeps uncertainty at a tolerable level 3. Ensure legal obligations are satisfied 4. social responsibility
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| show | 1. ultimate survival 2. continuity of operations 3. any level of profitability 4. stable earnings (no loss in profit 5. social responsibility (to employees, suppliers, customers, and community) 6. continued growth
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| direct loss | show 🗑
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| show | Financial loss occurring as the result of some other loss (also called consequential loss). An example is business interruption where a business is closed following a direct loss.
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| objective probability | show 🗑
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| show | frequency that cannot be verified because it is based on the state of mind of the observer (such as the likelihood of a stock increasing in value)
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| show | as the number of observations or trials increases, the amount of objective risk falls. important for insurers, it says that the experience of a group of policyholders becomes more predictable as the number of policies increases.
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| show | A two-dimensional assessment of the risks faced by an organization which begins the process of selecting risk management tools. A risk map illustrates the frequency and the severity/impact of each risk.
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| show | the probability of a loss occurring, or the number of losses occurring during a particular time period
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| Severity | show 🗑
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| What are the two major categories of risk management techniques that are available? | show 🗑
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| show | any technique that attempts to reduce the amount of losses experienced
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| show | any technique that is used to pay for losses when they occur
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| show | reduction in productive capacity of economy (damaged factories don't produce), individuals would have larger emergency funds, discontinued goods/services, worry and fear
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| show | Fewer/smaller losses saving resources, reduced financing costs for businesses, no societal burden for unfortunate, reduced residual uncertainty
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| What are four requirements when compiling data when analyzing loss exposures? | show 🗑
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| What are four measures of central tendency? | show 🗑
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| show | variance, standard deviation, coefficient of variation, and tail percentiles (such as the 5th or 95th percentiles, called value at risk)
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| show | 68%, 95%, and over 99%
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| What methods are used to identify loss exposures? | show 🗑
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| show | financial statements (balance sheet, income statement, cash flow statement), checklists/questionnaires, organizational policies/documents, organizational chart/flowchart, loss history, contracts, insurance policies
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| show | likelihood of an event is based on the known structure of possible outcomes, such as the roll of a die or spin of a roulette wheel. In risk management, we rarely know the structure of the event so we don't know theoretical probabilities.
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| show | estimate of the likelihood based on a sample of data
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| law of large numbers | show 🗑
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| show | presents estimates of the probability of all possible outcomes. these can be presented as a graph/chart or as a table
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| discrete probability distribution | show 🗑
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| continuous probability distribution | show 🗑
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| expected value | show 🗑
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| show | a single number that attempts to represent a distribution of outcomes. (e.g., the "middle" of the distribution)
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| show | it's the average that you and I tend to think of. To determine the mean, add up all outcomes and divide by the number of observations. without additional information, it is likely the best "guess" at what an outcome would be (i.e., the predicted outcome)
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| show | 50th percentile of a distribution, or the midpoint of sequenced data. 50% of outcomes are larger than the median and 50% are less.
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| mode | show 🗑
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| show | a measure of how spread out a probability distribution is. If the dispersion is high, measures of central tendency are less reliable since some outcomes are far away from the middle of the distribution
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| show | the "average" squared deviation from the mean. first, you must calculate the mean. next, subtract the mean from each data point and square this result. finally, add up these squared deviations and divide by the number of observations minus one (n-1)
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| standard deviation | show 🗑
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| coefficient of variation | show 🗑
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| show | the number of losses that occur in a given period of time. or the probability that a loss will occur
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| loss severity | show 🗑
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| total dollar losses | show 🗑
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| show | the total value of loss exposures that can be caused by any one particular event
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| risk map / matrix | show 🗑
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| Prouty approach | show 🗑
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| show | the weight (or confidence) attached to historical data when forecasting future events
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| show | in a probability distribution, all possible outcomes should be illustrated - an outcome not listed is not possible
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| show | when only one outcome is possible at a time (like heads vs. tails on a flip of a coin)
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| show | indicates the likelihood of falling below a specific value
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| tail percentile (value at risk) | show 🗑
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| cumulative probability distribution | show 🗑
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| show | frequency, severity, total dollar losses, and timing
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| show | a technique that is aimed at reducing losses of an organization by targeting the frequency or severity of losses or speeding recovery of operations
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| Avoidance | show 🗑
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| Loss prevention | show 🗑
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| show | A risk control technique aimed at reducing the severity of losses that occur. These techniques can be initiated both before the loss (sprinkler system) or post-loss (execute business continuity plan)
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| show | avoidance, loss prevention, loss reduction, duplication, separation, diversification
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| Separation | show 🗑
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| Duplication | show 🗑
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| show | A risk control technique to spread loss exposures across several different products, markets, or locations.
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| show | 1. Implement effective and efficient measures (choose techniques that reduce losses and are cheaper) 2. Comply with legal requirements 3. Promote life safety 4. Ensure business continuity
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| Life safety | show 🗑
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| What does the acronym "COPE" stand for? | show 🗑
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| show | 1. identify critical functions 2. identify risks/threats to critical functions 3. evaluate impact to critical functions 4. develop a continuity strategy 5. develop a business continuity plan 6. monitor and revise
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| Which three risk control techniques are most useful for liability exposures? | show 🗑
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| proactive avoidance | show 🗑
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| show | abandonment of risky activities, often after experiencing significant losses
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| show | uses elements of design and technology in an effort to minimize losses and hazards (e.g., air bags in cars)
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| human behavior approach to risk control | show 🗑
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| show | liability that occurs at a business's location, such as customers slipping on a floor in a retail store
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| show | liability that arises from the normal activities of a business such as property damage and/or bodily injury (e.g., auto liability by delivery personnel is an example)
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| completed operations liability | show 🗑
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| show | liability that arises due to the defect of distributed goods
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| show | liability that arises from employee injuries while performing their job
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| professional liability | show 🗑
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| management liability | show 🗑
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| What are the goals of risk financing? | show 🗑
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| Retention | show 🗑
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| show | One extreme of risk financing where the financial responsibility for paying losses of an organization are shifted to another party
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| show | cost savings (insurer overhead/admin/commissions), control of the claims process, timing of the cash flows, strong incentive for risk control
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| When compared with retention, what are the advantages of risk transfer (insurance)? | show 🗑
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| What are some organization specific characteristics that affect the selection of risk financing measures? | show 🗑
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| Primary insurance layer | show 🗑
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| Excess insurance layer(s) | show 🗑
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| show | A type of liability insurance that often sits between primary coverages (such as auto and general liability) and excess coverage.
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| Self insurance | show 🗑
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| show | A risk financing technique where an insurer provides administrative/claims services and the organization reimburses insurer for losses under a large deductible
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| Captive insurer | show 🗑
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| risk retention group (RRG) | show 🗑
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| finite risk insurance plan | show 🗑
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| show | A risk financing technique where a group of organizations come together to provide protection in the event of a loss.
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| show | A risk financing technique where the premium for an insured is based on the actual loss experience during the policy period subject to a minimum and maximum
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| hold harmless agreement | show 🗑
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| What capital market solutions exist as risk financing techniques? | show 🗑
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| (insurance) securitization | show 🗑
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| hedging | show 🗑
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| show | A risk financing technique that allows an organization to raise capital by entering into an agreement with another party who agrees to buy securities at prearranged terms if losses exceed some amount.
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| What are methods of retention? | show 🗑
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| show | a conscious decision of an organization that recognizes a loss exposure and decides to pay subsequent losses directly
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| passive retention | show 🗑
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| guaranteed cost insurance | show 🗑
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| show | a type of retention where an organization prefunds losses based on formal analysis and establishes claims services.
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| show | a type of risk transfer that uses an insurance company, but losses are reimbursed only after an organization has absorbed a certain level of losses.
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| show | an insurance subsidiary that is owned by only the parent company
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| show | an insurance company formed and owned by several companies, often from the same industry, who are looking to insure their own losses
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| catastrophe (cat) bonds | show 🗑
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| show | hazard, operational, financial, strategic
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| show | Enhanced decision making and improved risk communication
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| show | foreign exchange, interest rate, commodity price, and equity price (also credit risk)
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| What are some differences between traditional risk management and ERM? | show 🗑
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| show | board of directors and top managers of company discuss, develop, and refine overall business strategies for the company
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| What are the dimensions of SWOT analysis? | show 🗑
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| show | increased profitability from exploiting opportunities, reduced volatility in overall financial performance, improved ability in meeting strategic goals, increased managerial accountability
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| show | more consensus by managers, more acceptance and cooperation by all stakeholders
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| What are the three specific risks identified in banking standard called Basel II? | show 🗑
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| Describe the law of large numbers | show 🗑
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| show | "Only sick people buy insurance". Adverse selection is the tendency of persons with higher-than-average chance of loss to seek insurance at average rates which, if not controlled by an insurer's underwriters, results in higher-than-expected loss levels.
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| show | Property and liability coverage for businesses, non-profit organizations, and government agencies. Not personal lines coverage
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| What is commercial general liability (CGL) insurance? | show 🗑
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| show | An unforeseen and unexpected loss that occurs as a result of chance
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| show | Compensation to the victim of a loss in an attempt to make them financially whole by payment, repair, or replacement
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| How does pooling work? | show 🗑
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| What the requirements of ideally insurable risk? | show 🗑
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| What is risk transfer? | show 🗑
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| show | indemnification for losses, improved financial security/peace of mind, enhances credit (by protecting collateral), may help comply with legal requirements, promotes risk control activity, insurers are a source of investment capital, reduces social burden
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| show | using insurance may be more expensive because of insurer expenses and profit, moral hazard (such as fraud)
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| What are reasons for governments to get involved in insurance markets? | show 🗑
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| show | when a party of a contract (such as the insured) has no input into contract language and must accept the entire contract with all of its terms and conditions. if ambiguous, courts often rule against the writer of contracts of adhesion (the insurer)
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| show | Unlike a commutative contracts in which dollar values exchanged by both parties are equal, an aleatory contract is one in which specific dollar values exchanged may not be equal
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| show | one method for determining the actual cash value which should include all relevant factors an expert would use in determining the value of the property
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| What is a conditional contract? | show 🗑
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| show | transfer of legal rights of a contract to another party
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| What is the principle of indemnity? | show 🗑
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| In the context of insurance, what is the end result of the principle of utmost good faith? | show 🗑
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| What is subrogation? | show 🗑
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| show | one where only one party makes a legally enforceable promise
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| What is a bilateral contract? | show 🗑
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| show | Policy that pays the face amount of insurance regardless of actual cash value if a total loss occurs (e.g., life insurance)
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| In an insurance policy, what is the declarations page (decs page)? | show 🗑
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| What is the insuring agreement? | show 🗑
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| What is an endorsement (or rider)? | show 🗑
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| In the context of an insurance policy, what are exclusions? | show 🗑
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| In the context of an insurance policy, what are conditions? | show 🗑
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| In the context of an insurance policy, what does the acronym "DICE" stand for? | show 🗑
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| show | a monoline insurance policy includes only a single type of insurance while a multiline (or package) policy contains more than one type of insurance in the same policy. e.g., HO and personal auto includes both property insurance and liability coverage
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| show | a self-contained policy has all necessary contract provisions in a singular document. A modular policy must combine several separate documents to complete the policy (such as combining coverage forms/insuring agreements with a conditions form)
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| What are the requirements of any contract? | show 🗑
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| What are some reasons for exclusions in insurance contracts? | show 🗑
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| show | often used as a method to determine loss payments under property insurance. Most often determined by subtracting depreciation of the item from its replacement cost
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| Deductible | show 🗑
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| show | common in disability insurance, it is a deductible in days - the period during which benefits are not paid or the period of time that must elapse before benefits are payable
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| coinsurance requirement (property) | show 🗑
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| principle of insurable interest | show 🗑
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| show | the failure to exercise the standard of care required by law to protect others. if you are found negligent, you may become financially responsible for another's injuries
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| compensatory damages | show 🗑
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| What are the methods for determining actual cash value? | show 🗑
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| show | ownership, secured creditors, contractual rights, factual expectancy, representation of another party
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| What are some legal bases for demonstrating insurance interest in life insurance? | show 🗑
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| bailee | show 🗑
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| show | several parties have entire ownership, including survivorship interest
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| show | same as joint tenancy, but between a husband and wife
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| tenancy in common | show 🗑
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| Agreed value policy | show 🗑
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| functional valuation | show 🗑
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