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CAS - OC1

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Finite risk insurance

Reinsurer's liability is limited, investment income included. Any kind of risks (incl. those typically insurable or uninsurable) Multiyear period, long-term protection Designed to cover high severity losses

Five construction characteristics an UW should consider

- construction type - building age - building height - fire divisions - building openings - building codes

How does the AAIS categorize fire protection classes?

- Protected - Partially protected - Unprotected

Risk management activities under the enterprise-wide risk management approach occur at the Select one: A. Enterprise level. B. Departmental level. C. Regional level. D. Business unit level.

Claim representatives handling losses to homes have two goals:

- address insured's concerns (they're sad because their house is brokeded) - enforce policy provisions and protect the insurer's rights

Relatively non-combustible interior finishings include:

plaster, gypsum, and wallboard

Normal loss expectancy

Loss expected under normal operating conditions with all fire protection services working

Four steps in monitoring and revising of a risk management program

(1) establishing standards of acceptable performance (2) comparing actual results with these standards (3) correcting substandard performance or revising standards that prove to be unrealistic (4) evaluating standards that have been substantially exceeded.

What are insurance pools?

- A group of organizations that insures each other's losses - Well-suited for organizations that are too small to form a captive - The pool achieves savings through economies of scale in administration, claim handling, and the purchase of excess insurance or reinsurance.

What is a finite risk plan? How is it used? Does it fulfill risk financing goals?

- A risk financing plan that transfers a specified amount of risk to an insurer. - A large part of the insured's premium creates a fund (experience fund) for the insured's own losses. The remaining amount of the premium is used to transfer a limited portion of the risk of loss to the insurer. The insurer usually shares a large percentage of its profit from the plan with the insured. Used for especially hazardous exposures for which insurance is not offered or limited. - Does not maintain an appropriate level of liquidity because premiums are typically paid upfront

Premises medical payments CGL

- Automatically included in coverage C - Applies to medical expenses for persons other than the insured who are injured on insured's premises - Does not require that the insured be legally liable to pay for them -> so low limts (5-10k per person)

Premises Medical Payments Liability in CGL policy

- Medical payments coverage applies to medical expenses of persons other than the insured who are injured on the insured's premises or because of the insured's operations. - Medical payments coverage does not require the insured to be legally liable to pay for them. Because of this, the limits for medical payments coverage are usually much lower than those for bodily injury or property damage.

Three methods of limiting access to claims data

- Password - Restrict certain data to managers only - Prevent changes to data

Two broad categories of market data.

- Secondary data: Research typically begins with secondary data, which is data collected by other parties, because it is immediately available at little or no cost. - Primary data: more expensive but addresses issues specific to the marketing research project

Three things an insured needs to provide to prove arson

- incendiary fire - motive - opportunity

How does risk control help marketing and sales?

-Making marginal accounts acceptable -Proving to applicants and insureds that the insurer understands their business operations and associated hazards -Retaining insureds as customers

Underlying an underwriter's evaluation of an account for general liability insurance is _____.

...the extent of its liability exposure to the public. The public includes customers, representatives of suppliers, anyone else associated with the business, and the general public.

Three risk control techniques that can be used to control liability losses

1. Avoidance 2. Loss prevention methods 3. Loss reduction

Steps to the underwriting process

1. Evaluate the submission - Using all sources of information 2. Develop underwriting alternatives - Make a counteroffer with modifications (risk control, rates, limits, policy terms, reinsurance) 3. Select an underwriting alternative - Consider UW authority, supporting business (other LoBs), MoB, producer relationships, regulatory restrictions 4. Determine an appropriate premium 5. Implement the UW decision - Communicate it to producer, issuing documents, record data 6. Monitor

What are the three components of the financial consequences of risk?

1. Expected cost of losses or gains 2. Expenditures on risk management - If an individual: cost of buying insurance - If a firm: wide variety of RM techniques 3. Cost of residual uncertainty - The cost of worry. For example, if an individual is unduly concerned about a particular risk, he or she may overestimate the frequency or severity of it, resulting in a subjective interpretation of the true objective risk. - For firms, it might be the loss of customers due to a poor safety reputation.

On-premises hazards in WC

1. Housekeeping: physical layout, cleanliness, etc 2. Maintenance of machines 3. Occupational diseases - sometimes covered 4. Cumulative trauma injuries 5.

What should an UW consider for the O in COPE?

1. Occupancy categories - habitational, office, institutional (schools, churches, govt), mercantile, service, manufacturing 2. Characteristics of contents -Consider ignition, combustibility, and susceptibility. - Ignition: chemical reactions (magnesium/phosphate), friction, electrical work - Combustibility: how quickly it ignites, spreads, and the heat it generates. - Susceptibility: how much the fire will damage property 3. Occupancy hazards - Common hazards - Special hazards of the class (normal hazards for the class) - Special hazards of the risk (hazards not in the class)

Distortions in combined ratio

1. Premium volume 2. Catastrophes 3. Delays in loss reporting and development 4. Underwriting cycle

Four benefits of risk transfer

1. Reducing exposure to large losses 2. Reducing cash flow variability 3. Providing ancillary services (insurers often offer risk assessment, risk control, litigation services) 4. Avoiding adverse employee and public relations

Five external constraints on achieving insurer goals

1. Regulation 2. Rating agencies 3. Public opinion 4. Competition 5. Economic conditions

AS/NZS 4360

1. Risk Management, a joint Australian/New Zealand Standard for ERM known as AS/NZS 4360, was published in 2004 as a generic framework for managing risk. 2. AS/NZS 4360 is designed for directors, elected officials, chief executive officers, senior executives, line managers, and staff across a wide range of organizations. 3. AS/NZS 4360 is intended to provide only a broad overview of risk management. Organizations are expected to interpret this guide in the context of their own environments and to develop their own specific ERM approaches.

Describe the underwriting considerations and risk control techniques associated with employee dishonesty and crimes committed by others.

1. employee dishonesty - losses can be large, employers reluctant to believe employees will steal. - cvg often included in comm. policies, but UW should ensure no moral hazard exists - Should screen employees, turnover should be normal for industry, rotate duties, etc. 2. Crimes committed by others - visibility/size/portability of property, location, occupancy (some have cash on premises), moral/morale hazards, public protection - can control by having safes and vaults, alarms, etc.

Control process for evaluating strategy

1. establish standards 2. create and apply measurements 3. compare actual results to standards 4. evaluate and implement correct standards if necessary

Describe the framework for coverage analysis and the information obtained by following it.

1. is the person involved covered? 2. did the loss occur during policy period? 3. is COL covered? 4. is the damaged property covered? 5. is the type of loss covered? 6. are the amounts of loss or damages covered? 7. is the location of the loss covered? 8. exclusions? 9. other insurance apply?

Three strategies for companies in a growth mode

1. single business - concentrating on one industry or one product 2. vertical integration - backward integration: producing inputs - forward integration: selling directly to customer 3. diversification

Premium-to-surplus ratio is considered too high when it exceeds ______

300%, or 3-to-1

Risk control can assist premium auditing by Select one: A. Reporting the existence of new operations. B. Designing product recall procedures. C. Developing safety management programs. D. Providing laboratory analyses.

A manufacturer that elects to discontinue a particular product due to potential liability loss exposures is practicing which one of the following risk control techniques? Select one: A. Avoidance B. Loss prevention C. Loss reduction D. Separation

Examples of risk control loss reduction techniques that primarily apply to occupancy are Select one: A. Safety training and emergency evacuation procedures. B. Fire detection and suppression. C. Relocation away from hazards and removing combustible materials from the space that separates buildings. D. Construction design and internal fire protection.

Filip manages a small ski resort. He notes upon reviewing the injury claims he has received that many of them occurred on the same slope. To manage this exposure, Filip widens the slope and reduces the steepness. He believes these changes will reduce the number of injuries. Which one of the following risk control techniques is Filip using? Select one: A. Loss prevention B. Avoidance C. Separation D. Diversification

Generally applied to fire losses, which one of the following loss severity measures is an estimate of the financial cost of the loss that would occur if all protection measures were to fail and no effective fire department response occurred. Select one: A. Maximum foreseeable loss B. Policy amount C. Normal loss expectancy D. Amount subject

One approach to categorizing risks involves dividing risks into risk quadrants. The risks categorized as hazard risks are Select one: A. Traditionally managed by risk management professionals. B. Traditionally handled by the chief financial officer. C. Fundamental to an organization's existence and business plans. D. Speculative risks that fall outside the operational risk category.

Ranji is a commercial underwriter. She is evaluating an application for employee dishonesty coverage submitted on behalf of a grocery store. The company carefully screens new hires and checks references. Seasoned employees are thoroughly evaluated prior to any promotion. A substance-abuse screening program is in place. Termination procedures are well defined. Bank reconciliations are done to ensure that company and bank records agree. Periodic audits are conducted and employees monitor one another via a division of authority. Annual vacations are required. Duties are rotated and dual control systems are in place on the vault, cash, and other items susceptible to theft. Bank deposits are always made by two employees, and management selects two different employees each day. Which one of the following ratings would Ranji most probably give to this risk? Select one: A. Desirable B. Average C. Undesirable D. Highly undesirable

Risk transfer is the appropriate risk financing measure for loss exposures with which one of the following combinations of characteristics? Select one: A. Low frequency and high severity B. High frequency and high severity C. Low frequency and low severity D. High frequency and low severity

Underwriting authority requirements are usually communicated to an underwriter through Select one: A. The underwriting guidelines. B. Their agent's manual. C. Their underwriting management. D. Their underwriting supervisor.

Which one of the following is correct regarding major risk management frameworks and standards? Select one: A. A purpose of Basel II is to ensure that capital allocation is more risk sensitive. B. A purpose of Basel II is to promote confidence in the financial stability of the insurance sector. C. COSO II applies only to U.S. public companies subject to securities laws. D. Solvency II was established as an international standard for the banking industry.

Which one of the following is the primary advantage of using retention as a risk financing measure to help an organization meet its risk financing goals? Select one: A. Managing the cost of risk B. Complying with legal requirements C. Paying for losses D. Managing cash flow variability

Which one of the following is true about insurable interest in properrty insurance? Select one: A. The most common interest in property comes from outright ownership. B. Insurable interest is the primary policy provision that determines the amount paid. C. An insured's recovery is limited to the amount of its insurable interest at the time the insurance is purchased. D. No more than one entity may have an insurable interest in a given property at a given point in time.

Which one of the following statements is correct with regard to the risk control function of insurers? Select one: A. Risk control helps insurers meet profit goals by improving the quality of underwriting decisions. B. Insurance regulation in all states requires insurers to provide a minimal level of risk control services to commercial policyholders. C. Insurance regulation in all states prohibits insurers from selling unbundled risk control to firms that self-insure. D. Providing risk control services increases the chance of policyholders making errors and omissions claims based on insurer negligence.

Which one of the following statements is correct with respect to developing safety management programs? Select one: A. Developing a safety management program begins with a complete evaluation of the policyholder's operations. B. Examples of safety management programs include fire safety, driver safety, and machine operation safety. C. Safety management program development can often be done remotely without the need to visit the policyholder's premises. D. Less experienced risk control representatives are often assigned to developing safety management programs.

Which two risk control measures are directly aimed at reducing the severity of net income losses? Select one: A. Separation and duplication B. Diversification and loss reduction C. Avoidance and loss prevention D. Avoidance and diversification

While developing goals for its book of business, an insurer's staff underwriter decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity is known as Select one: A. Formulating underwriting policy. B. Providing assistance to policyholders. C. Developing underwriting guides. D. Reviewing and revising rating plans.

What is a hold-harmless agreement?

A contractual provision that obligates one of the parties to assume the legal liability of another party. An example is an organization's agreement to assume the liability losses that may arise from the use of equipment rented from the equipment's owner.

Business income coverage requires _____ to be a covered loss

A direct loss to the property

What is a firestop?

A firestop is an element of fire-resistant construction, inserted in concealed spaces or between structural elements of a building, either a floor, or wall, or roof area, that prevents the passage of flame from one point to another. It makes fire stop lmao.

Five forces model

A framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy. 1. Threat of new entrants - Economies of scale, offering unique products, regulatory environment 2. Threat of substitute products 3. Bargaining power of buyers 4. Bargaining power of suppliers 5. Rivalry among existing firms

What is a disaster recovery plan?

A plan for backup procedures, emergency response, and post-disaster recovery to ensure that critical resources are available to facilitate the continuity of operations in an emergency situation.

Analysis of external and internal environments method for determining how receptive the market would be to its products and services and its competitive position within the market.

A strengths, weaknesses, opportunities, and threats (SWOT)

Successful differentiation strategy

A successful differentiation strategy requires products and services that customers perceive as distinctive and that are difficult for rivals to imitate

Pro rata reinsurance

A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses). Reinsurer typically pays the primary insurer a ceding commission for the ceded loss exposures.

SWOT (strengths, weaknesses, opportunities, threats)

Allows organizations to consider both the general environment and the task environment

As an individual or organization's retention increases, what needs to happen to its liquidity?

Also needs to increase

What is an unadmitted insurer

An unlicensed insurer (nonadmitted insurer) has not been granted a license to operate in a given state

Risk control techniques

Avoidance eliminates any possibility of loss. The probability of loss from an avoided loss exposure is zero because an entity decides not to assume a loss exposure in the first place (proactive avoidance) or to eliminate one that already exists (abandonment). Loss prevention Loss reduction. Separation involves dispersing a particular activity or asset over several locations. Separation involves the routine, daily reliance on each of the separated assets or activities, all of which regularly form a portion of the organization's working resources. Duplication involves relying on backups, that is, spares or duplicates, used only if primary assets or activities suffer loss. Diversification involves providing a range of products and services used by a variety of customers.

All of the following are principal sources of underwriting information, EXCEPT: Select one: A. Applications B. Underwriting authority reports C. Financial rating services D. Producers

As part of its risk management program, a vending company installed a new top of the line security system with an expectation of fewer thefts and Select one: A. Increased residual uncertainty. B. Less residual uncertainty. C. Higher expected losses. D. Increased anxiety.

At a minimum, in the enterprise-wide risk management (ERM) process, an organization should identify how many of its top risks for consideration of their likelihood, to target them for treatment and monitoring? Select one: A. 3 B. 5 C. 6 D. 7

Dave owns a computer store. He stores backup media copies of confidential records off site in case there is a fire at the computer store. The risk control technique Dave is using to protect the confidential records is Select one: A. Avoidance. B. Duplication. C. Separation. D. Diversification.

Insurer B (IB) notifies one of its independent agents that its agency contract will be terminated unless the agency improves its hit (or success) ratio during the next 90 days. This indicates that IB has Select one: A. A higher-than-expected loss ratio with the agency. B. Written too few of the accounts it quoted for the agency. C. Less restrictive underwriting selection criteria than other insurers the agency represents. D. Renewed too few of the accounts the agency wrote with IB in the past year.

Maja, who has 29 years of experience as a professional liability underwriter, works in the home office of Richley Insurance Company. Her primary responsibilities involve formulating underwriting policy and revising underwriting guides for various lines of professional liability insurance that will be used by personnel in the company's field offices. Maja is functioning as a Select one: A. Chartered underwriter. B. Staff underwriter. C. Line underwriter. D. Field underwriter.

Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the Select one: A. Cost of implementing and administering risk management. B. Cost of residual uncertainty. C. Cost of measures to prevent or reduce the size of potential losses. D. Cost of losses not reimbursed by insurance.

Risk management concepts in one form or another apply Select one: A. To all companies but not families. B. To all companies and families. C. Only to large companies. D. Only to international companies.

The final, and ongoing, step in the underwriting process is monitoring underwriting decisions. Which one of the following statements is correct with respect to this process? Select one: A. Because underwriters do not have the resources necessary for constant monitoring of all individual policies, existing policies are reviewed only upon renewal. B. The underwriter is tasked with monitoring both individual policies and books of business to ensure that satisfactory results are achieved. C. Renewal underwriting is typically more time-consuming than new business underwriting as claim reports and risk control reports must be reviewed. D. Underwriters will generally not concern themselves with changes in the nature of the insured's business when monitoring the insured's policy.

The improved decision making that results in an organization that adopts an enterprise-wide risk management (ERM) approach provides which one of the following additional advantages over traditional risk management? Select one: A. Improved employee retention B. Increased management accountability C. Reduced insurance costs D. Enhanced customer satisfaction

The overarching purpose of underwriting is Select one: A. Add to policyholder surplus. B. To develop and maintain a profitable book of business. C. Achieve the underwriting goals of the company. D. Make and sustain a profit.

Which one of the following best describes one of the steps in the business continuity process? Select one: A. Identify the organization's important resources B. Identify the risks to the organization's critical functions C. Develop an emergency response plan to deal with life and safety issues D. Arrange appropriate insurance coverage

Which one of the following financial ratios is key for evaluating insurer solvency? Select one: A. Retention ratio B. Premium to surplus ratio C. Loss ratio D. Expense ratio

Which one of the following has load-bearing walls and columns of masonry or reinforced concrete construction and has a fire-resistance rating of one to two hours? Select one: A. Joisted masonry construction B. Modified fire-resistive construction C. Fire-resistive construction D. Masonry noncombustible construction

Which one of the following is a problem with an individual or organization maintaining high levels of liquidity? Select one: A. Maintaining high levels of liquidity leads to increased risk control expenses. B. Maintaining high levels of liquidity typically results in a lower rate of return on investments. C. Maintaining high levels of liquidity makes it difficult to manage cash flow variability. D. Maintaining high levels of liquidity requires a high tolerance for risk.

Which one of the following is an example of a common hazard relating to premises and operations liability loss exposures? Select one: A. Poorly maintained underground storage tanks B. Inadequate housekeeping C. Improperly stored explosives D. Forklift trucks with no warning lights

Which one of the following statements is true with regard to occupancy analysis when underwriting property insurance? Select one: A. An insured's management practices can do little to improve the acceptability of an account with significant occupancy hazards. B. Electrical equipment is a source of common hazards that exists in almost all business occupancies. C. Severe loss to the contents of a building is an underwriting concern only for large fires that are difficult to extinguish. D. The office occupancy category is a high hazard category due to the extreme combustibility of contents.

At year end, Omicron Insurance Company (OIC) posted these results: Premiums written = $10,000,000 Premiums earned = 9,500,000 Underwriting expenses incurred = 4,000,000 Loss+LAE incurred = 5,700,000 Based on this information, which one of the following represents OIC's trade basis combined ratio? Select one: A. 97% B. 100% C. 102% D. 110%

B (57/95 + 4/10)

Diary system for documenting claims

Because claims representatives simultaneously handle many claims, they must have a system for working on and reviewing each claim. The system allows the claims representative to work on a claim one day and then diary it or calendar it for review

Why are products liability and completed operations liability considered together?

Both address exposures to accidents or damage caused by a defect in finished work that is away from the insured's premises and over which the insured has relinquished control.

After construction type, the first additional construction characteristic that an UW should consider is _____. Second additional characteristic?

Building age then building height

Temporary and seasonal workers

Consideration in WC underwriting. These employees are not as well-trained. Need to consider whether the company that leases the workers is the employer

Developing a safety management program begins with a Select one: A. Series of safety-related subjects. B. Positive safety attitude among all workers. C. Complete evaluation of the policyholder's operations. D. Service contract to provide periodic testing and maintenance of all fire protection systems.

Restricting the number of key employees who can travel on the same aircraft is an example of which one of the following risk control techniques? Select one: A. Loss reduction B. Duplication C. Separation D. Diversification

Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? Select one: A. The distinction between diversifiable and nondiversifiable risks is clear; risks cannot fall under both classifications simultaneously. B. Private insurance tends to concentrate on nondiversifiable risks; government insurance is often suitable for diversifiable risks. C. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. D. Inflation, unemployment, and natural disasters, such as hurricanes, are examples of diversifiable risk.

What is a reciprocal insurance exchange?

Consists of a series of private contracts in which subscribers, or members of the group, agree to insure each other.

Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of the following additional functions for underwriting profitability does this case illustrate? Select one: A. Prevention of errors and omissions B. Ensuring adequate policyholder surplus C. Enforcing underwriting guidelines D. Guarding against adverse selection

The level of cash flow variability that an organization is willing to accept Select one: A. Is highest for organizations with low risk tolerance. B. Is typically quite easy to determine. C. Is affected by the risk appetite of its stakeholders. D. Is independent of the organization's risk tolerance.

Which one of the following controls the coverage provided by a workers compensation policy? Select one: A. Professional employer organizations (PEOs) B. The policy provisions C. The state compensation laws D. The Occupational Safety and Health Administration (OSHA)

Which one of the following is a characteristic of an organization that would be more appropriate for risk transfer than risk retention? Select one: A. Diversity of loss exposures B. High risk tolerance C. Weak financial condition D. Loss control capabilities

Personal and advertising injury is included in ______

Coverage B in the ISO CGL coverage form

A wholesale grocer is evaluating the introduction of a fleet safety program to reduce both worker injuries and liability claims arising from its extensive over-the-road exposure. Which one of the following factors would the grocer consider under an enterprise-wide risk management (ERM) framework, but generally not under a traditional risk management (RM) framework? Select one: A. Expected cost to implement the program B. Expected savings in cost of insurance C. Potential for reduction in number of auto accidents D. Potential to invest savings in growth opportunities

Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting? Select one: A. Provides feedback to Blithe on underwriting procedures B. Save Blithe training time spent on new underwriters C. Serves as a resource for Blithe on marketing climate D. Saves Blithe from having to evaluate accounts that they will ultimately reject

Art Décor is an interior decorating business located in a renovated two-story brick century home. The roof is asphalt shingles and the exterior walls have been insulated with fiberglass insulation. The ground floor of the building is a display area for fabric and wall covering samples, and flooring and carpeting samples. The second floor contains offices and client consulting rooms. The building is heated by a standard oil furnace. It is well-maintained and is located on the outskirts of town 1,500 feet from a fire hydrant and 8 miles from the responding fire hall, which ISO rates as Public Protection Class 7. The building is equipped with smoke detectors and has an automatic sprinkler system. Immediately north of the building is a lumber yard located in relatively new, one-story frame building. To the south is open farm land. Which one of the following ratings would a property underwriter for a standard insurer most probably give this risk? Select one: A. Desirable B. Highly desirable C. Highly undesirable D. Undesirable

Billy owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a Select one: A. Speculative risk. B. Strategic risk. C. Market risk. D. Subjective risk.

Business continuity management was initially developed with a focus on Select one: A. Life safety concerns. B. Terrorism concerns. C. Ethical concerns. D. Information technology concerns.

In considering a worst case scenario for a chemical lab exposure, property underwriter Thad assumes that the automatic fire sprinklers will not be maintained and fully functional to actuate when a fire occurs and that firefighters will not respond to the alarm in a timely manner. While this seems unlikely, Thad wants to make sure all facts of the loss exposure have been considered. To determine the potential loss severity for the chemical lab Thad is using the measure of Select one: A. Normal loss expectancy. B. Policy amount. C. Amount subject. D. Probable maximum loss.

Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there are 11 named hurricane storms predicted for their coastal area this year. Sofie and the homeowner association members plan to increase their homeowner's property coverage limits to handle their concern about the possible hurricane damage. Their action is known as Select one: A. Misclassification. B. Managing the book of business. C. Increasing capacity. D. Adverse selection.

Tania's Boardwalk Soda Shop (TBSS) is open year round, but the majority of its sales occur during the summer months. The shop is staffed primarily by college students. TBSS operates out of a 2,000 square foot frame building that could be rebuilt in three months. Which one of the following statements concerning TBSS's business income exposure is true? Select one: A. The use of college students to staff the shop creates a bottleneck exposure. B. The amount of time required to rebuild the shop does not affect the business income loss exposure. C. The size of any business income loss that TBSS could suffer is directly related to the size of the direct damage loss. D. TBSS could suffer a severe business income loss from a relatively short shutdown.

Staff claim representatives vs field

Handle most claims, usually while working from branch or regional offices rather than at the insurer's home office. Field claim reps investigate the scene of the loss

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) published what is referred to as COSO II. COSO II, a risk management framework, Select one: A. Is intended for smaller organizations that do not have a board of directors. B. Creates specific enterprise-wide risk management (ERM) strategies and treatment techniques. C. Delves into the details of risk management approaches and processes. D. Focuses on threats to the organization and application of controls.

Walter, a commercial underwriter, is evaluating a CGL application for MedConstruct, a construction company. MedConstruct specializes in building hospitals, nursing homes, senior citizen residences, medical clinics, and related types of buildings. The company has been in business for 15 years and has a very good reputation. The company has grown rapidly and has had some difficulty in hiring sufficient qualified employees to keep up with its heavy schedule. Management is concerned about on-the-job safety and, so far, the company has a reasonably good record when it comes to employee injuries. To which one of the following loss exposures will Walter devote more attention when evaluating this risk? Select one: A. Products liability loss exposure B. Premises liability loss exposure C. Premises medical payments liability loss exposure D. Completed operations liability loss exposure

Which one of the following is considered the primary advantage of using retention as a risk financing technique? Select one: A. Incentives for risk control B. Timing of cash flows C. Control of claims process D. Cost savings

While identifying risks to strategy using the enterprise-wide risk management (ERM) process, an organization might ask the question, "What if an event occurs that decreases the product yield for one of our major competitors?" Assuming the likelihood of the event is high, which one of the following techniques for treating risks to strategy would be the most appropriate to treat this risk? Select one: A. Mitigate B. Transfer C. Avoid D. Optimize

While designing a display window, Adam, an employee of Mellfor Clothing Store, was injured when he fell from a ladder. Adam's accident was witnessed by several customers and employees. Adam suffered a broken leg and was unable to work for several weeks. Which one of the following represents a hidden cost to the clothing store resulting from Adam's accident? Select one: A. Wages paid to Adam while he is unable to work B. Medical costs paid to Adam C. Time lost by customers who witnessed the accident D. Time lost by employees who witnessed the accident

D. Time lost by employees who witnessed the accident

After setting risk financing goals, what should an organization do?

Determine the best mix of retention and transfer

In the context of risk control, what is life safety?

In the context of risk control, life safety is the aspect of fire safety that focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of the building.

The process of ERM is both _____ and _____.

Iterative and recursive. a. It is iterative in that the risk management process is engaged to identify and manage each discoverable risk. b. It is recursive in that the risk management process is revisited regularly to maintain its optimization in relationship to strategic goals.

Benefits of risk management (two components)

Lower expected losses and less residual anxiety

Radius of operation

Measure of road exposure used in comm. auto

What are the goals of business continuity management?

To meet the organizational post-loss goals of survival and continuity of operations.

Return on equity relates what things together? Stock insurers use what accounting principles to calculate it? Mutual insurers?

Net operating gain (after taxes) as a percentage of prior-year capital and surplus Stock insurers use both SAP and GAAP principles; mutual insurers use only SAP.

Formula for UW gain/loss

Net underwriting gain or loss = earned premiums - (incurred losses + UW expenses)

An insurer's financial capacity refers to the relationship between what two things?

Premiums written and the size of the policyholder surplus

Liability loss exposures - whether they fulfill the six characteristics of an insurable loss exposure.

Pure risk, fortuitous, definite/measurable, large # of exposures, independent/not catastrophic, economically feasible premium. - Products liability, COL not always definite. Losses difficult to measure. - Products liability loss could be catastrophic - Inherently dangerous product ... premium might not be economical

External exposure

Refers to fires outside of the insured's premises

What is sales fulfillment?

Sales fulfillment is the satisfactory delivery of the products and services that result from the product development activity

In regards to preferred distribution channels, what is best for small businesses and what is best for larger accounts?

Small businesses = independent agents Larger accounts = brokers

Supply vs demand in influencing the underwriting cycle

Supply, not demand, holds more influence, as insurance is relatively inelastic

Broad evidence rule

The determination of actual cash value should include all relevant factors (e.g. market value, obsolescence, physical wear and tear, etc.) an expert would use to determine the value of the property

What is insurable interest?

The insured's financial relationship to the property. Usually outright ownership.

Amount subject

The total value exposed to loss at any one location from any one event. For fire insurance, that might mean what's "within four walls"

Personal and advertising injury liability coverage intended for whom

This coverage is intended for businesses that purchase advertising to sell their own products or services, not for a company that is in the advertising business.

Traditional risk management considers which two risks? ERM considers which two additional risks?

Traditional: operational + hazard ERM: those + financial + strategic

T/F: All risk management processes are designed to assess, control, and finance risk.

True

Planned vs unplanned retention

Unplanned retention occurs when losses cannot be insured or when an org failed to identify a loss exposure

ASOP 23 - six questions an actuary should ask with regards to data quality

a. Are the data appropriate for the intended purpose of the analysis, and sufficiently current? b. Are the necessary data elements reasonable and comprehensive with internal and external consistency? c. Are there any known material limitations of the data? d. What is the cost and feasibility of obtaining alternative data within a reasonable time frame? e. What is the benefit to be gained from an alternative data set or data source compared to its availability and the time and cost to collect and compile it? f. What were the sampling methods, if any, used to collect the data?

What would a marketing plan for a typical insurance product look like?

a. Product proposal and sales goals b. Situational analysis c. Marketing goals d. Marketing strategies e. Projected outcome

What three activities help insurers realize maximized ROE?

a. Setting return thresholds b. Redirecting focus on target business classes c. Adjusting underwriting policy based on jurisdiction

FERMA

a. The standard has several elements: • The establishment of consistent terminology • A process by which risk management can be executed • An organized risk management structure • Risk management goals b. The standard, which is intended for public and private organizations, recognizes that risk has both an upside and a downside.

Given a loss exposure and the effective alternative risk control measures, the risk manager can use _________ to determine which measure will be most efficient

cash flow analysis

T/F: Umbrella policies are standardized

false

How to encourage purchasing insurance to value

insurance policies include coinsurance clauses and other ITV provisions

Three primary recipients of claims information

marketing, underwriting, actuarial

What is a reinsurance syndicate?

members share the risk with other members

Another name for XOL reinsurance

non-proportional reinsurance

Primary loss exposures facing most businesses

premises and operations

The effectiveness of risk control is based on both ___ and ___ methods.

qualitative and quantitative

Experience modification factor

serves as an index of the account's desirability within a particular class.

Four ways to classify an insurer

• Legal form of ownership • Place of incorporation • Licensing status • Insurance distribution systems and channels

To perform their intended function, smoke and heat detectors must be connected to an alarm, which can be a _____, _______, or _______.

• Local fire alarm system—A local fire alarm system is a type of automatic fire detection system that relies on occupants or passersby to report the alarm to fire or police officials. • Central station system—A central station system is a private service with personnel who monitor the systems of commercial establishments and, sometimes, residences. • Remote station system and proprietary alarm system—These are similar to central station systems, except that they do not signal a commercially operated central station

How to ensure compliance with claims standards

Claims audit

Some of the most widely used metadata approaches

Collection of statistical data

COPE stands for what?

Construction, occupancy, protection, external exposures

Two most common property valuation methods

- Actual cash value - Replacement cost

Organizational structure differences in ERM vs TRM

- ERM: the enterprise risk manager will typically report to the CEO - TRM: the traditional risk manager will report to various heads of depts such as finance, legal, etc.

How do underwriters achieve profitability?

- Guarding against adverse selection - Ensuring adequate policyholder surplus - Enforcing underwriting guidelines

How does the insurer benefit when underwriters encourage purchasing insurance to value?

- Higher limits -> higher premiums - Adequately priced book... underinsured book generates inadequate premiums - Competitive status for the insurer

How do premium audits reinforce insureds' confidence?

- If they see the auditor exercised due care collecting and verifying data, they'll fall in love with the insurer - Because they're in love with the insurer, they won't look around come renewal, they'll have a greater appreciation for the premium audit, and they'll improve their own recordkeeping. I feel like this is really reaching...

Uninsured motorist coverage, two types of triggers

- Limits trigger: UIM kicks in when negligent driver has liab limits lower than the other driver's UIM limits - Damages trigger: UIM kicks in when when the negligent driver carries liability limits that are lower than the insured party's damages

Three examples of govt insurance .

- NFIP - Terrorism Risk Insurance Act. TRIA ensures that commercial property owners can obtain reasonable and predictably priced terrorism coverage by specifying that the federal government will share the risk of loss from foreign terrorist acts - Fair Access to Insurance Requirements: helps property owners get access to insurance

What are pre-action sprinkler systems? What are deluge sprinkler systems?

- Pre-action sprinkler systems are used where property is highly susceptible to water damage from damaged sprinklers or piping. - Deluge sprinkler systems are similar to pre-action systems, except that sprinkler heads are always open

Three classifications of commercial automobiles according to the ISO Commercial Lines Manual

- Service use. Used for transportation to job sites. Lowest rates. - Retail use. Used for deliveries to and pickups from households. Highest rate. - Commercial use. All other bucket.

What are some of the most crucial responsibilities of the premium auditing function?

- To classify insured exposures correctly - Identification of inadequate exposure estimates - Provide underwriters with desirability of the account

The principal federal laws covering on-the-job injuries for maritime occupations

- United States Longshore and Harbor Workers' (USL&HW) Compensation Act - Merchant Marine Act (Jones Act): intended to cover masters and crew members of vessels

Insured's duties after a loss

-give prompt written notice to insurer of facts relating to the claim. -protect the property from further damage - assist with loss adjustment process - provide proof of loss - submit to examination under oath

Which one of the following is a major constraint of underwriting policy? Select one: A. Reinsurance B. Underwriting management C. Competition D. Economy

Which one of the following is a way in which risk control activities can help insurers meet their profit goals? Select one: A. Providing an additional source of revenue B. Eliminating premium audits C. Confirming rating values D. Improving staff credibiilty

Six ISO construction classes

1) Frame construction - In addition to the direct damage caused by a fire, frame construction can suffer structural damage because the weight-bearing supports are combustible 2) Joisted Masonry construction - Exterior walls can be fire-resistive construction with a fire-resistance rating of at least one hour, or they can be masonry construction - Mill construction (heavy-timber) is a joisted masonry construction type in which no concealed areas exist under roof or floors that allow a fire to go undetected 3) Non-combustible construction - Non-combustible but not fire-resistive. Steel structure will melt. 4) Masonry non-combustible construction - Building's exterior walls are made of self-supporting masonry materials - Floors/roof made of metal or slow-burning non combustible material 5) Modified fire-resistive construction - It is similar to fire-resistive construction, except that the material's fire-resistance rating is one to two hours 6) Fire-resistive construction - Can withstand fire damage for at least two hours - Can be all non-combustible or covered by non-combustible material

Benefits of insurance.

1) Paying for losses 2) Managing cash flow uncertainty 3) Meeting legal requirements 4) Promoting risk control 5) Enabling efficient use of resources 6) Providing support for insured's credit 7) Providing source of investment funds 8) Reducing social burdens

Two ways that premium audits affect the equity and accuracy of rates

1. Classification determinations - if premium auditor A says risk is one class, while B says it's another, that leads to inequitable rates. 2. Measurement of the exposure unit base - Audit error in determining exposures

Steps in the liability claims adjusting process

1. Determine if coverage applies 2. Determine legal liability 3. Determine damages 4. Negotiate and settle claims

Process for integrating an ERM program.

1. Develop ERM goals, considering risk appetite, the organizational need, the scope, etc. 2. Identify risks. 3. Analyze, evaluate, and prioritize risks. 4. Treat critical risks, considering priority (avoid, mitigate, etc.) 5. Monitor critical risks.

Four goals in conducting risk control activities

1. Earning a profit 2. Meet customer needs (helping them control insurance premiums, comply with OSHA & laws, etc.) 3. Comply with legal requirements 4. Fulfill duty to society

Four internal constraints on achieving insurer goals.

1. Efficiency 2. Expertise 3. Size 4. Financial resources

Describe the two important benefits of ERM.

1. Enhanced decision making. - Increased profitability - Reduced volatility - Improved ability to meet strategic goals - Increased management accountability 2. Improved risk communication - Management consensus (embracing risk as an addl component of each decision) - Stakeholder acceptance

Six ways risk control helps insurers reach their profit goals

1. Improving UW decisions 2. Improving premium volume (marginal -> acceptable accts) 3. Encouraging insureds to improve risk control 4. Providing an additional revenue source (risk control for a fee, with experts!) 5. Reducing insured losses 6. Reducing errors and omissions against the insurer

How an ERM program improve a company's decision-making?

1. It can address devastating threats. 2. It can exploit opportunities by incorporating them into its current business model or completely reinventing a new model that will successfully carry it into the future 3. It can use ERM as a process to manage unwanted variations from expectations

Four functions of facultative reinsurance

1. Large line capacity 2. Reduce primary insurer's exposure in a given region 3. can insure a loss exposure with atypical hazard characteristics and thereby maintain the favorable loss experience of the primary insurer's treaty reinsurance and any associated profit-sharing arrangements 4. Can insure particular exposures that are excluded under treaty reinsurance

Five major goals of an insurer.

1. Make a profit 2. Meet customer needs 3. Comply with legal requirements 4. Diversify risk 5. Fulfill duty to society

How are underwriting authority requirements communicated?

1. Notation next to a specific classification might indicate that a senior underwriter must review it 2. UW guidelines may specify that above a certain policy limit, accounts must be submitted to a higher authority 3. Certain rating plans, coverage forms, etc. might require a higher authority

What are the steps in product development?

1. Opportunity assessment: monitor market, identify opportunity, relate opportunity to strategy, secure approval 2. Development of contract, underwriting, and pricing - Coverage/policy forms, pricing structure, UW guidelines 3. Business forecast 4. Regulatory requirements 5. Distribution requirements (sales training, advertising info) 6. Introduction

Describe the underwriting considerations for business income and extra expense coverage.

1. PML - Direct PML is logical starting point. 2. Factors affecting period of interruption - Rebuilding time, seasonality, bottlenecks (machine, building, etc.), computer system, long production process, availability of substitutes, business continuity and disaster recovery planning

Five types of excess of loss reinsurance

1. Per-risk - Generally used with property 2. Catastrophe - protect against accumulation of retained losses from single event 3. Per-policy - used with liability, triggered when loss > attachment point 4. per-occurrence - also typically liability. Limits losses from single event. 5. Aggregate - When the attachment point is stated as a loss ratio, the treaty is called stop-loss reinsurance.

What are the two key differences between insurance and pooling?

1. Pooling is a risk-sharing mechanism. Insurance is a risk-transfer mechanism. 2. An insurer has additional financial resources to help pay, primarily from initial capital from investors and retained earnings.

Types of legal classifications of insurers

1. Proprietary insurers (stock insurers, Lloyd's, insurance exchanges). 2. Cooperative insurers (mutual, reciprocal, fraternal) 3. Other insurers (pools, government)

Eight purposes that underwriting guidelines serve

1. Provide for structured decisions 2. Ensure uniformity and consistency 3. Synthesize insights and experience 4. Distinguish between routine and non-routine decisions 5. Avoid duplication of efforts 6. Ensure adherence to reinsurance treaties 7. Support policy preparation and compliance 8. Provide a basis for predictive models.

Categorizing protection in COPE

1. Public fire protection (PPC, AAIS fire rates, ISO FSRS) 2. Private fire protection: prevention - controlling heat sources, preventing arson, separating fuel and heat 3. Private fire protection: detection - smoke detectors, guards, heat detectors, patrol services 4. Private fire protection: suppression - fire extinguishers, sprinklers, private fire brigades

Six characteristics of an insurable loss exposure.

1. Pure risk - Insured should not profit from loss 2. Fortuitous (COL should be random) 3. Definite and measurable 4. Large number of similar exposures - Cross-sectional risk transfer: law of large numbers, achieved through pooling - Intertemporal risk transfer: spreading risk through time 5. Independent and not catastrophic 6. Economically feasible premium

Two types of pro rata reinsurance

1. Quota share - Fixed percentage ceded 2. Surplus share - When the policy exceeds a given AOI, the reinsurer covers the surplus share

Line underwriters perform what tasks?

1. Select insureds 2. Classify and price accounts 3. Recommend or provide coverage 4. Manage a book of business 5. Coordinate with marketing efforts

Nonfinancial measures for evaluating U/W performance

1. Selection 2. Product or LoB mix 3. Pricing 4. Accommodated accounts (accepting substandard exposures for other, more profitable accts) 5. Retention ratio 6. Hit ratio 7. Service to producers 8. Premium to underwriter

Categorizing external exposures in COPE

1. Single occupancy exposures - Property being underwritten is owned by the same insured 2. Multiple-occupancy exposures - Multiple persons own the insured property with potentially different occupancies

Four reasons why government gets involved in insurance

1. To fulfill insurance needs not met by private insurers 2. To help people to buy a mandatory type of insurance 3. To obtain greater efficiency and/or provide convenience to insurance buyers 4. To achieve collateral social purposes. Making use of pooling system benefits both society + economy (positive externalities).

To place controls on levels of underwriting authority, insurers generally grant authority in what ways?

1. Underwriters gain underwriting authority with experience and/or positive results 2. Producers may gain underwriting authority based on experience, profitability, and contractual arrangements 3. Managing general agents assume decentralized underwriting authority which capitalizes on an MGA's familiarity with local conditions.

Strategy formulation steps

1. analysis of external and internal environments 2. development of long-term strategies 3. determination of strategy at different organizational levels

Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them Select one: A. Trade secrets. B. The level of authority. C. The key to profitability. D. The tool for training underwriters.

Enterprise-wide risk management (ERM) considers the global array of risks that affect an organization, which can be represented by a three-dimensional depiction of attributes. These attributes are resources, events, and Select one: A. Impacts. B. Metrics. C. Strategies. D. Hazards.

Enterprise-wide risk management (ERM) will generally result in which one of the following? Select one: A. Management by consensus B. Hierarchal management C. Top-down decision making D. Bottom-up decision making

Which one of the following is considered an advantage of the use of retention as a risk financing technique? Select one: A. Timing of cash flows B. Avoiding adverse public relations C. Less exposure to large loss D. Less cash flow variability

Halbinger Insurance Company (HIC) is a regional provider of homeowners insurance products. The management team at HIC has identified the risk that a competitor could emerge in the market offering a similar product at reduced rates. To deal with this threat, the team has developed plans to launch a marketing campaign that would highlight the superior coverage and service features that the HIC product offers in the event that the competitor does emerge. The technique HIC is using to treat this risk to strategy falls into which one of the following categories? Select one: A. Mitigate B. Avoid C. Transfer D. Accept

The chief risk officer helps the enterprise create a risk culture in which individual department heads and project managers are identified as Select one: A. Risk owners. B. Stakeholders. C. Strategists. D. Coaches.

The common distinction between line underwriters and staff underwriters is that line underwriters Select one: A. Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy. B. Develop underwriting guides. Staff underwriters provide service to policyholders. C. Research the market. Staff underwriters verify that policies are issued with the appropriate forms and endorsements. D. Conduct underwriting audits. Staff underwriters prepare files for the data entry department.

The first step in the underwriting process is evaluating the submission. Which one of the following statements is correct with respect to that evaluation? Select one: A. Underwriters must understand the activities, operations, and character of each applicant. B. The goal is for underwriters to obtain as much information as possible about each submission they review. C. Expert underwriting systems allow for automated decision making for all commercial lines submissions. D. The application is the only principal source of underwriting information for most submissions.

The owners of Olivia Fuel Oil, Inc., (OFO) see no need to purchase crime insurance. Because most customers pay by credit card or check, OFO's bookkeeper, Erin, handles very little cash. Erin, a conscientious, detail-oriented employee who has missed only one day of work during the past 10 years, personally handles all bank deposits and disbursements. Which one of the following statements concerning OFO's crime exposures is true? Select one: A. Because she handles all financial transactions, Erin is well positioned to steal from OFO. B. The bulk and weight of OFO's product make it especially susceptible to a robbery. C. Because Erin handles very little cash, controls to minimizing employee dishonesty losses are not warranted. D. In the event that Erin did steal from OFO, the theft would be visible and detected very quickly.

The risk control service of conducting a physical survey consists of Select one: A. Collecting underwriting information on a customer's loss exposures. B. Implementing a safety management program designed by senior risk control consultants. C. Submitting written recommendations to a business owner or manager. D. Implementing a service contract with the business owner or manager.

Underwriters use several measures to determine potential loss severity. One measure, amount subject, varies with the type of construction used in the building. In one class of construction, exterior walls, floor, and roof of a building are constructed and supported by metal, gypsum, and other material that will not catch fire. This type of construction is known as Select one: A. Noncombustible construction. B. Frame construction. C. Masonry noncombustible construction. D. Fire resistive construction.

Which one of the following common risk financing goals is most significantly influenced by an organization's tolerance for risk? Select one: A. Managing cash flow variability B. Pay for losses C. Comply with legal requirements D. Maintain an appropriate level of liquidity

Which one of the following entities consists of national risk management associations, individual risk managers from Central European countries, and representatives from health organizations, educational sectors and public sectors? Select one: A. The Federation of European Risk Management Associations (FERMA) B. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) C. The Basel Committee on Banking Supervision D. The British Standards Institution (BSI)

Which one of the following statements is correct regarding the interaction between risk control and other insurer functions? Select one: A. A risk control evaluation can make the difference between the applicant's being rejected or accepted by the underwriter. B. Risk control representatives compile detailed data for the actuarial department to use in establishing rates. C. Risk control representatives are responsible for compiling all the information required for a premium audit. D. Risk control personnel are responsible for answering any complex questions that insureds have about premium audits.

Which one of the following statements is correct regarding the relationship between risk control and claims? Select one: A. The risk control department needs claim experience information to direct loss-control resources and efforts to crucial areas. B. The claim department has its own technical resources and rarely relies on the risk control department for expertise. C. While the details of individual losses are useful to risk control representatives, frequency and severity data by line of business are rarely used. D. While risk control representatives carefully review property claims, they rarely examine liability or workers' compensation losses.

Which one of the following statements is correct with respect to premises medical payments coverage? Select one: A. The coverage can be excluded by endorsement, but this is rarely done. B. The limits for medical payments coverage are typically $25,000 to $50,000. C. It pays medical expenses for insureds injured by the policyholder's premises or operations. D. It requires that the policyholder be legally liable for the injured party's injury.

Which one of the following statements is correct with respect to transfer's ability to meet risk financing goals? Select one: A. The primary benefit of transfer is certainty regarding the ability to pay losses. B. Transfer is less effective than retention in managing cash flow variability. C. Transfer increases the level of liquidity that an organization requires. D. The primary benefit of transfer is that it allows an organization to manage its cost of risk.

Which one of the following statements is correct with respect to umbrella and excess liability insurance? Select one: A. The self-insured retention for a commercial umbrella liability policy is usually $10,000. B. Excess liability insurance policies typically offer much broader coverage than do the underlying policies. C. Umbrella liability insurance is designed to cover an aggregation of smaller, high-frequency losses. D. While umbrella policies are typically layered, a single excess policy will provide all the increased limits an insured requires.

Which one of the following statements is correct with respect to underwriting umbrella liability insurance? Select one: A. It requires careful analysis of the loss exposures covered by the underlying policies, plus those exposures covered only by the umbrella policy. B. Umbrella policy underwriters need not concern themselves with the specific coverage provided under the underlying policies or endorsements. C. If the insurer providing the underlying coverage is unable to defend a claim, the umbrella insurer is relieved of its duty to do so. D. Umbrella liability insurance policies are generally written with relatively low limits because they are excess of underlying coverage.

Which one of the following statements is true regarding traditional risk management (RM) verses enterprise-wide risk management (ERM)? Select one: A. ERM emphasizes the interrelationships between pure and speculative risk. B. Both RM and ERM focus on pure risk. C. ERM focuses only on pure risk, while RM does not. D. RM considers the risk that the organization will outperform its strategic goals.

Which one of the following statements is true? Select one: A. Insurers benefit from insurance to value because it promotes higher limits of property insurance. B. Adequate limits of insurance on new business ensure ongoing insurance to value. C. The coinsurance clause in a property policy encourages insurance to value through premium discounts. D. The insurable value of a building is the same as the building's book value.

After construction type, building age, and building height, what's the next construction characteristic an UW should consider?

A building's fire divisions. a. Fire divisions are the analogous solution for fires in buildings with large horizontal areas. b. A fire wall restricts the spread of fire by serving as a fire-resistive barrier.

An underwriter is comparing workers compensation submissions on two accounting firms, Firm A and Firm B. Each firm employs roughly 350 employees. Firm A occupies two floors in a prominent high rise building in a major metropolitan area. Employees are not required to travel. Firm B, located in the same metropolitan area, has multiple offices spread throughout the city to facilitate client visits. Housekeeping and maintenance hazards are similar among the firms. Firm A poses a greater single loss exposure due to Select one: A. Higher employee turnover rates for single location firms. B. The potential for many injuries or deaths resulting from a single incident. C. The fact that loss experience is typically higher for single location firms. D. The special hazards associated with the accounting firm classification.

JSP Insurance Agency (JSP) is an exclusive agency for a large writer of personal insurance products. JSP occupies the end unit of a strip shopping center, and a restaurant occupies the adjoining unit. JSP's office is separated by adequate clear space from an adjacent strip of stores. The strip mall is classified as ISO construction class 3 and is made of noncombustible materials. JSP's office is separated from the restaurant by a movable wall to allow the units to be easily resized to meet occupants' needs. The ISO public protection classification (PPC) for the strip mall is 2. Given this information, which one of the following statements is true regarding the physical hazards presented by JSP from a fire underwriting standpoint? Select one: A. The noncombustible construction of this property means that this building is fire resistive and much safer than joisted masonry or frame construction. B. The PPC of 2 indicates that the public fire service should provide at least adequate public protection from fire loss. C. The external loss exposures presented to JSP require no special consideration due to the construction type and the end unit location within the mall. D. The nature of JSP's business makes it a relatively high-hazard risk from an occupancy standpoint.

Risk professional Alex has assigned a high likelihood to the risk that a competitor will cut prices in the market in which his organization operates. In analyzing this potential risk, Alex decides that if this threat materializes, his organization's strategy will be to launch a marketing campaign that emphasizes his firm's superior product features, so as to reduce the risk to an acceptable level. This is an example of which one of the following techniques for treating risks to strategy? Select one: A. Transfer B. Mitigate C. Avoid D. Optimize/exploit

Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually Select one: A. Use automated underwriting systems. B. Centralize underwriting authority. C. Extend underwriting authority to producers. D. Refer those lines to senior underwriters.

Taylor, Wiggett, and Long is a law firm located in a single-occupancy, owned building. The building is three stories high, fire-resistive construction, and was built for the firm four years ago. It is located in a complex of new commercial buildings most of which house professional offices such as doctor offices, law firms, engineering firms, and architectural firms. Each building is separated from its neighbors by an area of lawn and an open parking lot. The complex is less than 1,000 feet from a fire hydrant, and is 3 miles from the responding fire hall, which ISO rates as Public Protection Class 2. The law firm's building has a central station fire and burglar alarm and an automatic sprinkler system. In addition, the complex employs a private service to patrol the area during non-business hours. Which one of the following ratings would a property underwriter for a standard insurer most probably give this risk? Select one: A. Highly undesirable B. Highly desirable C. Desirable D. Undesirable

The term risk control refers to Select one: A. An activity to improve insurer premium volume. B. A technique to prevent or mitigate losses. C. A risk management technique to expand policy coverages. D. A technique to assist in the claim adjustment of losses.

Which one of the following is an underwriting evaluation tool that uses Global Positioning System (GPS) tracking to collect and analyze data regarding driver behavior and vehicle use? Select one: A. Predictive analytics B. Telematics C. Catastrophe modeling D. Predictive modeling

Which one of the following is correct with respect to a business continuity plan? Select one: A. It details all of the risk control techniques that an organization has implemented in order to meet its risk management goals. B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood. C. It should be developed after the occurrence of a significant loss and should outline how the organization will respond to similar future losses. D. It is typically a closely-guarded document, available only to an organization's senior management.

Which one of the following is the best example of an insurer's risk control activities generating additional revenue for the insurer? Select one: A. A risk control representative provides an underwriter with an inspection report. B. An insurer provides industrial hygiene services to a self-insured firm for a fee. C. A risk control representative works with a policyholder to identify safety improvements. D. An insurer helps a policyholder prevent occupational injuries.

Which one of the following statements is correct regarding insurers' involvement in safety management programs for insureds? Select one: A. Risk control consultants typically have authority to exercise a management role in the insured's safety program. B. Part of a risk control consultant's role in developing a safety management program is assisting the insured in establishing risk control goals. C. Once the safety management program is implemented, the risk control consultant generally is not able to provide technical assistance in the monitoring phase of the program. D. Risk control consultants are usually actively involved in implementing safety management programs.

Which one of the following statements is correct with respect to an organization's risk financing goals? Select one: A. To be effective as part of a risk management program, the cost of risk must be managed to minimize administrative, risk control, and risk financing expenses. B. The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength. C. For most organizations, borrowing is the only available method of increasing liquidity to pay for retained losses. D. The level of cash flow variability that an organization is willing to accept is highest for organizations that prefer to avoid risk.

Which one of the following statements is correct with respect to personal and advertising injury coverage? Select one: A. Underwriters usually evaluate this loss exposure closely for all risks. B. Personal injury loss exposures include such things as legal liability arising out of libel, slander, and copyright infringement. C. The ISO CGL coverage form must be endorsed to provide personal and advertising injury coverage. D. The advertising injury coverage provided under the ISO CGL coverage form is intended for advertising, telecasting, and broadcasting firms.

Which one of the following statements is correct with respect to retrospective rating plans? Select one: A. The loss limit for a retrospective rating plan is the most the insured must pay in any one year for losses. B. An organization must have a substantial insurance premium to benefit from retrospective rating. C. Retrospective rating adjusts premiums for the current policy period based on actual losses from prior policy periods. D. The loss limit for a retrospective rating plan is the most the insurer will pay per occurrence for a loss.

Which one of the following statements is correct with respect to workers compensation underwriting? Select one: A. Seasonal employees tend to be better trained and more attentive to work safety than full-time employees. B. The off-premises hazard has three elements: the duration of travel, the mode of transportation, and the hazards at remote job sites. C. Employee morale is generally not a factor considered when underwriting workers compensation insurance. D. The standard workers compensation policy for a contractor specifically excludes coverage for employees of any uninsured subcontractors.

Which one of the following statements is true regarding avoidance as a risk control technique? Select one: A. Complete avoidance is the most common risk control technique. B. The most effective way of managing any loss exposure is to avoid the exposure completely. C. The aim of avoidance as a risk control technique is solely to reduce loss frequency. D. Avoidance is used as a method to isolate loss exposures from one another.

Which one of the following statements is true? Select one: A. Real property and machinery are examples of liquid assets. B. As an organization's retention level increases, so does the level of liquidity required. C. Liquid assets offer higher returns than other, longer-term investments. D. Liquidity can be increased by using cash flow to fund capital projects.

Which one of the following statements regarding underwriter responsibilities is correct? Select one: A. Staff underwriters offer valuable technical assistance to the insured's risk manager and the producer who is directly responsible for determining what coverage best meets the insured's needs. B. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments. C. Line underwriters often serve on industry committees that study standard policy forms and recommend changes. D. Line underwriters are generally responsible for completing underwriting audits of the branch or region in which they work.

Within the enterprise-wide risk management (ERM) framework is the Associate in Risk Management (ARM) six-step risk management process. One way the ERM process enhances the ARM process is by adding a decision step prior to risk treatment that asks the risk manager to determine whether Select one: A. Affordable risk management techniques are available for all critical risks. B. Residual impact is within risk tolerance/appetite. C. It is necessary to establish internal and external contexts of the enterprise. D. It is necessary to consult with all internal and external stakeholders.

Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $16,500,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP approach, which one of the following is Argot's return on equity? Select one: A. 5% B. 6% C. 18% D. 20%

B, determined by net income ($1,000,000) divided by average owners' equity ($16,500,000).

Which one of the following best explains the concept of residual uncertainty, as relates to estimation of the financial consequences of risk? Select one: A. It is the level of risk that remains after implementing risk management plans. B. It is the difference between estimated subjective risk and calculated objective risk. C. It is the amount invested in risk management in order to eliminate concern. D. It is uncertainty regarding the value of any residual salvage that would remain after a loss.

B. It is the difference between estimated subjective risk and calculated objective risk.

All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT: Select one: A. The availability and cost of adequate reinsurance can influence underwriting policy. B. Return-on-equity thresholds guide insurers in deciding where to allocate capital. C. The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings. D. Insurers are subject to penalties from the states if they deviate from filed forms or rates.

A commercial automobile classified for retail use may be rated higher than a similar commercial automobile classified for service use because Select one: A. Service vehicles are generally regarded as traveling in a smaller radius of operation. B. Vehicles classified as retail use are subject to the requirements of the Commercial Motor Vehicle Safety Act (CMVSA). C. Retail use involves delivery vehicles that may travel on unfamiliar routes and have tight schedules. D. Service vehicles require the operator to hold a commercial driver's license (CDL).

A hold harmless agreement is a Select one: A. Risk retention measure. B. Form of liability insurance. C. Noninsurance risk transfer measure. D. Type of risk pooling mechanism.

A risk control representative can obtain important insight into the possibility and extent of moral hazards and morale hazards by doing which one of the following? Select one: A. Obtaining a professional building appraisal valuation B. Interviewing injured workers C. Evaluating management's approach to accident prevention D. Reviewing the written safety program

An applicant for commercial property insurance is found unacceptable by an underwriter due to the nature of its operations and the construction of the building it occupies. If the applicant installs an automatic fire-extinguishing sprinkler system, the underwriter will approve the application. This type of underwriting modification is known as Select one: A. Amending the policy terms and conditions. B. Changing insurance rates, rating plans, or policy limits. C. Requiring risk control measures. D. Using facultative reinsurance.

An insurer decides to discontinue writing a class of workers compensation insureds because losses on the business have exceeded expectations. Instead, in an effort to maximize its return on equity, the insurer plans to use its resources to increase the volume of accounts in an area that offers more promising returns. This need to redirect the focus for desired business is an example of an underwriting constraint due to Select one: A. Audit compliance. B. Adherence to underwriting guidelines. C. Financial capacity. D. Regulation.

Captive insurers are Select one: A. Prohibited from underwriting loss exposures not directly related to the captive's parent or affiliates. B. Typically domiciled in the same jurisdiction as the parent company. C. Used to insure property loss exposures that are difficult to insure in the primary market. D. Not permitted to transfer the financial consequences of insured loss exposures to other insurers.

Julio, a producer for Argot's Insurance Company, submits an application for a 50-year-old residence to Mathilde, the underwriter. Julio wants to know why the homeowners rate is higher for his 50-year-old residence. Mathilde explains that the homeowners rate for the 50-year-old residence is not the same for a five-year-old residence because the exposures are different. Which one of the following underwriting profitability functions of Argot is Mathilde's explanation supporting? Select one: A. Enforcing policy guidelines B. Guarding against adverse selection C. Ensuring adequate policyholder's surplus D. Protecting the homeowner rate

The principal advantage of risk transfer measures is that they Select one: A. Provide the organization with incentive for risk control. B. Allow the organization to maintain control of the claims process. C. Reduce exposure to large losses. D. Provide ancillary services.

Underwriters may encourage insurance to value to provide better policyholder protection against total loss, and to Select one: A. Eliminate the coinsurance classes. B. Recognize the effects of depreciation on the property's value. C. Generate premiums that properly reflect loss exposures. D. Reflect the market value of the property.

Underwriting guidelines serve which one of the following purposes? Select one: A. Provide rates for individual risks B. Provide for flexible and unstructured decisions C. Avoid duplication of effort D. Allow for the development of insights and experience

Which one of the following statements is correct with respect to underwriting workers compensation insurance? Select one: A. On-premises hazards relating to housekeeping and maintenance are rare. B. All firms in the same industry generally have the same hazards and level of risk. C. From an underwriting standpoint, housekeeping refers to cleanliness and operating efficiency. D. An insured's providing healthcare benefits is not related to its workers compensation exposure.

Which one of the following is correct regarding traditional risk management (RM) versus enterprise-wide risk management (ERM) in approaching business uncertainties? Select one: A. The RM approach requires an organization to systematically explore new opportunities for economic efficiencies while managing internal and external threats. B. The focus in a strong ERM program is on monitoring systemic risks inherent in the organization that can adversely affect quarterly profits and losses. C. A strong ERM program encourages the buy-in of an organization's stakeholders by establishing management strategies that protect the organization's reputation and assets. D. The RM approach establishes a method to gather information organization-wide about obstacles to achieving goals, and develops a framework for analyzing and communicating that information.

Which one of the following is not compulsary unless contractually required by a client or customer? Select one: A. Sarbanes-Oxley Act of 2002 B. Basel II C. ISO 31000:2009 D. Solvency II

Which one of the following is true regarding business income coverage under the BOP? Select one: A. Hurricane Katrina demonstrated that the BOP business income coverage dollar limits were often inadequate. B. The dollar limit of business income coverage under the BOP is relatively high. C. Business income coverage under the BOP is written on an actual loss sustained basis. D. Business income coverage under the BOP is identical to that of the separate ISO policy.

Which one of the following is true regarding organizational post-loss goals? Select one: A. The most basic post-loss goal is survival, which means returning the organization to the condition that existed before the loss. B. Social responsibility is a post-loss goal that is unique to not-for-profit and public entities. C. With a post-loss goal of profitability, senior management may establish a minimum amount of profit that no loss can be allowed to reduce. D. With a post lost goal of earnings stability, the risk management professional will seek to raise retention levels to minimize the amount spent on risk transfer mechanisms.

Which one of the following methods employed by an organization demonstrates the use of an enterprise-wide risk management (ERM) approach improving decisions and promoting economic efficiency? Select one: A. The organization retains loss associated with its core operations. B. The organization avoids operating in states that are prone to natural disasters. C. The organization builds supply chain resilience into its operational model. D. The organization employs loss reduction techniques in its diversified operations.

Which one of the following planned retention measures is appropriate for funding losses with a low expected value, but becomes less advisable as the expected value of losses gets larger? Select one: A. Using a funded reserve B. Borrowing funds C. Current expensing of losses D. Using an unfunded reserve

Which one of the following risk financing measures can reduce an organization's cost of risk over time but has significant start-up costs relative to the other measures? Select one: A. A retrospective rating plan B. A self insurance plan C. A captive plan D. A large deductible plan

Which one of the following statements is correct with respect to employee dishonesty? Select one: A. Employee dishonesty insurance is generally unprofitable for insurers. B. Most mercantile establishments purchase employee dishonesty insurance. C. Losses can be hidden from discovery and large losses are common. D. Most employers are eager to have dishonest employees prosecuted.

Which one of the following statements is correct with respect to umbrella liability insurance? Select one: A. Policy language and underwriting rules are standardized among umbrella liability insurers. B. Most umbrella liability policies do not contain a deductible or self-insured retention. C. If an insured fails to maintain underlying insurance with agreed limits, the umbrella policy will respond as though the required underlying coverage is in place. D. Umbrella liability polices provide coverage for gaps in underlying policies, but will not provide coverage when the aggregate limits of the underlying policies have been exhausted.

Which one of the following statements is correct? Select one: A. While risk control services benefit insurers and policyholders, they have little or no impact on society as a whole. B. Policyholders generally consider an insurer's risk control recommendations to be a source of unnecessary expenses and a financial burden. C. By exercising sound risk control, organizations fulfill occupational safety and health standards and comply with local, state, and federal laws. D. All states require insurers to provide a minimum level of risk control services to commercial policyholders.

Which one of the following statements is true concerning risk control? Select one: A. Risk control can sell additional lines of coverage. B. Risk control departments are purely a function of insurers. C. Risk control can assist marketing by providing advice on improving safety. D. Risk control can use claim information to pave the way for the premium audit.

Which one of the following statements is true regarding measures of potential loss severity for property loss exposures? Select one: A. The amount subject to a single loss at a location is consistent for all causes of loss to which the location is exposed. B. The amount of insurance carried on a property location is the most useful figure for determining potential loss severity. C. The amount subject for a location, as estimated by any two underwriters with a common employer, should be consistent. D. The amount subject should be determined separately for each policy an insurer writes within a single fire division.

Which one of the following statements is correct with respect to the expected cost of losses or gains? Select one: A. The expected cost of gains or losses includes only the direct costs associated with a particular risk. B. Calculating the expected cost of losses or gains for pure risks is more complex than for speculative risks. C. Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses. D. The expected cost of losses is equal to the uninsured portion of any bodily injury or property damage.

C. Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses.

COSO II

COSO II defines ERM as a process driven from an organization's board of directors that establishes an organization-wide strategy to manage risk within its risk appetite. Provides an effective mechanism for initiating a dialogue with an organization's board and its senior executives about establishing ERM goals as part of the strategic management process. Its intended audience is an organization large enough to require examination of risk appetite and board direction of ERM strategies

All of the following factors are considered when underwriting workers compensation insurance, EXCEPT: Select one: A. Management attitude and capability B. Cumulative trauma disorders C. Subcontractors D. Employee gender and marital status

An organization that has adopted an enterprise-wide risk management (ERM) approach monitors risks, threats, and opportunities that arise from a variety of sources. The two important benefits provided by this approach versus traditional risk management are improved risk communication and Select one: A. Centralization of risk ownership. B. Increased focus on transfer of risk. C. Increased focus on avoidance of risk. D. Enhanced decision making.

Frank is a commercial underwriter. He is evaluating a business income coverage application for Harvest Estate Winery. The winery is located in a large masonry building in a remote area. The applicant and producer have requested $1 million coverage limits and a 125 percent coinsurance clause because they anticipate the location may lengthen the time required to rebuild after a loss. The winery's production equipment and storage facilities are computer-controlled as are the temperature and humidity levels throughout the facility. The winery's vineyards are well-established with mature vines. Harvest occurs during a three to four-week period in September. Frank has been advised by the producer that the winery has neither a disaster recovery plan nor a business continuity plan in place. Which one of the following ratings would Frank likely give this risk? Select one: A. Highly desirable B. Desirable C. Average D. Undesirable

One measure of potential loss severity measures the exposure to a single loss and varies by cause of loss. Underwriters often use the expression "within four walls" to explain the concept of Select one: A. Probable maximum loss. B. Policy amount. C. Normal loss expectancy. D. Amount subject.

One of the differences between traditional risk management (RM) and enterprise-wide risk management (ERM) is in the organizational structure. The chief risk officer in an ERM structure typically reports to the Select one: A. Operations manager. B. Legal department. C. Finance department. D. Chief executive officer (CEO).

Tania, an underwriting trainee for Keithly Insurance Company, has received a new homeowners application for Nanami. The home is to be insured for $150,000. It is a frame house with a swimming pool and trampoline in the back yard. The grass needs mowing and the shrubbery needs trimming. Nanami has a marginal credit score. What is Tania's first step in underwriting the policy for Nanami? Select one: A. Determine whether the credit score is acceptable. B. Check the underwriting guidelines on the pool and trampoline. C. Contact the agent about the upkeep problem. D. Check to see if she has the underwriting authority to make the decision.

Vanessa, an underwriter, is evaluating a CGL application for Taunton Publishing. Taunton publishes a weekly tabloid newspaper with articles about popular entertainment and political figures. It has a large readership. The newspaper owns and operates out of a new, single-story building in a complex of commercial buildings. The publishing equipment is computerized, state-of-the-art. The publisher sells through variety stores, grocery stores, and newsstands and it has no on-premises retail operation. Taunton does have outside sales staff that promote the publisher's newspaper among potential sales outlets and that solicit advertising. Which one of the following liability loss exposures would Vanessa probably consider to be Taunton's greatest? Select one: A. Operations liability for sales staff activities at vendors and advertisers B. Premises liability for the publishing facility C. Products liability for the newspapers that the organization sells D. Personal and advertising injury for potential libel, slander, or copyright infringement

Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters? Select one: A. Cromley's underwriter, Ciara uses predictive modeling to analyze her risks. She is underwriting Chloe's homeowner application and it falls within the acceptable scores the company has created. B. Cromley's underwriting guidelines provide a section on insuring swimming pools, illustrating the principal considerations for such risks. New underwriter Pedro refers to this section of the quidelines. C. Ella, an experienced staff underwriter provides insight for Cromley's Insurance on amusement parks by authoring a section on amusement parks in the underwriting guidelines. D. Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk.

Which one of the following cases illustrates how underwriting guidelines ensure uniformity and consistency? Select one: A. Cromley identifies applicants that present a lower underwriting risk by assigning a rank or score of all the variables presented by an account and its loss exposures. B. Furkan and Daniel have experience in underwriting workers compensation policies for Cromley Insurance Company. They have provided feedback and expertise in updating the current workers compensation guidelines in the underwriting manual. C. Cromley's contractor's equipment underwriting guidelines might indicate that equipment use is of paramount importance in determining acceptability and pricing. D. Chloe and Elin are underwriting identical homeowners risks for Cromley Insurance Company. The applicants have the same protection class, construction, and coverage amount. After checking the underwriting guidelines, they come to the same underwriting decision.

Which one of the following is the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement? Select one: A. Predictive models B. Market conduct examinations C. Reinsurance treaty D. Underwriting audits

Which one of the following provides an effective mechanism for initiating dialogue with an organization's board and senior executives about establishing enterprise-wide risk management (ERM) goals as part of the strategic management process? Select one: A. ISO 31000:2009 B. Solvency II C. Basel II D. COSO II

Which one of the following rating plans adjusts the premium for the current policy period to recognize the insured's actual losses during the current policy period? Select one: A. Guaranteed cost plan B. Experience rating plan C. Schedule rating plan D. Retrospective rating plan

Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions? Select one: A. Loss ratio and quote ratio B. Combined ratio and success ratio C. New business ratio and retention ratio D. Retention ratio and hit ratio

Which one of the following statements is correct regarding the interaction between risk control and other insurer functions? Select one: A. Risk control representatives compile detailed data for the actuarial department to use in establishing rates. B. Risk control personnel are responsible for answering any complex questions that insureds have about premium audits. C. Risk control representatives are responsible for compiling all the information required for a premium audit. D. Risk control personnel can assist underwriters in modifying a new applicant's loss exposures to meet eligibility requirements.

Which one of the following statements is correct with respect to business income coverage? Select one: A. Business income coverage written on an actual loss sustained basis is usually subject to a dollar limit. B. A covered business income loss can occur without direct damage to property at the insured premises. C. When establishing the PML for business income losses, the dollar amount of the direct loss is important. D. A seasonal business could suffer a severe business income loss from a relatively short shutdown.

Which one of the following statements is correct with respect to insurance for crimes committed by others? Select one: A. Because crime can occur anywhere, the location of property is not a consideration when underwriting this coverage. B. The policy limit purchased is usually close to the value of the exposed property. C. The use of deductibles is not important with this type of insurance because the crime is committed by someone other than the insured. D. When evaluating loss exposures, underwriters consider the property's susceptibility to being stolen and its marketability.

Which one of the following statements is correct with respect to risk transfer measures? Select one: A. The majority of risk transfer measures are pure transfers. B. Risk transfers shift the transferor's legal responsibility for paying a loss to the transferee. C. Risk transfer measures tend to increase the variability of cash flow making an organization less attractive to investors. D. Most risk transfer measures limit the potential loss amounts being transferred.

Which one of the following statements is correct? Select one: A. Having adequate limits of insurance on new business ensures ongoing insurance to value. B. Insisting on insurance to value can damage an insurer's competitive position in the market. C. Most property losses are total losses so insurance to value is needed to cover most losses. D. It is preferable to insure to value with rates that reflect the loss exposure than to underinsure property at inflated rates.

Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter? Select one: A. Verify policies are issued with appropriate forms and endorsements B. Prepare premium quotations C. Assist producers and insureds in determining appropriate coverage D. Review and revise rating plans

What is a fraternal organization?

Fraternal organizations resemble mutual companies, but they combine a lodge or social function with their insurance function. They write primarily life and health insurance.

Business Continuity Plan

Guidelines and arrangements for response to disruption of critical business functions, to restore and maintain operation. Most crucial part is disaster recovery plan, how to restore production if everything goes to h*ck

When would an insurer hire a public adjuster?

If a claim is complex, or if settlement negotiations are not progressing satisfactorily with the insurer, the insured may hire a public adjuster to protect his or her interests.

Considerations in managing cash flow variability for an org and individual

Individual: financial strength, family obligations, aversion to risk Organization: company size, mgmt's risk tolerance, other stakeholders

Sources of products liability

Liability for products comes from three areas: 1. Breach of warranty 2. Negligence 3. Strict liability in tort (incl. liability if you produce a dangerous product)

Two key components of successful risk control measures

Management's commitment to risk control and employee attitudes about safety

What are MGAs?

Managing general agents MGAs serve as intermediaries between insurers and the agents and brokers who sell insurance directly to the customer, similar to wholesalers in the marketing system for tangible goods. An insurer operating through an MGA reaps the advantages of a low fixed cost, specialty expertise, and the assumption of insurer activities.

What risk financing goal do capital market solutions fail?

Managing the cost of risk: capital market solutions are expensive

How are most liability claims settled?

Most claims are settled using a general release, in which the claimant releases the insured of all liability for the claim and the insurer agrees to pay the claimant the agreed settlement amount. - Usually in lump sum

Formula for overall gain/loss from operations

Overall gain/loss from operations = net UW gain or loss + investment gain or loss

Probable maximum loss. Maximum foreseeable loss.

PML: Unless the building is fire-resistive, usually just the amount subject MFL: loss if all protective mechanisms were to fail

How does an ERM program improve an org's strategic decision-making?

Producing high-quality information that's essential to the org's survival. The current business model will not survive indefinitely, so it's critical that the plans be refreshed

ISO 31000:2009

Provides an international standard for risk management as well as a generic approach to risk management applicable within any industry sector.

Personnel loss exposures - whether they fulfill the six characteristics of an insurable loss exposure.

Pure risk, fortuitous, definite/measurable, large # of exposures, independent/not catastrophic, economically feasible premium. 1. The cost of loss of a key employee through death or retirement may be difficult to measure. 2. The potential loss of key employees does not usually involve large numbers of similar exposure units.

Net income loss exposures - whether they fulfill the six characteristics of an insurable loss exposure.

Pure risk, fortuitous, definite/measurable, large # of exposures, independent/not catastrophic, economically feasible premium. Net income loss could involve any decrease in revenues or increase in expenses 1. Net income losses caused by the business environment do not meet the pure risk characteristic. 2. If they're associated w/ property losses, could be catastrophic. 3. If associated w/ liability losses, may not be definite in time, because there is no specific time when losses to net income cease

Real vs personal property

Real ~ land and everything attached to it, such as buildings Personal ~ everything else

Performance metrics in ERM vs TRM

TRM: Success in traditional risk management can be measured both as an activity and as a result. ERM: Seeks the balance (optimization) between risk taking and strategic goals.

Fleet safety programs

Used in comm auto. Consists of written policy and procedures, specifying vehicle use, driver selection, vehicle maintenance, etc.

BS 31100

The code establishes principles and terminology for risk management and provides recommendations for the model, framework, process, and implementation of risk management. Four primary goals: a. Ensuring that an organization achieves its goals b. Ensuring that risks are managed in specific areas or activities. c. Overseeing risk management in an organization d. Providing "reasonable assurance" on an organization's risk management

What is separation in the context of risk control techniques?

The intent of separation is to reduce the severity of an individual loss at a single location. However, by creating multiple locations, separation most likely increases loss frequency. For example, using two distantly separated warehouses instead of one reduces the maximum possible loss at each individual location, but increases loss frequency, because two units are exposed to loss. The insurance or risk management professional should be confident that the benefits of reduced loss severity from separation more than offset the increased loss frequency.

T/F: ERM considers "upside" risk—the risk that the organization will outperform its strategic goals, while TRM does not.

True

T/F: Risk can have both positive and negative outcomes.

True.

Retrocession

When a reinsurance company reinsures with another reinsurer

When do pooling functions perform best?

When the loss exposures being pooled are independent.

Combustible interior finishings include:

Wood or plywood, fiber ceiling tiles, and plastic wall coverings

What do staff underwriters do?

Work closely with UW management to perform activities essential for profitable risk selection. 1. Research the market 2. Formulate underwriting policy 3. Revise underwriting guidelines 4. Evaluate loss experience to determine if guidelines should be changed 5. Research and develop coverage forms (with actuaries) 6. Review and revise rates 7. Arrange treaty reinsurance 8. Assist others with complex accounts 9. Conduct underwriting audits to ensure underwriters are following rules 10. Participate in industry associations 11. Conduct education and training

Net income loss risk control efforts must focus on ___?

long-term effects such as a loss of a market share

Personnel exposures are _____. What are the risk control techniques?

unavoidable, because all employees have key employees. - Loss prevention (employee education) - Loss reduction (safety response training)

For a particular asset or activity, the cost of risk can be broken down in this way:

- Cost of losses not reimbursed by insurance or other external sources - Cost of insurance premiums - Cost of external sources of funds—for example, the interest payments to lenders or the transaction costs associated with noninsurance indemnity - Cost of measures to prevent or reduce the size of potential losses - Cost of implementing and administering risk management

Define economy of operations, tolerable uncertainty, legality, and social responsibility in the context of pre-loss risk management goals.

- Economy of operations: the org. should not incur substantial costs at the gain of only slight benefits. - Tolerable uncertainty: keeping managers' uncertainty at tolerable levels - Legality: the risk management program should help to ensure that the org's legal obligations (e.g. contracts) are satisfied. - Social responsibility: acting ethically and fulfilling obligations to the community at large

Discuss the ability of self-insurance to meet risk financing goals.

- Pay for losses? Yes if retention is carefully chosen - Manage the cost of risk? Yes. - Manage cash flow variability? No - retained loss outcomes are uncertain - Maintain appropriate level of liquidity? Yes, if the org carefully chooses the loss retention level, purchases appropriate excess coverage, and accurately forecasts retained losses - Comply with legal requirements? Yes

Discuss the ability of guaranteed cost insurance to meet risk financing goals.

- Pay for losses? Yes, if the loss exposures are covered - Manage the cost of risk? To some degree because insurance premiums include insurers' expenses - Manage cash flow variability? Yes, because uncertainty about future losses is transferred to the insurer - Maintain appropriate level of liquidity? Yes, because the organization requires less liquidity than with retention or other risk financing - Comply with legal requirements? Yes

Possible steps in implementing a selected risk management technique

- Purchasing loss reduction devices - Contracting for loss prevention services - Funding retention programs - Implementing and continually reinforcing loss control programs - Selecting agents or brokers, insurers, third-party administrators, and other providers for insurance programs - Requesting insurance policies and paying premiums

Pure vs speculative risk

-A pure risk is a situation in which there are only the possibilities of loss or no loss (earthquake) -A speculative risk is a situation in which either profit or loss is possible (gambling)

The overall financial consequence of a risk is the sum of what three components?

1) Cost of value lost because of actual events that cause the loss 2) The cost of resources devoted to risk management 3) The cost of residual uncertainty

In managing the cost of risk, what expenses are included?

1. Administrative expenses (internal admin, risk management consulting, claim management,etc.) 2. Risk control expenses (sprinklers?) 3. Risk financing expenses (transaction costs, fees paid to banks, to brokers, to investment institutions)

Three elements of loss exposures.

1. An asset exposed to loss 2. Cause of loss, or peril 3. Financial consequences of that loss For example, identifying a building (an asset exposed to loss) is not sufficient for describing that building as a loss exposure. It is also necessary to identify the causes of loss associated with that building (such as fire, flood, or hurricane) and the financial consequences of that loss (such as a decline in the market value of the building or in the income produced by the use of the building).

Four advantages of retention.

1. Cost savings 2. Control of claim process 3. Timing of cash flows 4. Incentives for risk control

Four measures available to an organization to fund retention.

1. Current expensing of losses. Relies on current cash flows. Least formal + least reliable. 2. Unfunded loss reserve. Shows up as accounting liability, but no actual funds set aside. 3. Funded loss reserve. 4. Borrowed funds

Three reasons why subjective and objective risk differ.

1. Familiarity and control. Airplane risk vs car risk 2. Consequences over likelihood. People typically view low freq, high sev events in two ways: either it won't happen or it's very likely it'll happen to them. 3. Risk awareness

Steps in risk management process.

1. Identify loss exposures 2. Measure and analyze the loss exposures 3. Examine the feasibility of risk management techniques 4. Select the appropriate risk measure 5. Implement the technique 6. Monitor and revise

What are the six steps of the business continuity process?

1. Identify the organization's critical functions 2. Identify the risks (threats) to the organization's critical functions 3. Evaluate the effect of the risks on those critical functions 4. Develop a business continuity strategy 5. Develop a business continuity plan 6. Monitor and revise the business continuity process

Four common risk control goals.

1. Implement efficient and effective risk control measures 2. Comply with legal requirements 3. Promote life safety 4. Ensure business continuity

Common risk financing goals (5)

1. Pay for losses 2. Manage the cost of risk 3. Manage cash flow variability 4. Maintain an appropriate level of liquidity 5. Comply with legal requirements

Two categories of risk management goals

1. Pre-loss goals: economy of operations, tolerable uncertainty, legality, and social responsibility 2. Post-loss goals: broadly describe the degree of recovery that an organization will strive to reach following a loss. Possible post-loss goals include survival, continuity of operations, profitability, earnings stability, social responsibility, and growth

Four types of loss exposures.

1. Property loss exposures: destruction, taking, or loss of use. Property can be categorized as either tangible property or intangible property. 2. Liability loss exposures: any court fees, not just pmt of damages 3. Personnel loss exposures: A condition that presents the possibility of loss caused by a person's death, disability, retirement, or resignation that deprives an organization of the person's special skill or knowledge that the organization cannot readily replace. 4. Net income loss exposures: A condition that presents the possibility of loss caused by a reduction in net income.

Six considerations in the balance between transfer and retention

1. Risk tolerance 2. Financial condition 3. Core operations 4. Ability to diversify 5. Ability to control losses 6. Ability to administer the retention plan

Discuss three key risk control measures for net income loss exposures.

1. Separation and duplication risk control measures enable an organization to reduce net income losses by maintaining operations or quickly resuming operations following a loss. 2. Diversification is also a viable risk control technique for many because it helps to ensure that an organization's entire income is not dependent on one product or customer.

Six examples of post loss goals in risk management.

1. Survival 2. Continuity of operations 3. Profitability 4. Earnings stability 5. Social responsibility 6. Growth

Business continuity management is primarily designed to meet which one of the following risk management goals? Select one: A. Survival B. Tolerable uncertainty C. Social responsibility D. Growth

The focus of risk quadrants is different from the focus of risk classifications. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on Select one: A. The source of risk and who has traditionally managed it. B. The determination of whether the risk is diversifiable. C. Subjective and objective risks. D. Pure and speculative risks.

Two steps of the risk management process, when combined, constitute the process of assessing loss exposures. For this reason, they are probably the two most important steps in the process. These two steps are identifying loss exposures and Select one: A. Analyzing loss exposures. B. Selecting the appropriate risk management techniques. C. Examining feasibility of risk management techniques. D. Implementing selected risk management techniques.

Which one of the following is both a pre-loss and a post-loss risk management goal for many organizations? Select one: A. Social responsibility B. Legality C. Survival D. Tolerable uncertainty

Which one of the following statements regarding monitoring the results of a risk management program is true? Select one: A. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program. B. When performance substantially exceeds the standard, the risk management professional knows that the standard has been appropriately set. C. Risk management professionals generally prefer performance standards that are solely dependent on the organization's loss record. D. A results standard focuses on the quality and quantity of the risk management activities undertaken by the organization.

The statement, "There is a five percent chance that John will be injured in an automobile accident while driving to work tomorrow," is an example of A. Quantifying risk. B. Verifying risk. C. Quantifying loss exposures. D. Indentifying hazards.

A. Quantifying risk.

What risk management techniques are appropriate for property?

Avoidance, loss prevention, loss reduction, separation, and duplication

Which one of the following risk control techniques will reduce loss severity and make losses more predictable, without increasing loss frequency significantly? Select one: A. Loss prevention B. Duplication C. Separation D. Diversification

Which one of the following statements is true regarding risk management techniques? Select one: A. Data based on objective risk factors are usually the only criteria considered in determining appropriate risk management techniques. B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical. C. In support of the goal of economy of operations, the risk management techniques selected by most for-profit organizations should be the least expensive ones. D. Nonfinancial considerations are usually disregarded in selecting risk management techniques because they cannot be factored into a cost/benefit analysis.

The cost of residual uncertainty can have a significant effect on an individual or organization. Which one of the following statements is correct with respect to residual uncertainty? Select one: A. For organizations, the cost of residual uncertainty is limited to the effect that uncertainty has on members of the organization. B. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy. C. The cost of residual uncertainty includes the cost of any insurance policies purchased to cover losses not treated by other risk management techniques. D. The cost of residual uncertainty can be calculated by subtracting the expected cost of losses or gains from an organization's cost of risk.

B. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy.

Which one of the following is measurable and quantifies risk? A. Feasibility B. Probability C. Possibility D. Uncertainty

B. Probability.

Delmond Manufacturing is opening a new manufacturing facility in a building that it purchased from a competitor. Using the information below, which one of the following represents the cost of risk of opening the new facility? New building cost $60.0 million Safety system upgrades $6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million Select one: A. $7.0 million B. $10.0 million C. $11.5 million D. $71.5 million

In remodeling the primary office location, Phil, who is a partner in his family's construction business, found asbestos in the attic of the building. He is concerned not only about the current tear-out exposure but is also aware that asbestos may have resulted in unidentified harm. In the "quadrants of risk," Phil's concern about the asbestos most likely falls into which one of the following quadrants of risk? Select one: A. Strategic risks B. Hazard risks C. Operational risks D. Financial risks

JNL Construction is a general contractor. As the risk management professional for JNL, Marie should be aware of the company's contractual obligations, as well as the contractual obligations that others owe JNL. This knowledge is necessary for Marie to meet which one of the following pre-loss risk management goals? Select one: A. Continuity of operations B. Social responsibility C. Legality D. Tolerable uncertainty

Risk management program goals are typically divided into two categories: pre-loss goals and post-loss goals. Which one of the following describes one of these categories of goals? Select one: A. Pre-loss goals are risk management goals that allow the organization to prepare for future losses. B. Pre-loss goals include profitability, earnings stability, and loss prevention. C. Post-loss goals broadly describe the degree of recovery that an organization will strive to reach following a loss. D. Post-loss goals include immediate restoration of operations, tolerable uncertainty, and loss mitigation.

The two benefits of risk management affecting individuals, organizations, and society are: it preserves financial resources by reducing expected losses and it Select one: A. Increases the attractiveness to investors. B. Increases productivity within the economy and improves overall standard of living. C. Reduces the residual uncertainty associated with risk. D. Improves the allocation of productive resources.

Traditionally, the risk management professional's role has been associated with loss exposures related to Select one: A. Speculative risk. B. Operational risk. C. Pure risk. D. Business risk.

Warehousing a company's inventory at different locations in different cities is an example of which one of the following risk control techniques? Select one: A. Diversification B. Duplication C. Separation D. Loss prevention

Which one of the following activities is the first step in the business continuity process? Select one: A. Evaluate the effect of risks on the organization's critical functions. B. Develop a business continuity plan. C. Identify the organization's critical functions. D. Develop a business continuity strategy.

Which one of the following is a risk financing technique? Select one: A. Diversification B. Separation C. Transfer D. Loss prevention

Which one of the following lists the steps in the risk management process in the correct order? Select one: A. Select techniques, examine techniques, identify loss exposures, analyze loss exposures, implement techniques, monitor, and revise the program B. Identify loss exposures, analyze loss exposures, select techniques, examine techniques, implement techniques, monitor, and revise the program C. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program D. Implement techniques, monitor and revise the program, identify loss exposures, analyze loss exposures, examine techniques, and select techniques

Which one of the following statements is correct with respect to risk control techniques for net income loss exposures? Select one: A. All techniques that control property, liability, or personnel loss exposures are ineffective in controlling net income loss exposures. B. Risk control efforts focused on reducing the immediate effect of losses on net income are not needed to control long-term effects. C. Two risk control techniques that are directly aimed at reducing the severity of net income losses are separation and duplication. D. Diversification is not a viable risk control measure for controlling net income losses.

One of the elements of risk is uncertainty. Which one of the following best describes the uncertainty that risk involves? A. Uncertainty as to how to manage potential losses B. Uncertainty as to whether a negative outcome is possible C. Uncertainty as to the type and timing of an outcome D. Uncertainty as to whether insurance is available

C. Uncertainty as to the type and timing of an outcome

Proactive avoidance vs reactive avoidance vs complete avoidance

Proactive: avoid a loss exposure before it exists Reactive: discontinue an existing activity Complete: not the most common and typically not feasible or desirable

Achieving any post-loss goal involves expending risk management resources, which may conflict with the pre-loss goal of Select one: A. Social responsibility. B. Tolerable uncertainty. C. Earnings stability. D. Economy of operations.

Which one of the following costs is part of the overall financial consequences of risk? Select one: A. The cost of benchmarking surveys B. The cost of purchasing an asset C. The cost of losses reimbursed by insurance D. The cost of the value lost due to events that caused a loss

Which one of the following is the goal of enterprise-wide risk management (ERM)? Select one: A. Reduce risk management costs B. Coordinate loss reduction efforts C. Decentralize control of business decisions D. Maximize the organization's value

Which one of the following statements is correct with respect to applying risk control techniques to the various types of loss exposures? Select one: A. Separation, duplication, and diversification are the most effective risk control techniques for treating liability loss exposures. B. Risk control techniques to reduce a liability loss once it occurs are generally not available. C. The most cost-effective risk control techniques for personnel loss exposures are those aimed at causes of loss that occur outside the workplace. D. Any measure that controls property, liability, or personnel loss exposures also indirectly controls associated net income loss exposures.

The most widely-known risk management technique used by individuals is Select one: A. Retention, that is, paying for the losses they incur. B. Risk control. C. Maintenance. D. Risk financing by purchasing insurance.

D. Risk financing by purchasing insurance.

Risk involves the possibility of a negative outcome. Possibility means A. The likelihood of an event occurring. B. That an outcome is unavoidable. C. An identified and predictable outcome. D. That an outcome may or may not occur.

D. That an outcome may or may not occur.

Separation usually _____ severity and _____ frequency

Decreases severity and increases frequency (two warehouses vs one)

What is the business continuity plan? What should it contain?

Details the activities the organization will undertake in response to an incident that interrupts its operations. Should contain: - Strategy that the org will follow in the wake of a crisis - Info regarding duties/responsibilities of various people in org - Steps that can be taken to prevent further loss - Emergency response to deal with life/safety issues - Crisis management plan to deal with communication and any reputation issues - Business recovery and restoration plan to deal with losses to property, products, or processes - Access to stress management

Which of the following post-loss goals would seek ways of creating consistent results over time, rather than choose actions that might produce fluctuating results? Continuity of operations Profitability Earnings stability Growth

Earnings stability

Retention is the most ____ form of risk financing

Economical

Financial considerations and non-financial considerations when selecting a risk management technique

Financial: - Forecasts of expected losses, effects of the technique on freq/sev, and after-tax result in applying chosen technique Non-financial: - Ethical, stability in earnings, safety, etc.

What are the benefits of risk management for an individual, an organization, and society?

Individual: - Preservation of financial resources - Reduction of anxiety Organization: - Preservation of financial resources - Increased attractiveness as an investment - Reduction of the deterrence effect of risk (can engage in business activities by minimizing the adverse effects of risk) Society: - Preservation of financial resources - Improved allocation of productive resources

Four classifications of hazards. Example for each.

Moral: intentionally causing, fabricating, or exaggerating a loss Morale: driving carelessly, failing to lock an unattended building, or failing to clear an icy sidewalk Physical: a condition of property, persons, or operations that increases the frequency and/or severity of loss (e.g. icy sidewalk -> slip and fall Legal: increases the freq/sev of loss (e.g. courts favoring plaintiffs

Risk financing techniques

Retention involves generating funds from within the organization to pay for losses. Transfer involves generating funds from outside the organization to pay for losses and includes insurance and noninsurance transfer.

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