Fin 456 exam 1

Insurance agent

a person employed to sell insurance policies.

insurance broker/agent

insurance specialist who acts on behalf of their clients

Insurance underwriters

decide if applications for insurance cover (risks) should be accepted and, if so, what the terms of that acceptance are. (selection + categorization). Assess and price risk

Insurance actuary

Calculates the premium to pay to the insurance company.

Risk manager

Individual responsible for managing an organizations risks and minimizing the adverse impact of losses on the achievement of the organizations objectives.

Loss Control Specialist/Engineer

ID and reduce risk for the workplace

Risk

uncertainty concerning the occurrence of a loss

Insurance

the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk

Pooling

Combining of risks so that in the process, average loss is substituted for actual loss. A fortuitous loss is one that is unforeseen or unexpected.

Insurance entity

Usually private company but could be a government unit

Peril

cause or source of loss

Hazard

a condition that increases the chance of loss.

4 types are; physical hazard, morale hazard, moral hazard, legal hazard

Physical Hazard

a physical condition that increases the frequency or severity of loss. Ice roads

Morale Hazard

carelessness or indifference to a loss because of the existence of insurance

Moral Hazard

A dishonest act by individual to increase chance of loss (hiring arsonist)

Legal Hazard

Laws or legal decisions that increase the chance of loss. laws that require insurance to accept all applicants.

For risk to be privately insurable

1. large number of similar exposure

2. losses should be accidental and unintentional

3. losses should be determinable and measurable

4. losses should not be catastrophic

5)chance of loss must be calculable

6)premium must be economically feasible

Law of Large Numbers

the larger the number of individuals that are randomly drawn from a population, the more representative the resulting group will be of the entire population

Adverse Selection

the tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates, leading to higher than expected losses unless the risk is underwritten correctly

Underwriting

the process of selecting, classifying, and pricing applicants for insurance

Risk management

Continuous process to manage the loss exposures faced by a family or business org

4 steps

ID of loss exposures

Analysis of loss exposures

selection and implementation of risk treatment measures

Monitoring the program and taking corrective action as needed

4 Steps in Risk Management Process

1. Identification of loss exposures

2. Analysis of loss exposures

3. Selection and Implementation of risk treatment measures

4. Monitoring the program and taking corrective action as needed

Matrix

Severity * frequency

LOW frequency low severity=risk retention (deductible)

Low frequency high severity= risk transfer. (Insuring car)

High frequency low severity= risk control (prevention, reduction) (seat belt)

High frequency high severity= risk avoidance (no driving in blizzard)

Risk Management

RM process of risk ID, risk analysis, selection and implementation of risk treatment measures, monitoring and adjusting RM. continuous

Benefits of RM

For org:

Reduce:

Cost of Hazard risk

Deterrence impact of hazard risk

Manage downside risk

Maximize profitability

Treat risk holistically

Satisfy legal + regulatory requirements

Benefits of RM society

Waste or productive resources reduced

Improved allocation of productive resources

Reduced systemic risk

Systemic risk

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

Hard Market vs. Soft Market

Hard mkt: tough to purchase, strict underwriting, high premiums

soft mkt: easy to buy, underwriting loose, low premiums

systematic vs systemic

structured; methodical; orderly vs of or relating to a system as a whole

Exposure

Max potential damage

Volatility

Relative variation of loss

Likelihood

Probability of an event, relies on the law of large number

time horizon

Several dimensions, such as economic downturn, the length of a business interruption, recovery time, duration of a peril.

Correlation

the relationship between variables

RM Goals

-Tolerable uncertainty

-Legal and regulatory compliance

-Survival

-Business continuity

-Earnings stability

-Profitability and growth

-Social responsibility

-Economy of risk management operations

Cost of Risk

a risk management tool that measures percent of sales used for risk management

Pure risk vs speculative risk

Pure risk involves chance of loss ONLY (accident or misfortune). Speculative risk involves chance of loss OR gain (gambling, stock investment).

Subjective and objective risk

Subject to interpretation

Expected to happen vs what happens

Diversifiable vs non diversifiable

systematic v systemic

Quadrants of risk

Hazard, Operational, Financial, Strategic

Enterprise Risk management

combines into a single unified treatment program all major risks faced by the firm. Consider hazard, fin, strategic, operational

Tenets of ERM

See whole picture, avoid silos (tunnel vision)

Correlation, reduce loss correlation'

Correlation and covariance considered in reducing portfolio risk (Markowitz)

Implement ERM

BUY in

Proper skill sets on board

Eliminate turf battles

Hazard (Pure) Risk include these loss exposures

Fire, explosion, property

Windstorm, earthquake, natural perils

Theft and crime losses, personal injury

'Business income interruption

disease and disability

Liability claims

Hazard Risk

property risk, liability risk, and personnel-related risk.

Hazard risk measurement

Frequency of loss and severity of loss (how bad)

Risk Control

avoidance; loss prevention; loss reduction; separation; duplication; diversification

Risk financing

Paying losses from current income, borrowing, asset liquidation, captive insurer, pay losses through insurance