Risk Management Definitions

Objective Risk

-The relative variation of actual loss from expected loss -Declines as the number of exposures increases -Varies inversely with the square root of the number of cases under observation

Insurable Risk

-There must be a large number of exposure units -The loss must be accidental and unintentional -The loss must be determinable and measurable -The loss should not be catastrophic -The chance of loss must be calculable -The premium must be economically feasible

Casualty Insurance

A broad field of insurance that covers whatever is not covered by fire, marine, and life insurance

Hazard

A condition that creates or increases the frequency or severity of loss

Aleatory Contract

A contract where the values exchanged may not be equal but depend on an uncertain event

Direct Loss

A financial loss that results from the physical damage, destruction, or theft of the property

Indirect Loss

A financial loss that results indirectly from the occurrence of a direct physical damage or theft loss

Risk Retention Group

A group captive that can write any type of liability coverage except employers' liability, workers compensation, and personal lines

Principle of Utmost Good Faith

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts

Valued Policy Law

A law that exists in some states that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law

Fortuitous Loss

A loss that is unforeseen and unexpected by the insured and occurs as a result of chance

Excess Insurance

A plan in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain

Valued Policy

A policy that pays the face amount of insurance if a total loss occurs

Risk Management

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

Deductible

A provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured

Risk Transfer

A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the insured

Avoidance

A risk control technique in which a certain loss exposure is never acquired, or an existing loss exposure is abandoned

Loss Reduction

A risk control technique that reduces the severity of a particular loss.

Cost of Risk

A risk management tool that measures certain costs in a rick management program

Diversifiable Risk

A risk that affects only individuals or small groups and not the entire economy, which can be reduced or eliminated by diversification

Nondiversifiable Risk

A risk that affects the entire economy or large numbers of persons or groups within the economy, which cannot be reduced or eliminated by diversification

Enterprise Risk Management

A single unified treatment program of all major risks faced by the firm

Speculative Risk

A situation in which either profit or loss is possible

Pure Risk

A situation in which there are only the possibilities of loss or no loss

Self-Insurance

A special form of planned retention by which part or all of a given loss exposure is retained by the firm

Warranty

A statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects

Loss Prevention

Aims at reducing the probability of loss so that the frequency of losses is reduced

Enterprise Risk

All major risks faced by a business firm

Reinsurance

An arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance

Active Risk Retention

An individual is consciously aware of the risk and deliberately plans to retain all or part of it

Retention

An individual or a business firm retains part or all of the losses that can result from a given risk. Used when no other method is available, the worst possible loss is not serious, and losses are highly predictable

Captive Insurer

An insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures while reducing premium costs, providing easier access to a reinsurer, and perhaps easing tax burdens

Single Parent Captive (Pure Captive)

An insurer owned by only one parent, such as a corporation

Association or Group Captive

An insurer owned by several parents

Loss Exposure

Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

Law of Large Numbers

As the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience

Attitudinal Hazard

Carelessness or indifference to a loss, which increases the frequency or severity of a loss

Legal Hazard

Characteristics of the legal system or regulatory environment that increase the frequency or severity of losses

Hold-Harmless Clause

Clause written into a contract by which one party agrees to release another party from all legal liability

Indemnification

Compensation to the victim of a loss, in whole or in part, by payment, repair, or replacement

Commutative Contract

Contract in which the values exchanged by both parties are theoretically equal

Personal Lines

Coverage that insure the real estate and personal property of individuals and families or provide them with protection against legal liability

Liability Insurance

Covers the insured's legal liability arising out of property damage or bodily injury to others; legal defense costs are also paid

Risk Management Manual

Describes in some detail the risk management program of the firm

Moral Hazard

Dishonestly or character defects in an individual that increase the frequency or severity of loss

Consequential Loss

Financial loss occurring as the consequence of some other loss

Social Insurance

Government insurance programs with certain characteristics that distinguish them from other government insurance programs. Programs are generally compulsory; specific earmarked taxes fund the programs; benefits are heavily weighted in favor of low-income groups; and programs are designed to achieve certain social goals

Material

If the insurer knew the true facts, the policy would not have been issued, or it would have been issued on different terms

Property Insurance

Indemnifies property owes against the loss or damage of real or personal property caused by various perils

Concealment

Intentional failure of the applicant for insurance to reveal a material fact to the insurer

Liability Risks

Legally liable if you do something that results in bodily injury or property damage to someone else

Unilateral Contract

Only one party makes a legally enforceable promise

Risk Management Policy Statement

Outlines the risk management objectives of the firm, as well as company policy with respect to treatment of loss exposures

Life Insurance

Pays death benefits to designated beneficiaries which the insured dies

Physical Hazard

Physical condition that increases the frequency or severity of loss

Manuscript Policy

Policy designed for a firm's specific needs and requirements

Commercial Lines

Property and casualty coverages for business firms, nonprofit organizations, and government agencies

Conditions

Provisions inserted in the policy that qualify or place limitations on the insurer's promise to perform

Personal Risks

Risks that directly affect an individual or family

Representations

Statements made by the applicant for insurance, such as the applicant's occupation, state of health, and family history

Subrogation

Substitution of the insurer on place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance; the insurer is entitled to recover from a negligent third party any loss payments made to the insured

Hedging

Technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling future contracts on an organized exchange

Risk Financing

Techniques that provide for the funding of losses after they occur, such as retention, non insurance transfers, and commercial insurance

Risk Control

Techniques that reduce the frequency or severity of losses, such as avoidance, loss prevention, and loss reduction

Binder

Temporary contract for insurance and can be either written or oral

Legal Purpose

That is, it must not be for the performance of an activity prohibited by law; else it is unenforceable.

Expense Loading

The amount needed to pay all expenses

Peril

The cause of loss

Premature Death

The death of a family head with unfulfilled financial obligations

Broad Evidence Rule

The determination of actual cash value should include all relevant factors an expert would use to determine the value of the property

Retention Level

The dollar amount of losses that the firm with retain

Personal Risk Management

The identification and analysis of pure ricks faced by an individual or family, and to the selection and implementation of the most appropriate technique(s) for treating such risks

Subjective Probability

The individual's personal estimate of the chance of loss

Pecuniary Interest

The insurable interest requirement in life insurance can be met

Principle of Insurable Interest

The insured must be in a position to lose financially if a covered loss occurs

Principle of Indemnity

The insurer agrees to pay no more than the actual amount of the loss; the insured should not profit from a loss

Conditional Contract

The insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all the conditions

Objective Probability

The long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions

Legally Competent

The parties must have legal capacity to enter into a binding contract

Insurance

The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk

Human Life Value

The present value of the family's share of the deceased breadwinner's future earnings

Fair Market Value

The price a willing buyer would pay a willing seller in a free market

Chance of Loss

The probability that an event will occur

Loss Frequency

The probable number of losses that may occur during some given time period

Loss Severity

The probable size of the losses that may occur

Underwriting

The process of selecting and classifying applicants for insurance through a clearly stated company policy consistent with company objectives

Non insurance Transfers

The risk is transferred to a part other than an insurance company

Property Risks

The risk of having property damaged or lost from numerous causes

Pooling

The spreading of losses incurred by the few over the entire group, so that in the process average loss is substituted for actual loss

Adverse Selection

The tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwriting, results in higher-than-expected loss levels

Financial Risk

The uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money

Consideration

The value that each party gives to the other

Maximum Possible Loss

The worst loss that could happen to the firm during its lifetime

Probable Maximum Los

The worst loss that is likely to happen

Replacement Cost Insurance

There is no deduction for physical depreciation in determining the amount paid for a loss

Subjective Risk

Uncertainty based on a person's mental condition or state of mind

Risk

Uncertainty containing the occurrence of a loss

Innocent Misrepresentation

Unintentional misrepresentation

Passive Risk Retention

Unknowingly retained because of ignorance, indifference, laziness, or failure to identify an important risk

Actual Cash Value

Value of property at the time of its damage or loss, determined by subtracting depreciation of the item from its replacement cost