Extra- RISK MGMT

An individual's personal estimate of the chance of a loss is what type of probability?

Subjective probability

The risk of an economic system's collapse is called what?

Systemic risk

Name the three types of risk control.

Avoidance; loss prevention; loss reduction

Name the three types of risk financing.

Retention; noninsurance transfer; insurance

Relative variation of actual losses from expected losses?

Objective risk

What is a loss exposure?

Any situation or circumstance in which a loss is possible

What is a hazard?

A condition that creates or increases the frequency or severity of loss

What is an attitudinal (morale) hazard?

Carelessness or indifference to a loss

Failure to comply with regulatory requirements is what type of hazard?

Legal hazard

Give an example of speculative risk.

Investing in stocks; starting a business; gambling

Premature death, inadequate retirement income, poor health, and unemployment are examples of what?

Personal risks

Premature death means dying earlier than your life expectancy. True or False?

True

A loss resulting from physical damage, destruction, or theft of property is what type of loss?

Direct loss

Name one way loss reduction can be employed.

Salvage; rehabilitation; reducing the severity of losses

What is passive retention?

A risk unknowingly retained because of ignorance, indifference, laziness, or failure to identify it

A hold-harmless or indemnification clause is an example of what type of risk transfer?

Noninsurance risk transfer

Insurance is the _____ of _____ losses by _____ of such risks to insurers.

Pooling; fortuitous; transfer

What do insurers agree to do for insureds?

Indemnify insureds for covered losses

What are the characteristics of an ideally insurable risk?

Large exposure units; accidental; measurable; noncatastrophic; calculable; economically feasible premium

What is adverse selection?

Higher-risk people seeking insurance at standard rates

What are examples of personal lines insurance?

Private passenger auto; homeowners; personal umbrella; earthquake; flood

What are examples of commercial lines insurance?

General liability; products liability; workers compensation; inland marine; professional liability

What are government insurance programs?

Government programs financed by mandatory employer and employee contributions

Name two major social and economic benefits of insurance.

Indemnification; investment funds; loss prevention; reduced worry; enhancement of credit

Name one social cost of insurance.

Insurance fraud; operating expenses; increased moral hazard

What is the law of large numbers?

As exposure units increase, actual losses more closely approach expected losses

Risk management is the process that identifies what and selects what?

Loss exposures; appropriate techniques for treating them

Name one pre-loss objective of risk management.

Prepare for potential losses economically; prevent/reduce losses; reduce anxiety

Name two post-loss objectives of risk management.

Survival; continued operation; stability of earnings; continued growth; minimize effects on others

What is the first step in the risk management process?

Identify loss exposures

What is the second step in the risk management process?

Measure and analyze loss exposures

What is the third step in the risk management process?

Select appropriate risk treatment techniques

What is the fourth step in the risk management process?

Implement and monitor the risk management program

The personal risk management process uses the same steps. True or False?

True

Theft of valuable personal property is a personal loss exposure. True or False?

True

Financial risk management is an important part of what?

Enterprise risk management

Financial risk management identifies, analyzes, and treats what?

Speculative financial risks

What is the underwriting cycle?

Fluctuating pattern between tight and loose insurance markets

What is a hard insurance market?

Tight underwriting standards and high premiums

What is a soft insurance market?

Loose underwriting standards and low premiums

What type of insurance company is owned by its policyholders?

Mutual insurer

What is a fraternal insurer?

An insurer providing life and health insurance to members of a social or religious organization

What type of mutual insurer can assess policyholders additional amounts?

Assessment mutual

What is the process of converting a mutual insurer to a stock insurer?

Demutualization

What is Lloyd's of London?

A market where members form syndicates to insure and pool risks

Who manages a reciprocal exchange?

An attorney-in-fact

What is a reciprocal exchange?

An arrangement where members insure each other through an unincorporated association

What are Blue Cross and Blue Shield plans?

Originally nonprofit hospital and physician/surgeon plans that merged into single entities

What are health maintenance organizations (HMOs)?

Organized healthcare plans emphasizing cost control

What is a captive insurer?

An insurer owned by a parent firm to insure the parent's loss exposures

Who does an insurance agent legally represent?

The principal, or insurance company

What is express authority?

Specific powers an agent receives from the insurer

The principal is responsible for an agent's acts within express, implied, or apparent authority. True or False?

True

A property-casualty agent can normally bind the insurer immediately, but a life agent normally cannot. True or False?

True

Who legally represents the insured and receives a commission from the insurer?

Insurance broker

What is the surplus lines market?

Insurance coverage unavailable from admitted insurers in the state and placed with a nonadmitted insurer

A nonadmitted insurer is licensed or not licensed in the state?

Not licensed

The majority of life insurance policies and annuities are sold through personal selling systems. True or False?

True

Name two personal selling distribution systems.

Agency system; brokerage system

What is the direct response marketing system?

Insurance sold directly to consumers without face-to-face agent meetings

What is the worksite marketing system?

Producers sell insurance at a business with management approval

In the independent agency system, agents represent how many insurers?

Several unrelated insurance companies

Who owns expirations in the independent agency system?

The agent

In the exclusive agency system, the agent represents whom?

One insurer or group under common ownership

Who owns expirations in the exclusive agency system?

The insurer

What is a direct writer?

An insurer whose sales representatives are employees

Some insurers use more than one distribution system. True or False?

True

Catastrophe models can precisely predict damage and losses from disasters. True or False?

False

What does an actuary employed by an insurance company help determine?

Premium rates

What is underwriting?

Selecting, classifying, and pricing applicants for insurance

What is the primary objective of an underwriter?

Attain an underwriting profit

Why does an insurer establish underwriting standards?

To reduce adverse selection

What principle means one group should not unduly subsidize another?

Equity among policyholders

Who is the first underwriter in the underwriting process?

The agent

Name two sources of underwriting information.

Application; inspection; physical exam; financial records; insurance history

What does MIB stand for?

Medical Information Bureau

An underwriter may accept, reject, or accept an application subject to what?

Certain restrictions or modifications

What is the first objective in settling claims?

Verification of a covered loss

What are the other two objectives of settling claims?

Fair and prompt payment; assistance to the insured

What is an independent adjuster?

An organization or individual adjusting claims for a fee

When are independent adjusters often used?

When catastrophic losses occur in a geographic area

What is a public adjuster?

An adjuster who represents the insured rather than the insurer

What is the first step in claims settlement?

Notice of loss

What is a proof of loss?

A sworn statement by the insured substantiating the loss

What is reinsurance?

An arrangement where a primary insurer transfers part or all of its potential losses to another insurer

What is the ceding company?

The primary insurer that transfers insurance to a reinsurer

What is the retention?

The amount of insurance retained by the primary insurer

What is retrocession?

When a reinsurer transfers part or all of its risk to another insurer

What is the insurer receiving a retrocession called?

Retrocessionaire

Name two reasons insurers use reinsurance.

Increase capacity; protect against catastrophes; stabilize profits; reduce unearned premium reserve

What is facultative reinsurance?

Optional, case-by-case reinsurance that is not automatic

What is treaty reinsurance?

Automatic reinsurance within the scope of the treaty

What are the two basic types of treaty reinsurance?

Pro rata and excess-of-loss

What is a ceding commission?

A payment from the reinsurer to compensate the primary insurer for acquisition expenses

What is excess-of-loss reinsurance?

Protection against large losses from a single exposure or occurrence

What is securitization of risk?

Transferring insurable risk to capital markets through financial instruments

What type of income reduces the cost of insurance to policyholders?

Investment income

For property-casualty insurers, is liquidity an important investment objective?

Yes

What are loss control services?

Services such as fire prevention, safety, and alarm-system advice

Assets minus liabilities equal what?

Policyholders' surplus