likelihood of a particular event occurring, or of a particular outcome?

1. o        A proportion of losses among a large number of exposures

2. A proportion of losses over a long period of time

o        A proportion of losses over a long period of time

Ways to calculate probability for insurance:

Preferred method for natural disaster risks, uses time with a large # of similar exposures, and bases losses on historical evidence?

   There is always a ________ between time proportions and exposure proportions?

-          if one thing happens, we know that the other cannot occur?

Probability rules:

 The probability of A and B occurring = 0?

Probability Rules:

For example, we cannot have a total loss and a partial loss for the same exposure?

Probability Rules:

o       Firms reduce risk when they pool independent risks

o       The probability of A and B occurring = P(A) x P(B)?

Probability rules:

o       For example, an auto loss in CA has no effect on an auto loss in IL

-          the chance of one event occurring, given additional information about another event.

Probability Distributions:

-          Number of Occurrences (Frequency Distribution) – Can it have a zero value?

Probability Distributions:

-          Severity of Losses – conditional on frequency (or event occurring), so can it have a zero value?

Statistical Measures:

weighted average, (total results / number of units)?

Statistical Measures:

location of the 50^th percentile?

Statistical Measures:

the most common event?

Statistical Measures:

highest outcome – lowest outcome?

Statistical Measures:

o       standard deviation / mean – used to compare variability of distributions w/ different shapes

Theoretical Probability Destributions (severity):

Normal is _______?

Theoretical Probability Destributions (severity):

Lognormal is _________ skewed?

Theoretical Probability Destributions (severity):

Pareto is __________ skewed?

Theoretical Probability Destributions (severity):

Gamma is _______skewed?

Implications for ERM:

• ____________ Problem- if multiple areas are impacted simultaneously, it leads to larger losses

Implications for ERM:

___________ Hedges- situations where so much negative correlation allows inactions to be appropriate

T/F?

If Correlation=0, then variables are independent?

T/F?

If Correlation=0, then variables are correlated?

Correlation:

Relationship can be between __ and ___, with ___ being a perfect positive relationship.

Regression Analysis, The Variable of Interest:

The direction of the relationship must be established ____________?

In regression analysis, R2 is the coefficient of _____________?

It can be between ___ and ___?

• Estimates of some future value, amount, or qty calculated by mathematical techniques determined by intuition

Loss Forecasting:

Incident rate?

Loss Forecasting:

Average Severity?

Loss Forecasting:

Claim Frequency?

Loss Forecasting:

total losses?

Concepts in loss control:

Frequency- main concept is loss __________?

Concepts in loss control:

Severity- main concept is loss ________?

___________ ____________ Theory:

One thing leads to another, try to remove one of the pieces?

Loss Control:  _____________ __________ _______ approach:

• control energy buildup
• separate released energy from persons or objects

Loss control: Human vs. Mechanical

To have a good program, you must address _______ error first, then apply _________ efforts?

1. compensation
2. Medical expenses

Determining Economic Feasibility of Loss controls:

Cost of Accidents-

2 Direct costs include?

Determining Economic Feasibility of Loss controls:

Which expenses are usually higher, direct or indirect?

Determining Economic Feasibility of Loss controls:

indirect costs are often ___ to___ times as great as direct costs

Costs of Loss Control Measures:

• Actual costs of implementations (are/are not) certain?

Costs of Loss Control Measures:

• Potential benefits of loss control (are/ are not) certain?

Costs of Loss Control Measures:

When comparing costs and benefits, it makes sense to spend money ______ to try to aviod losses in the future?

Costs of Loss Control Measures:

Formula for comparing costs and benefits?

Loss Control Programs:

_____________ includes:

• policy
• manual
• hiring
• training
• promotion of program
• reports
• executive safety committees

Loss Control Programs:

Profit Centers are mostly at the ________ ___________ level?

Loss Control Programs, Reward-Penalty System:

_________ allocation- need to give incentive to care about risk costs

Loss Control Programs, Reward-Penalty System:

________ Allocation- aligns interests, get profit centers to care about loss costs?

Cash Flows vs. Accounting values

• Depreciation is a/an _____________ value, but generates a ______ savings, which results in a cash savings

1. Timing
2. Opportunity cost of capital
3. Cash flows vs. accounting values

Evaluation methods used in Evaluating Loss Control Projects:

• Doesn't conisder time value of money
• Simpliest way of looking at project ideas
• The time it takes to recoup initial investment

Evaluation methods used in Evaluating Loss Control Projects:

• Considers size of project, but firm must select a discount rate
• Value, in today's dollars, of the future cash flows of a project
• Accept projects where NPV is greater than 0?

Evaluation methods used in Evaluating Loss Control Projects:

Which of the three is teh best method?

Evaluation methods used in Evaluating Loss Control Projects:

With IRR, do you need to know the cost of capital?

Evaluation methods used in Evaluating Loss Control Projects:

What is the most commonly used method?

Evaluation methods used in Evaluating Loss Control Projects:

• Is the rate at which NPV=0
• Accepts projects whose IRR exceeds "hurdle rate' or company's cost of capital?

Potential Reasons for Marketing an Insurance Program:

• Service issues involve loss runs and claims handling
• Financial solvency of current insurer may have become an issue
• If a company has changed, new coverages may be needed.  Products purchased has become obsolete?

Potential Reasons for Marketing an Insurance Program:

• RM Programs are more than just finding the lowest price
• Higher price may signal higher qualtiy

Potential Reasons for Marketing an Insurance Program:

• Marketing cycle changes- differing cycles affect __________?

Potential Reasons for Marketing an Insurance Program:

• If the market is hard, it leads to high prices and worse terms
• If the market is softening, low prices and good terms may lead a retention company to revamp insurance

Potential Reasons for Marketing an Insurance Program:

• Don't bid too often- normally should not exceed __ time in 5 years?

Potential Reasons for Marketing an Insurance Program:

• Process of bidding itself is costly, and irritates market
• Insurers do not make money off an insured until after 1st year, so if constantly changing, some insurers may refuse to quote a price
• Can reduce loyalty of insurers and their willingness to stand by insured in difficult times

Selecting Qualified Agents/Brokers

• Agent should be treated as an extension of the ________ ________ department, or like a ________-________ employee?

Characteristics of Agents and Brokers:

• Experience- not just time in business, but whether they have experience with similar ____________?

Characteristics of Agents and Brokers:

• Account Team- make sure people selling the account are also teh ones who ________ the account?

90-120 days (3-4) months

Allocating markets if using multiple agents/brokers:

• When implementing the program, you should allow __ weeks minimum before renewal date for implementation?

Good Underwriting Specifications:

• Insured is "selling" its loss expsoures, so it should be as ________ as possible?

1. Active Retention
2. Passive Retention

Pure____________

• A transfer plan, under which an organization uses another organization's resources to pay for or to offset its losses

Pure_______?

• A retention plan, under which an organiztion uses its own resources

Pure Insurance vs. Pure Retention

• Most plans are a ______ of the two elements, such as an insurance plan with a deductible

Specific Techniques of Retention:

• In exchange for premium reduction, insured agrees to reimburse insurer for all losses up to the deductible level
• can be dollar amounts or periods of time?

Specific Techniques of Retention:

________________ ______________ ___ ____________?

• Company pays losses as they are incurred out of current income
• Best for low-severity losses

Specific Techniques of Retention:

_______ __________?

• Losses disclosed in financial statements, represent a liability on the balance sheet

Specific Techniques of Retention:

_________ __________?

• Liability posted and funds are accumulated to match projected losses

Specific Techniques of Retention:

___________?

• Solicit funds as needed
• A Letter of Credit is the best way to do this because it can lock in a rate opportunity in advance of the loss

Specific Techniques of Retention:

_________?

Formalized retention

Methods for Selecting Retention:

• Total Assets- ___-____% of total assets, based on ability to borrow funds?

Specific Techniques of Retention:

• Working Captial formula?

Specific Techniques of Retention:

• Working Capital- ___-___% of working captial, based on liquidity of the firm
• Uses a smaller base number, so there is a higher percentage?

Specific Techniques of Retention:

Measures earnings and borrowing power; liquidity position is the key?

Specific Techniques of Retention:

• Earnings and surplus- __-__% of average pre-tax annual earnings and retianed earnings (surplus)

Retention:

Cost of __________ is the opportunity cost between retention and risk transfer?

Retention:

Tax considerations: (T/F)- a dollar earned today is worth more than a dollar earned tomorrow?

retention

A firm generating a lot of cash flows will be more inclined to select __________ risk management method

1. Self Insurance
2. Captives
3. Risk Retention Groups
4. Capital Market Securitizations

1. Total Assets
2. Working Captial
3. Earnings and surplus

Tax Considerations, Section _______?

• ¨expenses paid or incurred during the taxable year in carrying on a business are deductible
• ¨
ordinary and necessary

Tax Considerations, Section ______? 

• ¨can deduct “casualty” losses not compensated by insurance
• ¨
closed and completed transactions only

Methods for selecting retention: Earnings and Surplus

_____ to ___%   annual earnings (pre-tax) and retained earnings (surplus)?

_______________?

When a loss has occured, and the amount can be reasonably estimated, this rule makes firms put the losses on financial statements?

FASB #5

There is a conflict between IRS and FASB that relates to __________vs. ____________ performance?

FASB #5

If the loss is retained, financials take a hit, but firm recieves no ________ relief?

Tax advantages of insurance?

Insurance tends to smoothe ________?

Tax advantages of insurance?

Insurance accelerates _________ for losses? 

Tax advantages of insurance?

Insurance helps defer gain on ___________ property?

Tax advantages of insurance?

Premium is tax deductible, while losses are decutible only when _____?

Insurers vs. Non-Insurers?

Insurers are treated differently with respect to __________?

Insurers vs. Non-Insurers?

Noninsurers can deduct _______ losses only

Insurers can deduct ________ losses only

Insurers vs. Non-Insurers: Reserving Discretion?

Insurers can sell a product with a built-in _________?

_________ ____________ Rating Plans:

• Rating plan in which premium rate is adjusted after end of policy period based on a portion of the insured's actual losses during the policy period

___________ __________ Rating Plans:

• Insured pays a deposit premium to insurer, which reimburses claimants for losses and pays other expenses such as loss adjustment costs, legal fees, and ocvers insurer's profits and overhead?

Retrospective Insurance Rating Plans:

Insured pays a deposit premium to insurer, which is based on projected average ________ losses?

Retrospective Insurance Rating Plans:

• _______ premium is paid up front, and premium adjusted after end of policy period.
• To really know what losses are, parties must wait to see what develops, and then look back to determine ____ rate?

Retro Plan:

• ____________ _________ portion limits extent to which an insured's actual losses are included in the formula
• When total losses under loss limit reach specified aggregate $ amount, max premium level is reached, and insured pays no additional __________?

_______Plan:

• Up to loss limit, insured retains individual losses because they are used to raise/lower the retro-rated premium
• Insured pays a portion of premium on guaranteed cost basis to transfer portion of individual losses that exceed loss limit, and annual losses under loss limit to extent they exceed specified _________ amount?

____ _______ Plans:

• Are also known as paid loss retro
• closer to a retention plan

_______ ________ Plans:

Insured pays a small deposit at beginning of policy period, and reimburses insurer for a portion of losses as they are paid by insurer?

Cash Flow Plans:

_______ benefits from cash flow available on loss reserves for retained portion of it's losses, which might not be paid out for several years

Cash Flow Plans:

_______ plan for retained portion of losses?

Cash Flow Plans:

Amount required at policy inception is the ______-_____ portion of the premium plus a loss  _______ fund?

Cash Flow Plans:

Deposit fund of ___ to ___ months of estimated claims?

Cash Flow Plans:

• __________ __ ______ often required, and insured must be financially secure to qualify
• To guarantee future payments for retained portion of losses

___________?

Hybrid risk financing plan b/c most combine elements of risk retention and transfer?

Captives?

_________ low to medium severity losses, and purchases   _______ to transfer parent's high severity losses

Across the globe, the largest domocile for captives is _________?

In the US, the largest domocile for captives is_________?

Most captive insurers reinsure a _________ insurer that issues policies to parent and subsidiaries?

___________:

Usually not licensed, or admitted, it transacts business in the states, provinces, and territories where parent's exposures are located?

Captives:

Licensed insurer does not retian any of the losses, adn in effect "fronts" for teh captive in exchange for a ______?

Captives: T/F?

Has the US surpassed Bermuda as a domocile?

Captives:

• Worldwide, there are nearly __________ captives?

Types of Captives:

______ Captive

one owner, who is the insured?

Types of Captives:

______ ________ Captive

one owner, many insureds? 

Types of Captives:

________/ ______ Captive

Multiple owners and insureds

Types of Captives:

Pools, Multi-owner, Rent-a-Captive

3rd party ________ _________ of captives?

1. Cost
2. Coverage
3. Control

Captives: Improved Coordinantion in Multiple Jurisdictions

• _________ currency issue solved, and allocation of assets easier?

T/F?

Captives can purchase reinsurance

Captive Tax Treatment:

Best to have ______ and ________ for premiums to be deductible?

Captive Tax Treatment:

An example of ____________: having some % of unrelated business in the captive?

Catpive tax treatement:

An example of ________: some distribution of ownership?

________ Tax treatment:

• Some % of unrelated business
• arms- length ownership
• Some distribution of ownership

Characteristics of Various Risk Financing Plans:

Informal Retention?

Best Suited for ___ loss severity?

Characteristics of Various Risk Financing Plans:

Self Insurance?

Best Suited for ___-_______ loss severity?

Characteristics of Various Risk Financing Plans:

Guaranteed Cost Insurance?

Best Suited for ___ loss severity?

Characteristics of Various Risk Financing Plans:

Insurance Derivatives/Securities?

Best Suited for ___ loss severity?

Characteristics of Various Risk Financing Plans:

Large Deductible plans?

Best Suited for ___ -_______loss severity?

Characteristics of Various Risk Financing Plans:

Retro-Rated Plans?

Best Suited for ___- ________loss severity?

Characteristics of Various Risk Financing Plans:

Captives?

Best Suited for ___- ________loss severity?

Characteristics of Various Risk Financing Plans:

Informal Retention-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Self-Insurnace-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Guaranteed Cost Insurance-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Insurance Derivatives/Securities-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Large Deductible Plans-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Retro-Rated Plans-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Captives-

Degree of Risk Transfer?

Characteristics of Various Risk Financing Plans:

Informal Retention-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Self Insurance-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Guaranteed Cost Insurance-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Insurance Derivatives/Securities-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Large Deductible Plans-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Retro-Rated Plans-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Captives-

Degree of Planning Required?

Characteristics of Various Risk Financing Plans:

Type of Plan: ________?

• informal retention
• self insurance

Characteristics of Various Risk Financing Plans:

Type of Plan: _______?

• Guaranteed Cost Insurance
• Insurance Derivatives/Securities

Characteristics of Various Risk Financing Plans:

Type of Plan: _______?

• Large Deductible Plans
• Retro-Rated Plans
• Captives

___________ Insurance:

Organization identifies loss exposures, decides to retain them, and formulates a plan to pay for and handle its retianed losses?

________ Insurance:

• Generally used in relation to losses arising from hazard risk

_________ Insurance:

• Best suited for losses that are fairly predictable, such as losses with low frequency and low severity?

________ Insurance:

Particularly well-suited for losses that are paid out long after they occur, providing a cash flow benefit to teh firm that retians them?

T/F?

Self insurance can be both funded and unfunded?

______ Insurance:

• Organization keeps records of its losses and has a formal system to pay for them
• Firms that use this type of insurance must obtain certain services that an insurance company normally provides, adn othen saves expenses when these services are outsourced

_______ Self Insurance:

• Losses paid out of cash flow and/or available current assets?

________ self insurance:

• organization establishes internal fund to pay losses

__________ Retention:

organization pays for losses with its cash flow and/or current assets

__________ Retention:

• Usually applied to low-severity losses that are easily absorbed by organizations cash flow and current assets
• Total losses retained should be minimal or fairly predictable so that they do not severly affect an organization's working capital or cash flow

_____________ __________ Insurance:

Amount of premium insured will pay for policy is guranteed, regardless of amount of losses that actually fall under the policy?

Guaranteed Cost Insurance:

Premium is based on standard industry rates adjusted upward/downward based on an organization's past loss _______?

_____________ __________ Insurance:

• Helps an organization to reduce rinancial uncertainty associated with its losses
• Stability or organization's earnings, net worth, and cash flow enchanced?

________ _________ Insurance:

• Tends to be mroe expensive than retaining losses and paying separately for the services than an insurance policy covers?

Guaranteed Cost Insurance:

• Premiums normally paid at the beginning of the policy period, so _________ benefits from cash flows?

Insurance ____________?

• Financial contract that derives its value from teh level of insurable losses that occur during a specific period

Insurance Derivative:

• Insurable losses are treated as an underlying _______?

1. Swaps
2. Options

Insurance ________:

marketable insurance-linked secutities that are based on the cash flow that arises from teh transfer of insurable risks

________ risk:

The amount recieved by an organization may not match actual losses?

Derivatives/Securities

Basis risk can be eliminated if an organization can _______-________ a product for its risk-profile?