FINN 3271 Exam 1
insurance companies offer excess flood coverage over the government limit of
$250,000
fraud increases average household premium by
$300 annually
controlling adverse selection
- clue-credit score- MVR - Telematics- property inspection - google earth - drones
Friendly Society for the Mutual insurance of Homes established in Charleston in
1736
Pure risk
A chance of loss or no loss, but no chance of gain. speculative risk involves loss or gain and would require additional premium because of greater probability of loss
Captive insurers
A subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates.
Payment of fortuitous losses
Accidental (not intentional) loss Intentional Acts (arson, assault & battery) excluded
Why do private sector insurance companies consider primary flood insurable?
Catastrophic
CRM
Certified risk manager
First Fire Insurance company in the U.S. was established in:
Charleston
All of the following are techniques for insurance companies to manage catastrophes except:
Concentration of Exposurers
Incorporates risk decisions into everything the organization does
ERM
ERM
Enterprise Risk Management
Storm surge (flooding) from a hurricane is covered under the homeowners policy
False
ERM Adds the following:
Financial and Strategic risks
Risk transfer
From insured to insurance company as opposed to insured retention
A river floods thousands of home in a flood plain. Fundamental or particular
Fundamental
Buyers have difficulty getting a loan if the federal reserve maintains low interest rate causing banks to tighten lending standards. Fundamental risk or particular risk
Fundamental
Traditional Risk Management
Hazard and operational risk
Loss of business income following damage to property is a:
Hazard/ pure risk
Largest Insured Loss in U.S. history
Hurricane Katrina
Advantages of Retention
Insurance premium cost factors are saved, direct control of the claims process, timing of cash flows, increased incentive for risk control
Basel II
International Risk and Capital Standards for banks
Which of these is insurance:
Large group of homeowners agree to pay for fire loss to homes
Damage to the apartment building because of fire caused by Micheal cooking with a grill on the patio of his apartment
Liability
Lawsuit against Michael because he rear-ended another motorist
Liability
Borrowing Funds
Line of Credit or negotiated loan
What is the best tool to determine frequency and severity
Loss data
A building sprinkler system is an example of risk:
Loss retention
Loss severity refers to
Magnitude of losses
All of the follow about captive insurers are true except:
May increase investment Income
Traditional risk management seeks to
Minimize risk
Do private sector insurance companies insure property against the primary risk of flood?
No
Fundamental or Particular risk: A home may be damaged by fire.
Particular risk
Benefits of insurance:
Paying for losses, Managing cash flow uncertainty, Meeting legal requirements, Promoting risk control, Enabling efficient use of resources, Providing support for insureds credit, Providing source of investment funds, Reducing social burdens
Substitution of average loss for actual loss is:
Pooling
Strategic planning
Process by which a board and executives develop, refresh, and refine strategies for the future
Loss of clothing, furniture and other property because of grease fire from cooking in Michael's apartment
Property
Physical damage to Michaels 2010 Honda because he hits ice and strikes a tree
Property
Solvency II
Regulatory requirements for insurance firms operating in the European Union
two main approaches to risk financing
Retention and Transfer
A group captive for insuring medical malpractice is a:
Risk Retention group
Traditional vs ERM differences
Risk categories, strategic integration, performance metrics, organizational structure
government insurance:
Social insurance federal deposit insurance PBGC Federal flood Terrorism reinsurance
What type of risk is usually not insurable through traditional insurance?
Speculative
Individuals purchases 1,000 shares of facebook stock during IPO: Pure or speculative risk?
Speculative Risk
What makes a good risk manager
Technical Skills, Interpersonal Skills, Business Skills
Accidental overflow of water from a burst pipe is a covered peril under the homeowners policy?
True
Is fire insurable?
Yes
Is flooding insurable?
Yes
Is the risk of automobile accidents insurable?
Yes
indirect cost of losses
additional living expense, business interruption
Expenditures on risk management
administrative, risk control, risk financing
reasonable premium
affordability for the insured
How Pooling Reduces Risk
as the pool increases, the standard deviation decreases. This occurs because extreme outcomes (members incurring total loss) represent a smaller percentage at the pool level
ARM
associate in Risk Management
All of the following represent loss prevention except:
avoidance
risk exposure with the highest level of frequency and severity should be
avoided
State programs:
beach Plans, workers comp, Auto plans
hold-harmless agreement
clause or separate contract, transfer loss exposure to other party
Administrative costs
cost of internal administration, risk management consulting
risk financing expenses
costs to manage risk financing measures (broker fees, bank fees)
risk control expenses
costs to reduce frequency and severity or increase predictability
definite and measurable
definite in Time, Cause and Location. (fire damage, wind damage, death claim are definite in time.
unfunded reserve
estimate of cost shown as an accounting entry; no assets immediately available to pay
Federal programs:
flood, terrorism, crop insurance
funded reserve
formal or informal (identifying which assets could be sold to meet a loss obligation)
workers compensation
frequency and potential severity. WC insurance is required by State Statue
Terrorist group hijacks a truck and drives into a crowd of people causing multiple injuries and fatalities
fundamental risk
Insurance pools
group of companies band together to insure each other, economies of scale
Liability coverage
has a long tail, generating investment income from reserves
four quadrants of risk
hazard, financial, operational, strategic
Loss exposure characteristics
high severity/ low frequency
property risks
higher limits and broader coverages possible with captive
residual uncertainty
impact on financial stability and reputation
Cost of risk includes all of the following except
insurance recovery
Current expensing of losses
least formal/cheapest measure; relies on current cash flows to meet costs of loss
Private insurance:
life and health, property and liability
fortuitous
must be accidental/unexpected intentional acts are excluded
ERM seeks to
optimize risk (optimize success)
adverse selection
person with above average chance of loss seeing insurance at standard rates (withholding info from insurance company)
Michael has knee surgery following an injury while playing basketball
personal
Types of insurance:
private and government
direct cost of losses
property damage, liability judgements
ERM
pure and speculative risk, financial, strategic
insurance techniques to deal with catastrophes
reinsurance, securitization, wind pools
Indemnification
restored to original financial position
Large number of similar exposure units
risk transfer -> pooling and law of large numbers
Pooling of losses
sharing of losses by the entire group, prediction of losses based on law of large numbers
Flood insurance is provided by
the federal government