Insurance chapter 3

Risk management

process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures

Loss exposure

Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

Loss frequency

refers to the probable number of losses that may occur during some time period

Loss severity

refers to the probable size of the losses that may occur

Maximum possible loss

the worst loss that could happen

probable maximum loss

worst loss that is likely to happen

Risk control

refers to techniques that reduce the frequency and severity of losses

Avoidance

means a certain loss exposure is never acquired or undertaken, or an existing loss exposure is abandoned

Loss prevention

refers to measures that reduce the frequency of a particular loss

Loss reduction

refers to measures that reduce the severity of a loss after it occurs

Duplication

Having back-ups or copies of important documents or property available in case a loss occurs

Seperation

means dividing the assets exposed to loss to minimize the harm from a single event

Diversification

spreading the loss exposure across different parties, securities, or transactions, to reduce the chance of loss

Risk financing

Techniques that provide for the payment of losses after they occur

Retention

Means that the firm retains part or all of the losses that can result from a given loss

Retention level

The dollar amount of losses that the firm will retain

Captive insurer

Insurer owned by a parent firm for the purpose of insuring the parent firm’s loss exposures

Self-insurance

a special form of planned retention by which part or all of a given loss exposure is retained by the firm

Risk retention group

a group captive that can write any type of liability coverage except employers’ liability, workers comp, and personal lines

Non-insurance transfer

a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party

Deductible

a specified amount subtracted from the loss payment otherwise payable to the insured