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