Risk management and insurance(test 1)

Long-term care

-assisted living -nursing home care

Strict liability imposed under common law in three cases(3)

1) abnormally dangerous instrumentalities(ex: crazy chimp) 2)ultra hazardous activity (ex:building demolition, someone gets hit by debris) 3) dangerously defective products (ex:food poisoning) *sometimes imposed by statute: workers compensation laws*

A risk manager has several methods for paying retained losses which are?(3)

1) current net income 2) reserve fund 3) credit line

Post-loss objectives ( by priorities)(5)

1) ensure survival of the firm 2)continue operations 3) stabilize earnings 4) maintain growth 5) minimize the effects that a loss will have on other persons and on society-employees and customers

Pre loss objectives(3)

1) prepare for potential losses in the most economical way 2)reduce anxiety 3) meet any legal obligations

Liability risks

1) property ownership 2)automobile 3)products 4) professional services(medical doctors, lawyers, consultants,financial advisors)

Methods of risk financing include(3)

1) retention 2) non-insurance transfers 3) insurance

Techniques for managing risk(5)

1)avoidance 2)loss control 3)risk retention 4)non insurance risk transfer 5) insurance

Methods of risk control include?(3)

1)avoidance 2) loss prevention 3)loss reduction

Risk management process(4)

1)identify loss exposures 2)analyze the loss exposure 3)select the appropriate techniques for treating the loss exposures 4) implement and monitor the risk management program

Elements of negligence(4)

1)legal duty owned 2) breach of legal duty 3)actual damage suffered(economic or non-economic) 4)breach was proximate cause of damages *all these steps lead to the next*

Retention is effectively used when:(3)

1)no other method of treatment is available 2) the worst possible loss is not serious 3) losses are highly predictable

Captives may be performed for several reasons, including:

1)parent firm may have difficulty obtaining insurance 2) costs may be lower than purchasing commercial insurance ****premiums paid to captive May be tax-deductible under certain conditions****

Risk 1

1)pure risk 2)speculative risk

Hazard

A condition that increases the frequency or severity of loss

Retention is used when there is?

A low loss frequency and a low loss severity

Speculative risk

Activity in which either profit or loss is involved( stock price)

Diversifiable risk

Affects only individuals or small groups and not the entire economy(risk can be spread out) -low correlation -just because person one car gets stolen doesn't mean person two has the same chance

Enterprise risk

All major risks faced by a business

Respondeat superior

An employer can be held liable for the negligent acts of employees while they are acting on the employer's behalf

Non-admitted insurer

An insurer not licensed in a particular state

Negligent

An unintentional tort involving the failure to exercise the degree of care that a reasonably prudent person would have exercised, under similar circumstances,to avoid harming another person

Guarantee funds

Applies to licensed insurers, subject to dollar limits , does not cover all lines, state run

Involvement=

Bankrupt

Nondiversifiable

Cannot be eliminated or reduced through diversification( effects the whole economy or large geographic areas) -high correlation Ex. Flood, earth quake

Morale hazard

Carelessness, being more reckless because of insurance

Peril

Cause of loss - if a loss happens, what caused it? -ex:(fire, flood,stolen)

Peril

Cause of loss -if a loss happens, what caused it? -ex. (Fire, flood, storm)

Noninsurance risk transfer

Contracts, other than insurance

Direct risk

Cost to prepare or replace property -ex: theft of ipad

Contingent business interruption

Direct loss happens to someone else -ex. In some cases a direct loss to one company causes a indirect loss to another company

Personal risks

Directly affect an individual -premature death -insufficient retirement income -poor health -unemployment -longevity risk

Personal risks

Directly affect an individual 1) premature death( dying before life expectancy) 2)Insufficient retirement income 3) poor health( can't work so you lose income, and medical bills) 4)unemployment

Avoidance

Do not engage in risky activity

Retention level

Dollar amount of losses the firm will retain -a financially strong firm can have a higher retention level than a financially weak firm -the maximum retention level may be calculated as a percentage of the firms capital( assets -liabilities)

Physical hazard

Ex: not having light outside

Insurance premium=

Expected loss(claims)+operating expenses(salaries of employees)+profit margin

Solvency monitoring

Financial reporting , minimum capital requirements, investment restrictions, risk -based capital

Stocks

For profit, corporate form Ex:Allstate

What is the goal of a company managing risk?

Goal--> max value of firm-->minimize cost of risk

Public insurance

Government Ex:unemployment ins, flood ins.

Immunity

Government can't do any wrong, some instances they can be wrong though Ex: if the government is doing something a private firm can do the government may not have immunity

Indemnification agreement

If you pay for "x", I will reimburse you.

20%

In order to insure something the probability of occurrence needs to be below____

Assumption of risk

In some activities there is obvious risks that the plaintiff assumes

Low;high

Insurance is appropriate for loss exposures that have ___probability of loss but for which the severity of loss is____.

Moral hazard

Intentional

Pure risk

Involve only the possibility of loss or no loss(no chance of profit) -usually buy insurance for these risks -ex:fire, flood, theft

Non-insurance transfer

Is a method other than insurance by which a pure risk and it's potential financial consequences are transferred to another party. -ex. Contracts, leases, hold-harmless agreements, incorporation( which limits liability to owners)

Manuscript policy

Is a policy specially tailored for the firm( language in the policy must be clear to both parties)

What is the meaning of risk management?

Is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures

Captive insurer

Is an insurer owned by apparent firm for the purpose of insuring the parent firm's loss exposures

Association or group captive

Is an insurer owned by several parents

Loss exposure

Is any situation , activity or circumstance in which a loss is possible, regardless of whether a loss occurs Ex: a plant that may be damaged by an explosion or automobile that may be damaged in a collision

Subjective risk

Is based on a person's mental state or perception( the way you look at the risk) -May over or underestimate risk

Objective risk

Is observable and can be measured( looking at ski statistics)

A single-parent captive

Is owned by only one parent

Self insurance

Is special form of planned retention -part or all of a given loss exposure is retained by the firm -a more accurate term would be self funding -widely used for group health benefits -not equivalent to simply buying insurance

Maximum possible loss

Is the worst loss that could happen to the firm during its lifetim

Maximum probable loss

Is the worst loss that is likely to happen -considers loss controls

Strict liability

Liability without proof of negligence

Longevity risk

Living so long you run out of financial resources

Indirect risk

Loss of revenue and/or additional expenses -couldn't get new iPad for 3 days, so loss of revenue due to this is considered____

Reserve fund

Losses are deducted from liquid(like cash) fund where money put aside( similar to "emergency fund")

Avoidance

Means a certain loss exposure is never acquired, or an existing loss exposure is abandoned. - the chance of loss is reduced to zero -it is not always possible, or practical, to avoid all losses

Retention

Means that the firm retains responsibility for paying part or all of the losses that can result from a given loss

Fraternals

Mutuals that provide LH insurance to members of religious or social organization

Direct response

No agent Ex: 1-800 number, no face to face

Private insurance

Non government

Mutuals

Nonprofit, corporate form, owned by policy holder Ex: statefarm

Independent agent

Own renewal rights, sell you insurance for more than one company, you can switch from one company to another each policy period.

Lloyds

Owned by manager, for profit

Contributory negligence

Person who was harmed was 1% responsible , defendant is not responsible because you were 1% at fault Ex: hair dryer , plaintiff pushed on scalp

Comparative negligence

Plaintiff is 3% wrong, defendant is 97% wrong( total damages=100,000*.97=97,000) Since you were 3% at fault you lose $3000

Credit line

Pre approved loan, funds are borrowed to pay losses as they occur

Chance of loss

Probability that an event that causes a loss will occur( relative frequency of loss) - doesn't tell about how bad the loss was

Property risks

Property stolen, damaged, or destroyed

Surplus lines insurer

Provides insurance that is unavailable in admitted market due to unique characteristics of risk exposure

Risk managers have several sources of info to identify loss exposures, which are?

Questionnaires,physical inspection, flowcharts,contract Analysis, financial statements, historical loss data

Prevention

Reduce chance of loss

Reduction

Reduce severity of losses that do happen

Loss prevention

Refers to measures that reduce the frequency of a particular loss. -ex. Child safety caps on prescription drugs

Loss reduction

Refers to measures that reduce the severity of a loss after it occurs Ex: installing an automatic sprinkler system, first aid kit, hair dryer cut off

Risk financing

Refers to techniques that provide for the funding of losses. -how to pay for losses that do happen

Risk control

Refers to techniques that reduce the frequency and severity of losse

Loss frequency

Refers to the probable number of losses that may occur durning some given time period(500 people/10000)=10%

Loss severity

Refers to the probable size of the losses that may occur

Broker

Represents insurance buyer, businesses use these most

Exclusive agent

Represents one company, can't take business from one company to another

Loss___is more important than loss___.

Severity;frequency

Imputed negligence

The negligence of one person is attributed to another under some circumstances

Reciprocals

Unincorporated mutual(no limited liability)

Objective risk

Variation of actual average loss from expected average loss -objective risk declines as the number of risk exposures(exposure units) increase -standard deviation or coefficient of variation are common measures

Mysterious disappearance

When you don't know what happened to it

Risk retention

You bear responsibility for loss whether fully or partially

Involuntary insurance

You don't have a choice to have this insurance(required by law)

Voluntary ins.

You have a choice to buy this insurance

HH agreement

You won't be responsible if "x" happens I will

10-15%

____of people 65 and older have long-term care, and a nursing homes average stay is about 1-3years