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Definition
| uncertainty regarding the occurrence of a loss |
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Definition
the variation of actual losses from expected losses
objective probabilities
the long-run 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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Definition
uncertainty based on a person's mental condition or state of mind
an unwanted event as perceived by an individual
subjective probabilities
the individual's personal estimate of the chance of a loss |
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Definition
| cause of loss (fire, lightning, windstorm, hail, etc.) |
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| anything that increases the chance of loss |
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| a physical condition that increases the chance of loss (open container of gasoline next to a propane grill) |
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| dishonesty or character defects in an individual that increases the frequency or severity of loss (person can't make mortgage payments, so they burn down their house and collect insurance) |
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| Morale (attitudinal) hazard |
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Definition
carelessness or indifference to a loss because of the existence of insurance
presence of insurance creates morale hazard |
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Definition
characteristics of the legal system or regulatory environment that increase the frequency or severity of losses
i.e. if a law was passed that forced insurance to cover drug abuses |
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| Fundamental (non-diversifiable) risk |
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Definition
a risk that effects the entire economy or large numbers of persons within the economy
uninsurable because of the spread of risk -- can't insure floods, war, terrorism |
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| Particular (diversifiable) risk |
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Definition
a risk that affects only individuals and not the entire community
easily insured -- robbery, fire |
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Definition
the chance of loss or no loss
i.e. your house burns down or it does not |
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Definition
the chance of loss, no loss, or a gain
i.e. gambling
can not be insured |
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Term
| Characteristics of insurance |
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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 pecuniary benefits on their occurrence, or to render services connected with the risk
Basic aspects:
1. pooling of losses
2. payment of fortuitous losses
3. risk transfer
4. indemnification |
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Definition
| the larger the number, the more accurately you can predict the losses |
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Definition
large number of exposure units
loss must be fortuitous
loss must be determinable and measurable
loss should not be catastrophic (pooling, reinsurance, dispersion over large geographic areas)
chance of loss must be calculable
premium must be economically feasible (rule of thumb) |
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Definition
tendency of people with higher than average chance of loss to seek insurance at standard rates
adverse selection death cycle
people who collect more from insurance must have higher premiums so that other people's premiums aren't raised |
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Definition
| the insured is restore to his/her approximate financial position prior to the occurrence of a loss |
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| a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures |
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Definition
low frequency + high severity = transfer
high frequency + high severity = avoid
low severity + low frequency = retain
low severity + high frequency = loss control (and retain) |
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Definition
Sources of information:
risk analysis questionnaires
physical inspections
flowcharts
financial statements
historical loss data |
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Definition
| probable number of losses that may occur in a given time period |
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refers to the probable size of the loss that may occur
maximum probable loss
maximum possible loss |
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| economy, anxiety, and legal obligations |
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Definition
| survival, continued operations, earnings stability, growth, social responsibility |
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Definition
recall that risk control is a technique that reduces the frequency or severity of a loss
avoidance (HF, HS)
loss prevention (HF, LS)
loss reduction (HF, LS) |
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Term
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Definition
a technique that provides for the major funding of losses after they occur
retention (LF, LS)
non-insurance transfers (LF, HS)
commercial insurance (LF, HS) |
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Term
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Definition
CRO
in charge of implementing and monitoring all risk management
on the board, in line with the CFO
most major companies have one
has several people working under him/her |
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Term
| Enterprise risk management |
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Definition
ERM
a comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks
refers to how everyday businesses operate
look at the specific kinds of risk together |
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Term
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Definition
Pure risk
-chance of loss or no loss
-i.e. house burns down or it doesn't
-can buy insurance
Speculative risk
-chance of loss, no loss, or gain
-i.e. investment and financial performance
-can't buy insurance
Strategic risk
-uncertainty regarding goals and objectives
-i.e. if building burns down, how does it affect other things like profit
Operational risk
-develop out of business operations
-i.e. how potential losses impact our ability to manufacture products |
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Term
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Definition
identify: pure and speculative risks
measure (evaluate/analyze)
analyze correlations
evaluate alternatives (select a technique)
-avoidance, retention, loss prevention, loss reduction, noninsurance transfer, insurance, capital market tools
implement/monitor/review |
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Term
| What is different comparing ERM process to traditional risk management? |
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Definition
identifying speculative risks
analyze correlations
capital market tools |
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Definition
an insurance market that writes specialized lines of insurance
least regulated -- can charge whatever they want
combines owners and managers
forming their own risk pool |
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Term
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Definition
represents the insurer
can represent one company, or many
is a producer (anyone who sells insurance)
can issue a binder -- temporary insurance policy that lasts until the actual insurance policy is written |
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Term
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Definition
represents the insured/buyer
is a producer (anyone who sells insurance)
have better knowledge of the insured which reduces informational asymmetries/informational disadvantages |
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Term
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Definition
| the process of selecting, classifying, and pricing applications for insurance |
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Term
| Principles of underwriting |
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Definition
1. selection of insureds according to underwriting standards (to reduce adverse selection)
2. proper balance within each classification (diversification, balances risk)
3. equity among policyowners |
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Term
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Definition
insurance for insurers
increase underwriting capacity, stabilize profits, provide protection against a catastrophic loss |
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Term
| Insurer underwriting performance |
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Definition
over 1 = losing money
under 1 = earnings |
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Term
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Definition
incurred losses + loss adjustment expenses
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premiums earned |
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Definition
underwriting expenses
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premiums written |
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Definition
| loss ratio + expense ratio |
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Definition
| regulated at the state level |
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Term
| Reasons for insurance regulation |
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Definition
maintenance of insurer solvency
compensate for inadequate consumer knowledge
ensure reasonable rates
make insurance available |
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Definition
legislation
courts
state insurance departments |
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Term
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Definition
formation and licensing of insurers (will an insurer be permitted to operate in a state)
solvency regulation (capital and surplus requirements)
rate regulation (ensure rates are adequate and not excessive)
policy forms (insurance policy language)
sales practices and consumer protection (consumer complaints or unfair trade practices) |
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Term
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Definition
prior approval laws -- rates must be filed and approved by the state before use
file and use law -- rates must be filed and can be used immediately after filing
use and file law -- insurers can put into effect immediately any rate change, but rates must be filed within a certain amount of time
open competition -- insurers are not required to file their rates and can change whatever they want |
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Term
| Methods of ensuring insurer solvency |
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Definition
financial requirements
risk-based capital (RBC) standards
annual financial statements
field examinations
early warning system -- Insurance Regulatory Information System (IRIS) and Financial Analysis Solvency Tracking (FAST) |
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Term
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Definition
states that the insurer agrees to pay no more than the actual amount of the loss
purposes:
-prevent the insured from making a profit
-reduce moral hazard |
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Term
| Exceptions to the principle of indemnity |
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Definition
valued policy -- policy that pays the face amount of insurance is a total loss occurs -- used to insure antiques, fine arts, family heirlooms, etc. when determining actual cash value (ACV) is difficult
replacement cost insurance -- no deduction for physical depreciation in determining the amount paid for a loss -- just the replacement cost without depreciation |
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Term
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Definition
the insured must be in a position to lose financially if a covered loss occurs
once you sell a car, you are no longer covered because you can no longer lose financially |
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Term
| Reasons for insurable interest |
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Definition
prevent gambling -- insuring against gambling is against public interest
reduce moral hazard
measure the amount of the insured's loss in property insurance |
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Term
| When does insurable interest have to exist? |
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Definition
for property insurance -- at the time of loss
for life insurance -- at the time of purchase |
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Term
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Definition
| the insurer is entitled to recover from a negligent third party any loss payments made to the insured |
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Term
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Definition
prevents the insured from collecting twice for the same loss
used to hold the guilty person responsible for the loss
helps to hold down insurance rates |
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Term
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Definition
the insurer is entitled only to the amount it has paid
the insured cannot impair the insurer's subrogation rights
subrogation does not apply to life insurance and to most individual health insurance contracts
the insurer cannot subrogate against its own insureds |
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Term
| Distinct legal characteristics of insurance contracts |
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Definition
aleatory contract
unilateral contract
conditional contract
personal contract (assignments)
contract of adhesion
competent parties
legal purpose |
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Term
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Definition
unequal values exchanged
sometimes the insured pays more, sometimes the insurance company pays more
makes insurance legalities unique |
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Term
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Definition
only one party makes a legally enforceable contract
you can stop paying premium at any time, but lose coverage |
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Term
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Definition
obligation to pay depends on whether the insured has complied with all policy conditions
i.e. life insurance has suicide clause |
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| Personal contract (assignments) |
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Definition
| insurance contracts do not transfer with the property |
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Term
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Definition
| insured must accept the insurance contract with all its terms and conditions |
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Term
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Definition
a.k.a. absolute liability
liability is imposed regardless of negligence or fault
crop spraying, owning wild/dangerous animals, manufacturing explosives, doctors
party operates in some way that they will be at fault if something happens |
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Term
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Definition
| failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm |
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Term
| Elements of a negligent act |
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Definition
existence of a legal duty -- i.e. legal duty to stop at a red light
failure to perform that duty
damage of injury to the claimant
proximate cause relationship |
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Term
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Definition
under certain conditions, the negligence of one person can be attributed to another
auto insurance, employer-employee relationship |
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Term
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Definition
a business that sells liquor can be held liable for damages that may result from the sale of liquor
i.e. if a bartender over serves someone |
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Term
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Definition
"the thing speaks for itself"
the very fact that an injury or damage occurs establishes the presumption of negligence |
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Term
| Requirements for rep ipsa loquitur |
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Definition
1. the event is one that normally does not occur in the absence of negligence
2. the defendant has exclusive control over the instrumentality causing the accident
3. the injured party has not contributed to the accident in any way
i.e. doctor leaves a surgical instrument in the abdomen, dentist extracts the wrong tooth |
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Term
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Definition
a legal wrong for which the law allows a remedy in the form of money damages
intentional, absolute, negligence |
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Definition
intentional act or omission that results in harm or injury to another person or damage to the person's property
i.e. assault, battery, false imprisonment |
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Definition
| compensatory, special, general, punitive |
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Definition
awards for losses that can be determined and documented
i.e. medical expenses, lost earnings, property damage |
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Definition
awards for losses that cannot be specifically measured or itemized
i.e. pain and suffering or loss of consortium |
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Definition
| awards designed to punish people and make them an example |
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Term
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Definition
can be used in ERM
can get different types of assets to offset other risks |
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Term
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Definition
the more exposure units you have, the expected loss experience will more closely resemble the actual loss experience
like flipping a coin -- the more times you flip the coin the closer you get to 50% heads/50% tails |
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Definition
| any situation or circumstance where loss is possible, regardless of whether a loss occurs |
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Definition
the worst loss that could happen to a firm during it's lifetime
i.e. the company has three plants, one in FL, one in TX and one in LA -- max possible loss is that all three will be destroyed in a hurricane |
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Term
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Definition
the worst event that is likely to happen
i.e. the company has three plants, one in FL, one in TX and one in LA -- max probable loss is that a meteorologist predicts that one will be hit by a hurricane |
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Definition
how companies get their product to consumers
independent agency, exclusive agency, direct writer |
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Definition
represents unrelated insurers (more than one)
owns renewal rights
compensated by line |
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Definition
represents only one insurer or group of insurers under common ownership
don't own renewal rights
mutually beneficial
agent brings good homes to be insured |
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Definition
salesperson is an employee of the insurer
salaried instead of commission |
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Term
| Mutual insurance companies |
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Definition
a corporation owned by the policy owners
demutualization
-advantages: is loss is less, earn dividends
-disadvantages: harder to govern managers
combines owners and policy holder - buy a policy, own a part |
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Term
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Definition
| statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects |
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Definition
a defense against negligence
if you contributed in any way to your own injury, you cannot collect damages
don't see this very often |
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Term
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Definition
Pure rule: can collect damages even if you are negligent but your award is reduced proportionately
49 percent rule: if you are 49 percent or less negligent, you can collect all of the damages
the payment is reduced by whatever percentage you are responsible for the negligence
defense against negligence |
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Term
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Definition
a plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so
a defense against negligence
i.e. if you hit a pedestrian with your car, you still have a last clear chance to to swerve out of the way |
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Term
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Definition
a person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury
a defense against negligence
you decide to teach your friend who is 90% blind how to drive and they crash...you assume responsibility |
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