CPCU 500 Study

Property Liability insurance offered by the federal government

1. National flood insurance - insurance to those in flood prone areas 2. Terrorism Risk Insurance Program 3. Federal Crop insurance - e.g. in droughts, insects, excess rain and hail

Speculative risks include

1. Price risk 2. Credit risk 3. Inflation risk 4. Financial risk 5. Liquidity risk 6. Interest rate risk 7. Market risk

5 types of loss exposures

1. Property loss ecposure 2. liability loss exposure 3. Personal loss exposure aka human loss exposure 4. Personnel loss exposure 5. Net income loss exposure

Application of risk control techniques

1. Property loss exposure 2. Liability loss exposure 3. Personnel loss exposure 4. Net income loss exposure

6 characteristics of an ideally insurable loss

1. Pure risk - loss or not loss AND Speculative Risk 2. Fortuitous loss 3. Definite and measurable 4. A large number of similar insured exposures 5. Independent and non catastrophic 6. Economic Feasibility

The three major ways to classify risk

1. Pure risk versus speculative risk 2. Subjective risk versus objective risk 3. Diversifiability risk versus non diversifiable risk

The two measures of Dispersion

1. Standard Deviation 2. Coefficient of variation

Post Loss Risk Management goals

1. Survival 2. Continuity of operations 3. The four step plan for meeting the continuity of operations objective 4. earnings stability 5. Social responsibility 6. Growth - should be met after a loss occurs -address the firms degree of recovery after a significant loss

Two impediments to implementing ERM

1. Technological inadequacy - when inefficient or outdated info technology systems fail to get the right info to managers in a timely fashion 2. Corporate culture turf wars - refusal to share trade secrets - manager possessiveness - confusing intra- department lingo - lack of support from senior management

5 types of documents that may be included in insurance policies

1. The completed application -

Two Key elements of risk

1. Uncertainty - lack of determining the outcome 2. Possibility - chance that something could not happen

Unplanned retention occurs when

1. a business fails to identify or asses a loss exposure correctly 2. potential losses can not be insured or otherwise transferred

Three elements of a loss exposure

1. asset exposed to loss - what item of value can be lost 2. the peril or cause of loss - how the subject can be lost 3. the financial impact of loss - how much value can be lost - depends on the type of loss exposure, the cause of loss and the loss frequency and severity

6 risk control techniques

1. avoidance 2. loss prevention 3. loss reduction 4. Separation 5. Duplication 6. Diversification

Four funding resources for retained losses

1. current expensing of losses 2. Unfunded loss reserve 3. ability to control losses 4. ability to administer the retntion plan

3 guidelines for designing an effective business continuity plan

1. design a plan that is clear and capable of being easily read and understood during a crisis 2. distribute copies of the plan to all relevant parties 3. train all relevant parties in crisis procedure

Hedging

A financial transaction in which one asset is held to offset the risk associated with another asset.

Pool

A group of organizations that band together to insure each other's loss exposures.

Reasonable expectations doctrine

A legal doctrine that provides for an ambiguous insurance policy clause to be interpreted in the way that an insured would reasonably expect.

Collateral source rule

A legal doctrine that provides that the damages owed to a victim should not be reduced because the victim is entitled to recover money from other sources, such as an insurance policy.

Retrospective rating plan

A rating plan that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.

Finite risk insurance plan

A risk financing plan that transfers a limited (finite) amount of risk to an insurer.

Self-contained policy

A single document that contains all the agreements between the insured and the insurer and that forms a complete insurance policy.

Diversifiable risk versus nondiversifiable risk

Diversifiable risk - exposes just one or a few people to the same loss exposure Nondiversifiable risk - not highly correlated and thus gains or losses tend to occur simultaneously rather than randomly e.g. inflation, unemployment and natural disasters - considered the responsibility of society and are often addressed by government

Implementing ERM

ERM must be integrated throughout the firm with upper managers leading the initiative and encouraging all employees to support ERM

Correlation

ERM recognizes and manages risk correlation - correlation increases risk - uncorrelated risks can reduce risk as they balance each other out

Pure risk VS Speculative risk

Pure risk = loss or no loss - the chance of financial loss without the change of financial gain e.g. fire, death or tornado Speculative risk = involves loss, no loss or gain- the chance of financial loss with the chance of financial gain e.g. stock market investing and gambling

Hazard risks

Pure risks associated with accidential losses e.g. loss of a factor by fire

Commercial Loss Exposures

See pages 27-28

Data Credibility

The term data credibility refers to the level of confidence that available data can accurately indicate future losses. Two related data credibility issues may prevent data from being good indicators of future losses—the age of the data and whether the data represent actual losses or estimates of losses.

Total dollar losses

The total dollar amount of losses for all occurrences during a specific period.

Disadvantage of retention

Uncertainty - if losses are higher than expected in frequency or severity or both the firm has no choice but to pay until it goes bankrupt

Survival - Post -loss

resume operations eventually, losses that prevent survival include destruction of the only office or factory, a lawsuit that depletes the firms funds, death or disability of a key employee.

Legality - Pre loss

satisfy imposed regulations, honor contracts, and respond to liability exposures. Illegality is itself a loss exposure

Prouty Approach - three categories of loss severity

slight - losses that can be retained easily significant - part of the loss must be tranferred serve- the organizations survival depends on the transfer of the loss

Financial risks

speculative risks associated with an organizations financial activities e.g. changes in the cost or availability of capital

Strategic risks

speculative risks directly linked to management decisions and the business plan such as planning and product design

Moral Hazard

subjective characteristic of the insured that increases loss frequency and or severity. e,g, a reputation for dishonesty, repeated suspicious fires and associating with felons

Pooling

takes the losses of a few pool members and redistributed them over the entire group, thereby subjecting each group member to the groups average loss rather than to its own actual loss Pooling combins the loss expierence of a large number of exposure units , which enable the pool to use the law of large numbers and to predict future losses more accuratley

Personal Property

tangible property other than real property

Credit risk

the chance that a debtor will not pay his obligations as they come due

Inflation risk

the chance that the purchasing power of invested dollars will decline

Financial risk

the degree of uncertainty associated with an investments expected return

goodwill

the intangible asset that reflects the value a business recieves from reputation and patronage - a business loses goodwill through poor service, mismanagement and or defective or obsolete protects

Property loss expsure

the posibility of financial loss resulting from a. damage to b. destruction of c. loss of use of property in which a person or organization has a financial insurable interest

Personal loss exposure

the posibility that an individual or family will suffer financial loss due to illness/injurt, death, disability or unemployment of a family member

Net income loss exposure

the possibility of loss caused by a reduction in net income. Net income loss typically involves decrease in revenues or increse in expenses resulting from property loss.

Personnel loss exposure

the possibility that a business will suffer financial loss due to disability, death, retirement or resignation of a key employee

Liability loss exposure

the possibility that a third party will bring a claim for damages. The exposure emphasizes the possibility of a claim (rather than the possibility of a payment) because even a claim that can be successfuly defended will still result in defense costs and adverse publicity

Business continuity management

the process that identifies potential threats to an organizations existence and creates a strategy designed to minimize or eliminate business interruptions. - focuses on the orgainzational post-loss goals of survival and continuity of operations

Interest Rate risk

the variability in an investments return resulting from the changes in the market

Theoretical probability

theoretical and constant, can be calculated without actual trials (coin flips, dice throws, card draws)

Price risk

uncertainty over unanticipated change in the costs of inputs or the prices of products

Liquidity risk

relative inability to covert an asset into cash with little inconvenience, cost or risk of loss

Modular policy

An insurance policy that consists of several different documents, none of which by itself forms a complete policy.

Contract of adhesion

Any contract in which one party must either accept the agreement as written by the other party or reject it

The law of large numbers

As the number of similar but independent exposure units increases, forecasts of future events become more reliable if: 1. the past events occurred under substantially identical and unchanging conditions 2. the future events can be expected to occur under the same unchanging conditions. 3. the events have been and will continue to be numerous and independent.

Interdependency

- Traditional risk management categorizes specific loss exposures and manages them as unrelated statistically independent risks - ERM identifies and manages the potentially catastrophic interaction of losses e.g. traditional risk management treats hazard risk (such as product recall) separately from financial risks (reduced stock price) even though a product recall can hurt the stock price

Risk retention groups

- a group captive formed under the requirements of the liability risk retention act of 1986 to insure the parent org.

Portfolio theory

- a portfolio is a combination of risks designed to produce less risk than the sum of individual components. - portfolio theory assumes that risk includes both the combination of individual risks and their interactions

Chief Risk Officer

- acts as a facilitator who engages senior management in an ongoing process of relating risk strategic goals to the orgs SWOT - responsible for creating a risk culture in which managers and employees become risk owners and risk management becomes part of every job description

Prouty Approach - Four categories of loss frequency

- almost all - extremely unlikely to occur - slight - could occur but has not - moderate - occurs occasionally - Definite - occurs regularly

Pooling: Average losses

- harder to predict if the losses are positively correlated because there is a greater chance of many high losses

Economy of operations - Pre loss

- increase departmental and organizational efficiency. RM efficiency can be measured by comparing risk costs with those of similar firms

Standard Deviation

- indicates the variability between each value in a data set and the data set's mean - the smaller the SD the smaller the degree of dispersion and the greater the accuracy of predictions - direct comparison of the standard deviations of two probability distributions is possible only if both distributions have similar means.

Specific situations addressed by business continuity management

- interruptions resulting from property losses - info tech problems - damage to reputation - loss of utilities or infrastructure

Empirical probability

- practical and changeable - probability is comutued from historical data and study samples (mortality rates) - facts that improve the reliability of empirical probabilities include the use of a large number of data and an organization with stable operations and loss patterns - historical loss data have several sources - an orgs own loss experience, insurance rating org, national safety orgs.

Pooling of uncorrelated loss

- reduces risks without transferring risk

Pre-loss Risk Management goals

- should be met even if no losses occur 1. economy of operations 2. tolerable uncertainty 3. legality 4. social responsibility

Organizational Structure

- traditional risk management model uses a risk manager and a risk management department to manage hazard risk. - in ERM the risk management function is broader ERM incorportates all of the orgs risks and delegate ERM responsibility throughout the entire organization

Pooling of correlated losses

- will reduce risk for each partipant if the losses are not perfectly positivly correlated

The benefits of risk management

1. Benefits to individuals : - protects financial resources by reducing expected losses - reduces anxiety from the residual uncertainty of risk 2. Benefits to organizations - protects financial resources by reducing expected losses - inspires confidence that future resources are protected - reduced the deterrent effect of risk 3. Benefits to society - risk management improves the allocation of society scarce resources. There is a trade off between the cost of risk management and the value of the corresponding reduction in residual uncertainty. A firm that increases spending on risk management should have smaller expected losses and experience less residual uncertainty.

Two forms of probability distributions

1. Discrete probability distributions - have a finite number of possible outcomes - they are typically used as frequency distributions to analyze how often an event has occured. 2. Continuous probability distributions - have an infinite number of possible outcomes. -represented as a graph or by dividing the distribution into a finite number of bins and calculating the probability of an outcome falling within the range represented by each bin

Four methods of loss exposure identification

1. Document analysis - involves examination of internal and external documents to identfy loss exposure 2. Compliance review - evaluates the local, state and federal laws and helps the org minimize liability loss exposures related to non compliance 3. Personal inspections - evaluate property and operations for unexpected loss exposures 4. Experts - have special knowledge of the organization or its specific loss exposures.

Level of Government involvement

1. Exclusive insurer - exclusive provider of insurance or reinsurance when required by law or when private insurers will not provide coverage voluntarily 2. Partner with private insurers 3. Competitor with private insurers

The three measures of central tendency

1. Expected value - Expected value - equals the weighted average of all the possible outcomes of a theoretical probability distribution. - Mean sum of all values divided by the total number of observations 2. Median - midpoint 3. Mode - most frequent occurring value in data set

Property Liability insurance offered by state government

1. Fair Access to insurance Requirements plans - insurance pools that make basic property insurance available to property owners who can not buy coverage in the voluntary market. 2. Workers compensation insurance - covers statutory benefits for employees work related injuries and illnesses. 3. beach and windstorm plan - assigned risk plans that insure homes subject to hurricane losses 4. Residual auto plans - provide coverage to high risk insureds who can not buy coverage in the free, voluntary market

10 Risk financing measures or methods

1. Guaranteed cost insurance 2. self insurance 3. large deductible plan 4. captive insurer 5. finite risk insurance plan 6. pool 7. retrospective rating plan 8. hold harmless agreement 9. capital market solution 10. contingent capital arrangement

Enterprise risk management - 4 categories of risk

1. Hazard risks 2. Operational risks 3. Financial risks 4. Strategic risks

Six steps in the Risk management Process

1. Identify loss exposures 2. analyze loss exposures by : frequency, severity, total dollar losses and timing 3. Evaluate alternative RM exposure - risk control vs risk financing 4. select the best combination of risk management techniques - financial and non financial considerations 5. implement your decision 6. monitor the program

Four risk control goals

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

8 Benefits of Insurance

1. Indemnification of loss 2. Reduction in cash flow uncertainty 3. loss control 4. Complaince with legal requiremnts 5. Efficient use of resources 6.Support for credit 7. Source of investment funds 8. reduction of social burdens

2 differences between pooling and insurance

1. Insurance transfers risk from the insured to the insurer in exchange for the premium payment. 2. Insurers additonal funds are provided by - initial capital - provided by investors - retained earnings

Three theoretical pillars of Enterprise risk management

1. Inter dependency 2. Correlation 3. Portfolio theory

Two types of documents considered in document analysis

1. Internal documents : - financial statements - contracts - insurance policies - organizational policies and records - flowcharts and organizational charts - loss histories 2. External documents: - questionnaires/checklists - websites -news releases

2 requirements to construct an empirical probability distribution:

1. Loss categories must be designed so that all losses can be included, thus providing a mutually exclusive, collectively exhaustive list of outcomes. 2. The distribution must define the set of probabilities associated with each of the possible outcomes.

4 major categories of hazards

1. Moral hazard 2. Attitudinal hazard 3. Physical hazard 4. Legal Hazard

For both theoretical and empirical probability distributions, the list of outcomes must be

1. Mutually exclusive - only one can occur at a time 2. collectively exhaustive - no other outcomes are possible The sum of the outcomes probabilities totals exactly 1 (100%) always.

Enterprise Risk Management

1. developed to manage all of an organizations risks 2. offers a holistic approach to managing all of an organizations key business risks and opportunities together as a portfolio 3. manages both pure and speculative risks 4. all definitions incorporate the concept of managing all of the organizations risks to help meet its objectives 5. the key to deciding how to evaluate and treat risks is based on the link between managing the org risks and its objectives

Losses are independent or uncorrelated when

1. each loss occurs independently 2. the losses are not subject to the same risks

Fully integreted ERM program must have

1. encourages communication throughout all levels of the firm 2. promotes dialog among units and levels within the firm

Three reasons subjective risk differs from objective risk

1. familiarity - people tend to underestimate familiar risks and overestimate dramatic, unfamiliar risks 2. control - people who feel in control tend to underestimate the level of risk 3. frequency and severity - people tend to overestimate low-frequency events and to underestimate high-frequency events. Some people focus on probability regardless of severity while others focus on severity rather than probability

4 reasons for government insurance programs

1. fill unmet needs 2. create efficiency and provide convienience 3. to force people to buy certain types of insurance 4. to achieve social goals

6 steps in the business continuity process

1. identifiy the org critical process 2. identify the threats to those processes 3. analyse the effects of the threats on those processes 4. create a business continuity strategy 5. create a business continuity plan 6. monitor and revise the business continuity process

Post-loss four step plan

1. identify activities that can NOT be interrupted 2. identify accidents which can interrupt those activites 3. determine resources needed to counter loss effects 4. provide those resources

Probability

1. is the likelihood that an event will occur 2. Probability = the amount of times that an event will occur 3. It is expressed numerically as a number between 0 and 1 0 meaning an event will never happen 1 meaning and event will always happen 4. Probability is measurable possibility is not

Four advantages of retention

1. lowers long run costs 2. increases control over the claim process 3. improves timing of cash flows 4. encourages risk control

Potential net income losses include

1. missed opportunity - when a business fails to take advantage of a change to earn a profit. 2. Loss resulting from failure to perform - occurs when a product fails to perform as promised or a person fails to honor his obligations. 3. loss of goodwill - the possibility that a business will suffer loss of goodwill

5 goals for risk financing

1. pay for losses 2. manage the cost of risk 3. manage cash flow variability 4. maintain liquidity 5. comply with legal requirements

6 similarities between pooling and insurance

1. reduce each participants risk 2. require a large number of participants with similar risks 3. pay participants losses 4. incur expenses for marketing, admin, underwriting and claims 5. experience delays between loss occurrence and loss payment 6. requires participants to make payments that reflect their share of losses.

Loss data should be

1. relevant 2. complete 3. consistent 4. organized

Overall finanical consequences of risk for a given asset or activity include

1. the costs of unreimbursed losses 2. the costs of insurance premiums 3. the costs of external funds, such a interest payments on loans or the transaction costs of noninsurance indemnity 4. the costs of loss prevention and loss reduction 5. the costs to implement and administer risk management

Three finanical consequences of risk are

1. the expected cost of losses 2. the cost of risk management (includes the costs of loss control, loss financing and risk reduction) 3. the cost of residual uncertainty ( includes the effects of uncertainty on the prices of the firms products and on the price of the firms stock)

Most business continuity plans contain

1. the strategy to follow during a crisis 2. info about individuals roles and duties during a crisis 3. steps for preventing further loss and or damage 4. an emergency response plan that address life and saftey issues 5. a crisis management plan for addressing communication and reputation issues 6. a business recovery restoration plan for losses to property, processes and products 7. access to stress management and counseling

As more participants join the pool

1. the variability of losses is reduced - each participant is more likely to pay an amount approximating the average expected loss 2. the distribution of losses becomes less skewed and more bell shaped around the expected loss

Government Insurance programs vary based on

1. their purpose 2. level of government involvement 3. Whether the program is run at the federal or state level

Personal Loss Exposures

28-29

Contract of indemnity

A contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss.

Conditional contract

A contract that one or more parties must perform only under certain conditions.

Hold-harmless agreement (or indemnity agreement)

A contractual provision that obligates one of the parties to assume the legal liability of another party.

Protected cell company (PCC)

A corporate entity separated into cells so that each participating company owns an entire cell but only a portion of the overall company.

Derivative

A financial contract that derives its value from the value of another asset.

Capital market

A financial market in which long-term securities are traded.

Manuscript form

An insurance form that is drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer.

Median

Advantage: easy to identify Disadvantage: does not use all info in data set

Mode

Advantage: easy to identify and not affected by other extreme values Disadvantage: does not use all the info in a data set

Mean

Advantage: simple to calculate Disadvantage: can be affected by one extremely large or one extremely small value

Contingent capital arrangement

An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold.

How to calculate the standard deviation of a probability distribution

Calculate the distribution's expected value or mean Subtract this expected value from each distribution value to find the differences Square each of the resulting differences Multiply each square by the probability associated with the value Sum the resulting products Find the square root of the sum

How to calculate the standard deviate of a set of individual outcomes NOT involving probabilities.

Calculate the mean of the outcomes (the sum of the outcomes divided by the number of outcomes). Subtract the mean from each of the outcomes. Square each of the resulting differences. Sum these squares. Divide this sum by the number of outcomes minus one. (This value is called the variance.) Calculate the square root of the variance.

Public entities - Pre Loss

Government bodies, federal agencies and non-profits often have a special legal status and different liability expsures than private firms

The distinguishing characteristics of insurance policies are these

Indemnity Utmost good faith Fortuitous losses Contract of adhesion Exchange of unequal amounts Conditional Nontransferable

Social Responsibility - Pre Loss

Make society more secure by prparing the community-affecting losses. Fulfill your organizations moral obligations. Maintain a good public image

Monoline policy

Policy that covers only one line of business.

Package policy

Policy that covers two or more lines of business.

Continuity of operations - post loss

Resume operations quickly, important goal for most public entities. interrupting operations creates a gap in essential community services such as police and fire protection and provision of clean water

Risk

refers to uncertainty about the types and or timing of outcomes

Consideration

Something of value or bargained for and exchanged by the parties to a contract.

Speculative risk versus Objective risk

Subjective risk - the percieved amount of risk which is based on a persons opinion about risk Objective risk - refers to the measurable variation in outcomes based on facts and data

ERM structure

The ERM chief risk officer reports to the CEO or board of directors

Loss severity

The dollar amount of loss for a specific occurrence.

Loss limit

The level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium.

Loss frequency

The number of losses (such as fires, auto accidents, or liability claims) that occur during a specific period.

Timing

The points at which losses occur and loss payments are made. (The period between loss occurrence and loss payment can be lengthy.)

Principle of indemnity

The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured

Insurance securitization

The process of creating a marketable insurance-linked security based on the cash flows that arise from the transfer of insurable risks.

Securitization

The process of creating a marketable investment security based on a financial transaction's expected cash flows.

Peril

a cause of loss e.g. lightining, hail, fire tornadoes, windstorm, explosion, theft.

Hazard

a characteristic that increases loss frequency and or loss severity

Legal Hazard

a condition of the legal environment or a system that increases the frequency or severity of loss e.g. increasing litigation (lawsuit) of our society, legal trends (law suits against tabacco manufacturers)

Loss Exposure

a situation that presents the possibility of loss even if the exposure is not identified and the loss never occurs

Captive insurer

a subsidiary formed to insure the loss exposures of its parent company and the parents affiliates Deciding how a captive will operate includes these considerations: What types of loss exposures the captive will insure Where the captive will be domiciled Whether the captive will accept unaffiliated business

Physical hazard

a tangible characteristic of the person, property or operation insured. e.g. ill-health, wood frame construction and youthful or elderly drivers

rent-a-captive

an arrangement under which an organization rents capital from a captive to which it pays premiums and recieves reimbursement for its losses

Large deductible plan

an insurance policy with a per occurrence or per accident deductible of 100,000 or more.

Probability Analysis

applies to firms with stable operations and a substantial number of data on past losses. Probability analysis assumes future losses will approximate past losses.

Measures of central tendency

are descriptive statistics that indicate the middle or center of a set of values.

Five loss exposure transfer method

avoid retain transfer prevent control

Coefficient of variation

compares the degree of dispersion between two data sets with substantially different means. - equals the standard deviation divided by the mean - A large coefficient indicates a larger defree of dispersion- this makes accurate predicitions more difficult.

Total Claims distribution

considers all possible combinations of the frequency and severity

Real property

consists of land and its attached structures and their fixtures

Pooling

does not change accident frequency or severity but pooling does change the probability distribution of accident costs by reducing variability in the outcomes Does: - share losses Does NOT: - prevent loss or transfer risk - reduce the amount of risk facing each participant provide the resources to finance losses

expected cost of losses

expected loss frequency X expected average loss severity

Self Insurance

form of retention under which the organization records its losses and maintains its own system in how to pay for them - record keeping - A self-insured organization needs a record keeping system to track its self-insured claims. - Claim adjustment - As with an insured plan, claims must be investigated, evaluated, negotiated, and paid. - Loss reserving - A self-insured organization must determine reserve amounts needed for estimated future payments on self-insured losses that have occurred. The reserves for self-insured loss payments can be funded or unfunded. - Litigation management - Litigation management involves controlling the cost of legal expenses for claims that are litigated. This includes evaluating and selecting defense lawyers, supervising them during litigation, and keeping records of their costs. - regulatory requirements - organization must qualify as a self-insurer in order to self-insure workers compensation or auto liability loss exposures. The qualification requirements specify items such as financial security requirements; filing fees, taxes, and assessments that must be paid; excess coverage insurance requirements; and periodic reports that the organization must submit to the regulatory body to qualify as a self-insurer. - Excess coverage insurance - require a self-insurer to purchase excess coverage insurance. Some states specify conditions for the purchase of this coverage. In other states, the state agency responsible for self-insurance reviews each applicant and decides whether to require excess coverage insurance.

Intangible property

has no physical form and can not be seen or touch e.g. patents or copyrights

tangible property

has no physical form and characteristics and can be touched e.g. land

Probability distribution

is a list or display of probabilities that provides a statistical representation of the likelihood of the occurrence of a particular event of outcome - A 0.10 probabilitiy means a 10% chance of loss

Attitudinal Hazard

is an insureds what me, worry? attitude to loss. e.g. who cares attitude and unearned wealth

Pre loss and post loss RM gals conflict

mainly when pre-loss goal of econmy of operations conflicts with post-loss goals that require the firm to spend resources. More ambitious post loss goals are costlier.

Earnings stability

maintain a specified earning level from year to year e.g. a program stresses loss reserves and predictable RM costs

Profitability - post-loss

maintain at least a minimum profit level no matter what accident occurs. e.g. program stresses insurance and non insurance transfers

Growth - post loss

maintian the pre loss growth patter. Firms may either resuce RM costs to increase growth accepting inadequate loss preparation or increase RM vosts to protect expanding resources

Positive correlation

means that when one loss is greater than expected other losses tend to be greater than expected. When positively correlated losses are pooled, the magnitude of risk reduction is lower than when the losses are uncorrelated

Perfect positive correlation: Pooling

means that when one pooled loss occurs the other loss will always occur

Dispersion

measure the degree of variability among the values in a data set. - More dispersion means less predictable outcomes. - Calculations vary according to data presentation. - Individual losses give more accurate dispersion calculations than grouped losses.

Probability

measures the expected frequency of an event over time in a stable environment. Impossible events have a probability of 0. Certain events have a probability of 1. All other probabilities can be expressed as fractions or decimals between 0 and 1.

social responsibility - post loss

minimize the effects of loss on society through RM programs, for moral reasons and good PR

Planned retention

occurs when a business has identifies and measures its loss exposure, decided to retain them and implemented a retention plan

Retention

occurs when a business uses its own funds to pay for its losses. Can come from cash flow, sale of assets, borrowed funds and or sale of stock. losses potentially destabilize earning, net worth and cash flow.

Normal Distribution

probability distribution that, when graphed, generates a bell-shaped curve. This particular probability distribution can help to accurately forecast the variability around some central, average, or expected value and has therefore proven useful in accurately forecasting the variability of many physical phenomena.

Tolerable uncertainty - Pre loss

provide an awareness of potential losses and an assurance of their effective management, keeping the worry of accidental loss at a tolerable level

Risk financing

provides funds to pay for or to offset a businesses losses

Operational risks

pure risks associated with an organizations operations e.g. adequacy of utilities and reliability of suppliers

Risk control techniques

reduce the estimated frequency and or severity of accidental losses

Guaranteed Cost Insurance

refer to insurance policies in which the premium and limits are specified in advance. The premium is guaranteed in that it does not depend on the losses incurred during the period of coverage. The primary layer is the first level of insurance coverage above any deductible. It is also referred to as the working layer because it is the layer used most often to pay losses. An excess layer is a level of insurance coverage above the primary layer. Insureds who want more insurance coverage than that offered by the primary layer usually purchase one or more excess layers. The insurance policies issued to provide coverage in excess layers are often referred to as excess coverage. Excess coverage is insurance that covers losses above an attachment point, below which there is usually another insurance policy or a self-insured retention. Some insurers do not provide primary layers of coverages; they specialize in supplying excess layers.