Risk Management and Insurance Key Terms

Comprehensive vocabulary flashcards covering risk management, insurance, technology, claims, underwriting, and reinsurance terms.

Big data

Sets of data that are too large to be gathered and analyzed by traditional methods.

Smart product

An innovative item that uses sensors; wireless sensor networks; and data collection, transmission, and analysis to further enable the item to be faster, more useful, or otherwise improved.

Internet of Things (IoT)

A network of objects that transmit data to and from each other without human interaction.

Cloud computing

Information, technology, and storage services contractually provided from remote locations, through the internet or another network, without a direct server connection.

Blockchain

A distributed digital ledger that facilitates secure transactions without the need for a third party.

Telematics

The use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to businesses or government agencies; some return information for the driver.

Text mining

Obtaining information through language recognition.

Risk appetite

Amount of risk an organization is willing to take on in order to achieve an anticipated result or return.

Value at risk (VaR)

A technique to quantify financial risk by measuring the likelihood of losing more than a specific dollar amount over a specific period of time.

Cost of risk

The total cost incurred by an organization because of the possibility of accidental loss.

Exposure

Any condition that presents a possibility of gain or loss, whether or not an actual loss occurs.

Volatility

Frequent fluctuations, such as in the price of an asset.

Pure risk

A chance of loss or no loss, but no chance of gain.

Speculative risk

A chance of loss, no loss, or gain.

Subjective risk

The perceived amount of risk based on an individual's or organization's opinion.

Objective risk

The measurable variation in uncertain outcomes based on facts and data.

Systemic risk

The potential for a major disruption in the function of an entire market or financial system.

Risk management framework

A foundation for applying the risk management process throughout the organization.

Risk treatment

The selection and implementation of actions to help manage or mitigate a risk.

Avoidance

A risk control technique that involves ceasing or never undertaking an activity so that the possibility of a future loss occurring from that activity is eliminated.

Loss prevention

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

Loss reduction

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

Risk transfer

The shifting of risk from one individual or organization to another.

Retention

A risk financing technique that involves assumption of risk in which gains and losses are retained within the organization.

Machine learning

Artificial intelligence in which computers continually teach themselves to make better decisions based on previous results and new data.

Hedging

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

Derivative

A financial instrument whose value is derived from the value of an underlying asset, which can be an index, an asset, yield on an asset, weather conditions, inflation, loans, bonds, an insurance risk, or other items.

Diversification

A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions.

Insurance

A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer.

Property loss exposure

A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest.

Liability loss exposure

Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.

Special damages

A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages.

General damages

A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific, measurable expenses.

Punitive damages (exemplary damages)

A payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages.

Negligence

The failure to exercise the degree of care that a reasonable person in a similar situation would exercise to avoid harming others.

Strict liability (absolute liability)

Liability imposed by a court or by a statute in the absence of fault when harm results from activities or conditions that are extremely dangerous, unnatural, ultrahazardous, extraordinary, abnormal, or inappropriate.

Replacement cost

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.

Actual cash value (ACV)

The cost to replace property with new property of like kind and quality less depreciation.

Proprietary insurer

An insurer formed for the purpose of earning a profit for its owners.

Cooperative insurer

An insurer owned by its policyholders and usually formed to provide insurance protection to policyholders at minimum cost.

Underwriting

The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.

Adverse selection

In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.

Statutory accounting principles (SAP)

The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow.

Moral hazard

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.

Morale hazard (attitudinal hazard)

A condition of carelessness or indifference that increases the frequency or severity of loss.

Subrogation

The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.

Quota share reinsurance

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.

Excess of loss reinsurance

A type of reinsurance in which the primary insurer is indemnified for the portion of each loss that exceeds a specified dollar amount.

Underwriting cycle

A cyclical pattern of insurance pricing in which a soft market (low rates, relaxed underwriting, and underwriting losses) is eventually followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern again repeats itself.