Term
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Definition
| Uncertainty concerning the occurence of a loss |
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Term
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Definition
| Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs. |
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Term
| Objective Risk/Degree of Risk |
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Definition
| The relative variation of actual loss from expected loss |
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Term
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Definition
| States that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience. |
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Term
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Definition
| Defined as uncertainty based on a person's mental condition or state of mind. |
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Term
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Definition
| Defined as the probability that an event will occur. |
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Term
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Definition
| Refers to 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. |
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Term
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Definition
| The individuals personal estimate of the chance of loss |
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Term
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Definition
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Term
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Definition
| condition that creates or increases the frequency or severity of loss |
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Term
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Definition
| Physical condition that increases the frequency or severity of loss |
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Term
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Definition
| Dishonesty or character defects in an individual that increase the frequency or severity of loss |
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Term
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Definition
| Carelessness or indifferency to a loss, which increases the frequency or serverity of a loss. |
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Term
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Definition
refers to characteristics of the legal system or regulatory environment that increase the freqeuncy or severity of loss
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Term
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Definition
| defined as a situation in which there are only the possibilities of loss or no loss. |
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Term
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Definition
| Defined as a situation in which either profit or loss is possible. |
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Term
| Diversifiable Risk/Nonsystematic Risk/Particular Risk |
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Definition
| risk that affects only individuals or small groups and not the entire economy. |
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Term
| Nondiversifiable Risk/Systematic Risk/Fundamental Risk |
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Definition
| Risk that affects the entire economy or large numbers of persons or groups within the economy. |
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Term
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Definition
| term that encompasses all major risks faced by a business firm. Includes pure risk, speculative risk, strategic risk, operational risk, financial risk. |
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Term
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Definition
refers to uncertainty regarding the firm's financial goals and objectives
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Term
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Definition
| Risk that results from the firms business operations |
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Term
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Definition
| refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. |
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Term
| Enterprise Risk Management |
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Definition
| Combines into a single unified treatment program all major risks faced by the firm. |
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Term
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Definition
| Risks that directly affect an individual |
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Term
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Definition
The death of a family head with unfulfilled financial obligations
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Term
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Definition
| The present value of the family's share of the deceased breadwinner's future earnings. |
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Term
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Definition
| the risk of having property damaged or lost from numerous causes |
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Term
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Definition
| defined as a financial loss that results from the physical damage, destruction, or theft of the propery. |
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Term
| Indirect/Consequential loss |
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Definition
is a financial loss that results indirectly from the occurence of a direct physical damage or theft loss.
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Term
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Definition
| consists of certain activities that reduce the frequency or severity of losses |
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Term
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Definition
| aims at reducing the probability of loss so that the frequency of losses is reduced |
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Term
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Definition
| intended to reduce the severity of a loss after it occurs. |
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Term
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Definition
| Means that an individual or a business firm retains part or all of the financial consequences of a given risk. |
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Term
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Definition
| Means that an individual is consciously aware of the risk and deliberately plans to retain all or part of it. |
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Term
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Definition
Unknowingly retaining a risk because of ignorance, indifference, or laziness.
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Term
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Definition
| Special form of planned retention by which part or all of a given loss exposure is retained by the firm. |
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Term
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Definition
| component of a contract that agrees to hold one party harmless in case of a loss. (Rent agreements, workers injuries, etc.) |
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Term
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Definition
| Technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange |
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Term
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Definition
| Example of risk transfer often used by proprietorships, and partnerships. |
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Term
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Definition
| The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuinary benefits on their occurence, or to render services connected with the risk. |
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Term
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Definition
| Spreading of losses incurred by the few over the entire group, so that in the process, the average loss is substitued for the actual loss. |
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Term
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Definition
| Loss that is unforseen and unexpected by the insured and occurs as a result of chance |
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Term
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Definition
| Means that a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position to the pay the loss than the insured. |
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Term
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Definition
| Means that the insured is restored to his or her approximate financial position prior to the occurence of the loss. |
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Term
| Determinable and Measurable Loss |
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Definition
| Means that the loss should be definite as to a cause, time, place, and amount. |
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Term
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Definition
| An arrangement by which the primary insurer that intially writes the insurance transfers to another insurer (called the reinsurer) part or all of the potential losses associated with such insurance. |
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Term
Calculable Chance of Loss
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Definition
| Loss where both the average frequency and the average severity of future losses can be determined with some accuracy. |
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Term
| Adverse Selection of Loss |
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Definition
| Tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which if not controlled by underwritings, results in higher-than-expected loss levels. |
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Term
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Definition
| Refers to the process of selecting and classifying applicants for insurance |
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Term
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Definition
| Pays death benefits to designated beneficiaries when the insured dies. |
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Term
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Definition
| indemnifies property owners against the loss or damage of real or personal property caused by various perils. |
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Term
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Definition
| Covers the insured's legal liability arising out of property damage or bodily injury to others; legal defense costs are also paid. |
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Term
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Definition
| Broad field of insurance that covers whatever is not covered by fire, marine, and life insurance; casualty lines include auto, liability, burglarly and theft, workers compensation, and health insurance. |
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Term
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Definition
| refers to coverages that insure the real estate and personal property of individuals and families or provide them with protection against legal liability. |
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Term
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Definition
| refer to property and casualty coverages for business firms, non profit organizations, and government agencies. |
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Term
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Definition
| Refer to coverages that are usually purchased with fire insurance, such as coverage for windstorm, hail, and vandalism. |
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Term
| Commercial Multiple-Peril Insurance |
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Definition
| Package policy that can be written to include property insurance, general liability insurance, business income insurance, equipment breakdown insurance, and crime insurance. |
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Term
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Definition
| covers goods being shipped on land as well as instrumentalities of transportation, fine art, jewelry, and furs. |
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Term
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Definition
| Covers ocean going vessels and their cargo from loss or damage due to perils of the sea |
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Term
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Definition
| cover loss caused by the dishonest or fraudulent acts of employees, such as embezzlement and the theft of money. |
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Term
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Definition
| Provide for monetary compensation in the case of failure by bonded persons to perform certain acts. |
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Term
Financial Guaranty Insurance
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Definition
| guarantees the payment of principal and interest on debt instruments by the insured. |
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Term
| Social Insurance Programs |
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Definition
| Government insurance programs with certain characteristics that distinguish them from other government insurance plans. |
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Term
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Definition
| The amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit. |
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Term
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Definition
| Process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures |
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Term
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Definition
| refers to the probable number of losses that may occur during some given time period. |
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Term
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Definition
| refers to the probable size of the losses that may occur |
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Term
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Definition
| the worst loss that could happen to the firm during its lifetime |
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Term
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Definition
| the worst loss that is likely to happen |
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Term
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Definition
| refers to techniques that reduce the frequency or severity of losses |
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Term
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Definition
| refers to techniques that provide for the funding of losses |
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Term
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Definition
| means a certain loss exposure is never acquired, or an existing loss exposure is abandoned |
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Term
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Definition
| refers to measures that reduce the frequency of a particular loss |
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Term
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Definition
| refers to measures that reduce the severity of a loss after it occurs |
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Term
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Definition
| means that the firm retains part or all of the losses that result from a given loss |
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Term
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Definition
| dollar amount of losses that the firm will retain |
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Term
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Definition
| insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures |
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Term
| Single parent captive/pure captive |
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Definition
| insurer owned by only one parent, such as a corporation |
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Term
| Association or group captive |
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Definition
| insurer owned by several parents |
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Term
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Definition
| bookkeeping account that is charged with actual or expected losses from a given exposure |
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Term
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Definition
| setting aside of liquid funds to pay losses. |
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Term
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Definition
| special form of planned retention by which part or all of a given loss exposure is retained by the firm |
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Term
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Definition
| a group captive that can write any type of liability coverage except employer's liability, workers compensation, and personal lines |
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Term
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Definition
| methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. |
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Term
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Definition
| caps the employers out-of-pocket costs once losses exceed certain limits for self insurance |
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Term
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Definition
| provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured |
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Term
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Definition
| plan in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain. |
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Term
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Definition
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Term
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Definition
| term used to describe the cyclical pattern in underwriting standards, amount of premiums charged, and profitability in the industry |
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Term
| Risk management policy statement |
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Definition
| necessary to have an effective risk management program. Outlines the risk management objectives of the firm, as well as company policy with respect to treatment of loss exposures. |
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Term
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Definition
| Describes in some detail the risk management program of the firm and can be a very useful tool for training new employees. |
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Term
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Definition
| risk management tool that measures certain costs. |
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Term
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Definition
| refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks. |
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Term
| Financial Risk Management |
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Definition
| refers to the identification, analysis, and treatment of speculative financial risks. |
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Term
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Definition
| Risk of losing money if the price of a commodity changes. |
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Term
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Definition
| Risk of loss caused by adverse interest rate movements. |
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Term
| Currency exchange rate risk |
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Definition
| risk of loss of value caused by changes in the rate at which one's nation currency may be converted to another nation's currency. |
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Term
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Definition
| Risk treatment technique that combines coverage for pure and speculative risks in the same contract. |
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Term
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Definition
| Responsible for the treatment of pure and speculative risks faced by the organization |
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Term
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Definition
| provision that provides for payment only it two specified losses occur |
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Term
| Enterprise Risk Management |
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Definition
| comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks. |
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Term
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Definition
| an agreement in which the risk of default of a financial instrument is transferred from the owner of the financial instrument to the issuer of the swap. |
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Term
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Definition
| cyclical pattern in underwriting stringency, premium levels, and profitability |
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Term
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Definition
| property and liability insurance markets fluctuate between periods of tight underwriting standards and high premiums |
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Term
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Definition
| property and liability insurance markets fluctuate between periods of loose underwriting standards and low premiums |
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Term
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Definition
| ratio of paid losses and loss adjustment expenses plus underwriting expenses to premiums |
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Term
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Definition
| relative level of surplus |
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Term
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Definition
| difference between an insurer's assets and its liabilities. |
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Term
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Definition
| occurs when several lines of insurance simultaneously experience large losses |
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Term
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Definition
| selling insurance coverages at lower premium rates, hoping to offset underwriting losses with investment income. |
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Term
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Definition
| means the combining of business organizations through mergers and acquisitions. |
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Term
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Definition
| intermediaries who represent insurance purchasers. |
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Term
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Definition
| means that insurable risk is transferred to the capital markets through creation of a financial instrument, such as a catastrophe bond, futures contract, options contract, or other financial instrument. |
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Term
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Definition
| Corporate bonds that permit the issuer to skip or defer schedule payments if a catastrophic loss occurs |
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Term
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Definition
| option that derives value from specific insurable losses or from an index of values |
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Term
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Definition
| provides payment if a specified weather contingency occurs. |
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Term
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Definition
| the occurrence does not affect the occurrence of another event |
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Term
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Definition
| the occurrence of one event affects the occurrence of the other |
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Term
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Definition
| the occurrence of one event precludes the occurrence of the second event |
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Term
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Definition
| means that when valuing cash flows in different time periods, the interest-earning capacity of money must be taken into consideration |
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Term
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Definition
| operation through which a present value is converted to a future value |
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Term
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Definition
| bringing a future value back to present value |
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Term
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Definition
| sum of the present values of the future net cash flows minus the cost of the project |
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Term
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Definition
| The average annual rate of return provided by investing in the project. |
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Term
| Risk Management Information System (RMIS) |
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Definition
| Computerized data base that permits the risk manager to store and analyze risk management data and to use such data to predict and attempt to control future loss levels. |
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Term
| What is the formula for Loss Ratio? |
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Definition
| Incurred Losses/Earned Premiums |
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Term
| What is the formula for Expense Ratio? |
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Definition
| Underwriting Expenses/Written Premium |
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Term
| What is the formula for Combined Ratio? |
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Definition
| Loss Ratio + Expense Ratio |
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Term
| What are the three rules of risk management? |
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Definition
Don’t risk more than you can afford to lose.
Consider the odds.
Don’t risk a lot for a little. |
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Term
| What are the three major characteristics of private insurance? |
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Definition
Pure risk is transferred to the insurer
The pooling technique is used to spread the losses of the few over the entire group so that average loss is substituted for actual loss.
Risk may be reduced by the application of the law of large numbers by which an insurer can predict future loss experience with greater accuracy |
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Term
| What are the six characteristics of insurable risk? |
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Definition
Must be a large number of exposure units
Loss must be accidental and unintentional
Loss must be determinable and measurable
Loss should not be catastrophic
Chance of loss must be calculable
Premium must be economically feasible. |
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Term
| What are the four steps in the risk management process? |
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Definition
Identify Loss exposures
Measure and analyze loss exposures
Select the appropriate combination of techniques for treating the loss exposures
Implement and monitor the risk management program |
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Term
| What are the three preloss objectives? |
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Definition
Firm should prepare for potential losses in the most economical way
Reduction of anxiety
Meet any legal obligations |
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Term
| What are the 5 post loss objectives? |
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Definition
Survival of the firm
Continue operating
Stability of earnings
Continued growth of the firm
Minimize the effects that a loss will have on other persons and society. |
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Term
| What are the three major burdens risk puts on society? |
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Definition
–In the absence of insurance, individuals and business firms would have to maintain large emergency funds to pay for unexpected losses
–The risk of a liability lawsuit may discourage innovation, depriving society of certain goods and services
–Risk causes worry and fear
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Term
What are three examples of noninsurance transfers?
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Definition
Hold harmless clause
Hedging
Incorporation |
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Term
| What are the four methods for paying off retained losses? |
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Definition
Current Net Income
Funded Reserve
Unfunded Reserve
Credit Line
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Term
| What are the four advantages of retention? |
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Definition
•
–Save on loss costs
–Save on expenses
–Encourage loss prevention
–Increase cash flow
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Term
| What are the three disadvantages of Retention? |
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Definition
–Possible higher losses
–Possible higher expenses
–Possible higher taxes
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