Risk Exam 2

ch. 3,4,9,10,19

loss exposure (aka risk event)

any situation in which a loss is possible, regardless of if the loss occurs; can be poitive or negative

pre-loss objectives of risk management

• prepare for losses in the most economical way

• reduce anxiety

• meet legal oblication

post loss objectives

• what were the lessons learned

• maximize shareholder value

• survival of firm

• continue operating

• stability of earnings

• continued growth of firm

• minimize effects of loss on person/society

steps of risk management process

1. indentify potential losses

2. measure + analyze loss exposures

3. select appropriate loss exposure treatment

4. impliment + MONITOR the risk management plan

what is more important, loss frequency or loss severity

loss severity

risk control

techniques that reduce risk frequency and severity

loss prevention

reducing frequency of loss

loss reduction

reducing severity of loss

duplication

backups or copies of important documents or property in case there is a loss

separation

dividing assets exposed to loss

diversification

spreading losses exposure across different parties

risk financing + methods

technique to provide $ for losses after they occur

ex. retention, non insurance transfers, commercial insurance

captive insurer

insurer owned by a parent firm to insure the parent firm’s loss exposure

can be SINGLE CAPTIVE or GROUP CAPTIVE

risk map

grid where risks are charted and compared based on potential severity and frequency of loss

risk score

qualitative or quantitative measure that priotitzes the importance of the risk

risk appetite

total exposure that an org is willing to accept given the risk and trade off

retention + when effectively used

firm retains part or all of the losses from a loss

effectively used when: no other treatment is available, loss is predictable, the loss isnt that serious

retention level

dollar amnt of losses that the firm will retain

self insurance or risk retention group

self: planned for of retention where all or part is retained by the firm

group: group captive that can write any type of libaility coverage EXCEPT employers liability, workers comp, and personal lines

• expempt from state insurance laws

non insurance transfers

methods other than insurance which are a pure risk and its consequences are transferred to another party

ex. contracts, leases

deductible

amnt subtracted from the loss payment, payable to the insured

excess insurance policy

insurer pays if loss amnt exceeds the amnt a firm decided to retain

manuscript policy (RARE)

policy spcifically tailored to the firm

pros of insurance

• firm is indemnified for losses → can continue to operate

• uncertainy is less

• firm can recive risk management services

• premiums are income tax dedectible

underwriting cycle

what the insurance market experiences based on hard or soft market

hard market

profit is low, underwriting standards are tight, premiums are up. insurance is HARD to get

soft market

profit is up, underwriting standards are loose, premiums low, insurance is EASY to get

risk management policy statement + manual

statement: outlines objectives and policies and educates top executives

manual: describes management program + train new employees

enterprise risk management

supports the org by adressing the whole spectrum of risks and managing the impact of those risks as an integrated risk portfolio

why is ERM implimentation difficult + ways for it to be implimented

hard bc orgs are resistant to change

can be implimented when there is a commitment from the management team and the framework is communicated through the organization

different types of risk an org faces

hazard risk: risk w orgs property, libaillity, personal related exposure

financial risk

operation risk

strategic risk: external risk

gov/compliance risk: risk of non compliance w a regulation

risk tolerance

amount of uncertainty that an organization is willing to accept

benefits of ERM

• increased risk awareness

• increased certainty of strategic + operational objectives

• compliance of legal

• accountability of risks

• effeciancy or risk management + potential cost savings

• impoved strategic dedcsion making

• increase value of org

combined ratio

(paid loss + loss adj exp + underwriting exp) / premiums

principle of indemnity + purpose

the insurer agrees to pay no more than the actual amount of the loss

based on actual cash value

purpose:

• to prevent the insured from proftting from aloss

• reduce moral hazard

insurance industry capacity

relative level of surplus

surplus

difference btw insurer’s assets and liabilities

clash loss

several lives of insurance simultaneously expeience large losses

securitization of risk

insurable risk is transferred to the capital markets through creation of a bond

• imapct is an increase in capacity for insurers

insurance option

option that derives value from specifc losses

how a risk manager predicts losses

• probability analysis

• regression analysis

• forecasting based on loss distribution

loss distribution

probability distribution of losses that could occur

• risk manager needs to know parameters of loss distribution

risk management information system, risk management intranet, predictive analysis

• RMIS: database that allows for storage, update, analyzr risk data

• risk management intranet: website for internal audience

• predictive analysis: gnerate info to make more informed decisions

Value at risk analysis

calculating worst proabblr loss likely to occur in a given period under regular market conditions

catastrophe modeling

estimating losses that could occur as a result of a catastrophic event with a computer

3 methods to determine actual cash value

1. replacement cost - depreciation

2. fair market value: price the buyer is willing to pay

3. broad evidence rule: determination includes all relevant factors an expert would use to determine the value of a property

expections to the principle of indemnity

a valued polivy and replacement cost insurance

valued policy

pays the face amount of insurance if a total loss occuers

• valued policy law: if a peril occurs, then the face amnt on insurance must be payed to the insurer

replacement cost insurance

no deduction for depreciation in determining the amount paid for a loss

principle of insurable interest + purpose

insured must be in a postion to lose financially if a covered loss occurs

purpose:

• prevent gambling, moral hazard

• measure the amnt of loss

when does insurable interest exist\

• preperty insurance: time of loss

• life insurance: inception of policy

subrogation

the substritution of the insurer to claim indemnity from a third party for a loss covered by insuranve

principle of utmost good faith + doctrines that support

high degree of honesty imposed on both parties to an insurance contract than normally

supported by:

• represenatations

• concealment

• warrenty

requirements of an insurance constract

1. offer and acceptance of terms

2. exchange of consideration: value that each party gives to the others

3. competent parties: legal capcity to enter a binding contract

4. contract exists for legal purpose

aleatory

values exchanged are not equal

unilateral

only the insurer makes a legally enforable promise

conditional

policyowners must comply with all provisions to collect for a loss

personal

property insurance policy cannot be validly assigned to a nother party wihtout consent

contract of adhesions

insured has to accept the vontract w all its terms and conditions

principle of reasonable expectations

states that an insured is entitled to coverage under a policy that they reasonably expects it to provide regardless of provisions

estoppel

loss of legal defense because of previous actions that are now inconsistent with that defense

declarations

stemtns that give info about the property or activity meant ot be insured

• can also include definitions to specity who is who

insuring agreemtn

summarizes the major promises of the insureer

2 major insuring agreeements in preperty insurance

1. named perils coverage: only covers stuff specifically mentions

2. open perils: all losses are covered except whats specificallt excluded

3 major exclusions in insurance contracts

1. excluded perils (flood)

2. excluded losses

3. excluded property (pets in homeowners insurance)

conditions

provisions in the policy that place limits on the insurers promise to perform

• if the policy conditions arent met then they can refuse to pay

  • or there can be other provisions like cancellations or grace periods

definition of insured

an insurance contratc has to idenitfy the perople/item under the policy

endersement vs. rider

written providions to add or modify the policy

• endoresemtn for property and liabiity

• rider for life and health

deductible

amount is subtracted from total loss payment that otherwise would be payable

streight vs aggregate deductible

streight is when a certain amount has to be paid before insurance steps in

aggregate is when all losses that occured during specific time period are used to satisfy the deductible amount

calendar yesr deductuble

type of aggregate deductible ususlaly in medical expenses

elimination periof

stated period of timr at the beginning of a loss where no benefits are paid

coinsurance clause

ecourages the insured to insure the proporty to a stated perecent of its insurable value, in propoerty insurance contract

amount pf recovery formula

(amount of insurance carried/amiunt of insurance required) x loss

prupose of coinsurance

equity in rating

coinsurance clause

in health insurance, where the insured is required to pay a specified perent of covered medical expenses in excess of the deductible

• purpose is to reduce premiums

pro rata liability

loss is based on the proportion the insraucne bears to the insurance on the property

contribution by equal shares

insurer shares equally in loss until the share paid by rach insurer equals the lowest limit of libaility under any policy, or until the full amount of loss is paid

coordination of benefits insurance

group health insurance that prevents insurance and the duplication of benefits if one person is covered by multiple insurances

legal wrong

is a voilation of persons legal rights or a failure to perform a legal duty

torts + its 3 categories

a legal wrong which a court fixes through money

1. intentional (fraud)

2. strict liability: imposed liability regadless of negligence

3. negligence

elements of negligence

• existance of legal duty to use care

• failre to perform a duty

• damage or injury

• promimate cause btw negligence and the damage which requires an unbroken chain of events

compensatiry damages + 2 types

to compensate the injured

• special damage: for medical expenses

• general damages: for pain and suffering

contributory negligence law

injured person cant collect damages if ther persons care falls below the standard of care required for his protention

comparative negligence law

financial burden is shared by both parties by their respective degrees of fault

last clear chance rule

someone can still recover damages for their own negligence if the person who hit them had a last chance to not hit someone but chose not to do so

assumption of risk doctrine

someone who knows what they’re doing is risky but still does it, then they can’t recover damages

imputed negligence

one person’s negligence can be attibuted to someone else

res ipsa loquitur + 3 requirements

“speaks for itself”, the fact that an injury occurs establishes the assumption of negligence

3 requirements

• event doesnt normally occur in the absense of negligence

• defendant has exclusive coontrol over the cause of the accident

• injured person has no contribution to the accident

licensee vs invitee

licensee: person who enters a place on implied permission

• owner of propoerty has to warn of unsafe conditions

invitee: person invited into a place for the benefit of the occupant

• owner has to eliminate any dangers

attractive nuisance

hazardous condition that can attract and injure children