Risk Management and Insurance Operations - CAS 1 Vocabulary

Flashcards covering key vocabulary and concepts from the Risk Management and Insurance Operations - CAS 1 lecture notes.

Uncertainty

An element of risk relating to the type of outcome and/or the timing of the outcome.

Possibility

An element of risk expressing that an outcome or event may or may not occur.

Probability

The likelihood that an outcome or event will occur; measurable and has a value between zero and one.

Pure Risk

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

Speculative Risk

Involves a chance of gain as well as a chance of loss or no loss.

Price Risk

Uncertainty over the size of cash flows resulting from possible changes in the cost of raw materials and other inputs, as well as cost-related changes in the market for completed products and other outputs.

Credit Risk

The risk that customers or other creditors will fail to make promised payments as they come due.

Subjective Risk

The perceived amount of risk based on opinion.

Objective Risk

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

Diversifiable Risk

Not highly correlated and can be managed through diversification.

Nondiversifiable Risk

Correlated; gains or losses tend to occur simultaneously rather than randomly. Systemic risks are generally this type.

Hazard Risks

Arise from property, liability, or personnel loss exposures and are generally the subject of insurance.

Operational Risks

Fall outside the hazard risk category and arise from people or a failure in processes, systems, or controls, including those involving information technology.

Financial Risks

Arise from the effect of market forces on financial assets or liabilities, including market risk, credit risk, liquidity risk, and price risk.

Strategic Risks

Arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts.

Expected Cost of Losses

For pure risks, includes direct as well as indirect costs.

Expenditures on Risk Management

Can include the costs of risk financing techniques and risk control techniques.

Cost of Residual Uncertainty

Worry about the level of risk that remains after risk management plans are implemented. Its cost may be difficult to measure, but may still have a significant effect on the ultimate financial consequences of risk.

Traditional Risk Management

Focuses on loss exposures related to hazard risk.

Enterprise Risk Management (ERM)

A broader view of risk management that encompasses both hazard risk and business risk (strategic, financial, and operational risks).

Loss Exposure

Any situation or circumstance presenting a possibility of loss, regardless of whether an actual loss occurs.

Moral Hazard

Increases the likelihood a person will intentionally cause or exaggerate a loss.

Morale Hazard

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

Physical Hazard

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss.

Legal Hazard

A condition of the legal environment that increases loss frequency or severity.

Property Loss Exposure

A condition that presents the possibility that a person or organization will sustain a loss resulting from damage to property in which they have a financial interest.

Tangible Property

Property that has a physical form.

Real Property

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land.

Personal Property

All tangible or intangible property that is not real property.

Intangible Property

Property that has no physical form.

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.

Personnel Loss Exposure

A condition that presents the possibility of loss caused by a person’s death, disability, retirement, or resignation, depriving an organization of the person’s special skill or knowledge that the organization cannot readily replace.

Net Income Loss Exposure

Presents the possibility of loss caused by a reduction in net income.

Pre-loss goals

Goals to be accomplished before a loss, involving social responsibility, externally imposed goals, reduction of anxiety, and economy.

Post-loss goals

Risk management program goals that should be in place in the event of a significant loss.

Probability

The likelihood that an outcome or event will occur.

Risk control

A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.

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.

Disaster recovery plan

A plan for backup procedures, emergency response, and post-disaster recovery to ensure that critical resources are available to facilitate the continuity of operations in an emergency situation.

Separation

A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss.

Duplication

A risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve.

Diversification

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

Life safety

The portion of fire safety that focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of the building.

Risk financing

a conscious decision to generate funds to offset the variability in cash flows that can occur as a result of an accidental loss.

Retention

A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses.

Transfer

In the context of risk management, a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party.

Primary layer

The first level of insurance coverage above any deductible.

Excess layer

A level of insurance coverage above the primary layer.

Excess coverage

Insurance that covers losses above an attachment point, below which there is usually another insurance policy or a self-insured retention.

Umbrella policy

A liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self-insured retention.

Buffer layer

A level of excess insurance coverage between a primary layer and an umbrella policy.

Self-insurance

A form of retention under which an organization records its losses and maintains a formal system to pay for them.

Large deductible plan

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

Captive insurer, or captive

A subsidiary formed to insure the loss exposures of its parent company and the parent’s affiliates.

Risk retention group

A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizations.

Rent-a-captive

An arrangement under which an organization rents capital from a captive, to which it pays premiums and receives reimbursement for its losses.

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.

Finite risk insurance plan

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

Pool

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

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.

Loss limit

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

Hold-harmless agreement (or indemnity agreement)

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

Capital market

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

Securitization

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

Insurance securitization

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

Hedging

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

Derivative

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

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.

Chief risk officer (CRO)

A senior risk professional who has oversight over an organization’s enterprise risk management function.

Business model

The core aspects of an organization, including its vision, mission, strategies, infrastructure, policies, offerings, and processes.

Proprietary insurer

Insurer formed for the purpose of earning a profit for its owners.

Mutual insurer

An insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them.

Reciprocal insurance exchange (interinsurance exchange)

An insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its subscribers, and managed by an attorney-in-fact.

Fair Access to Insurance Requirements (FAIR) plans

An insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties, especially those susceptible to loss by riot or civil commotion.

Residual market

The term referring collectively to insurers and other organizations that make insurance available through a shared risk mechanism to those who cannot obtain coverage in the admitted market.

Surplus lines broker

A person or firm that places business with insurers not licensed
(nonadmitted) in the state in which the transaction occurs but that
is permitted to write insurance because coverage is not available
through standard market insurers.

Independent agency and brokerage marketing system

An insurance marketing system under which producers (agents or
brokers), who are independent contractors, sell insurance, usually as
representatives of several unrelated insurers.

Direct writer marketing system

An insurance marketing system that,uses sales agents (or sales repre-
sentatives) who are direct employees of the insurer.

Exclusive agency marketing system

An insurance marketing system under which agents contract to sell
insurance exclusively for one insurer (or for an associated group of
insurers).

Distribution channel

The channel used by the producer of a product or service to transfer
that product or service to the ultimate customer.

Probable maximum loss (PML)

The largest loss that an insured is likely to sustain.

Underwriting

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

Book of business

A group of policies with a common characteristic, such as territory
or type of coverage, or all policies written by a particular insurer or
agency.

Underwriting guidelines (underwriting guide)

A written manual that communicates an insurer’s underwriting policy
and that specifies the attributes of an account that an insurer is will-
ing to insure.

Adverse selection

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

Producer

Any of several kinds of insurance personnel who place insurance and surety business with insurers and who represent either insurers or insureds, or both.

Market intelligence

Information gathered and analyzed regarding a company’s markets to improve competitive decision-making.

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.

Focus group

A small group of customers or potential customers brought together to provide opinions about a specific product, service, need, or other issue.

Predictive analytics

Statistical and analytical techniques used to develop models that predict future events or behaviors.

Market segmentation

The process of identifying and dividing the groups within a market that share needs and characteristics and that will respond similarly to a marketing action.

Target marketing

Focusing marketing efforts on a specific group of consumers.

Niche marketing

A type of marketing that focuses on specific types of buyers who are a subset of a larger market.

Distribution system

The necessary people and physical facilities to support the sale of insurance products and services.

Agency expiration list

The record of an insurance agency’s present policyholders and the dates their policies expire.

Countersignature laws

Laws that require all policies covering subjects of insurance within a state to be signed by a resident producer licensed in that state.

Managing general agent (MGA)

An authorized agent of the primary insurer that manages all or part of the primary insurer’s insurance activities, usually in a specific geographic area.

Direct response distribution channel

An insurance distribution channel that markets directly to the customer through such distribution channels as mail, telephone, or the Internet.