Risk Management chapter 4

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  1. What does P* stand for?
    Short hand notation for expected losses.
  2. What is step 2 of the rm process?
    objectively measure risk
  3. Amount of losses in a given time period is an example of a______.
    random variable
  4. Exposure unit
    Item, person, thing of value exposed to a loss.
  5. Ex. What formula would you use tocalculate p* for a group of "similar drivers"?
    • sum of all losses
    • # of drivers
  6. What was the expected loss for the whole class (car accidents)?
  7. How to calculate P* for a single exposure unit. (ex p* for a single driver)
    • sum of all losses
    • # of years
  8. Gross premium
    A premium paid per unit of coverage to insure a particular risk. aka "price for a product"
  9. What are the basis of insurance company pricing decisions?
    expected losses
  10. What two things make up a gross premium?
    • 1 admin costs
    • 2 losses/claims (interchangable claims)
  11. What is the formula for gross premium?
    pure premium(P*)+risk charge+administrative costs
  12. Pure premium
    Amount of portion of the gross premium which is calculated as being sufficient to pay for losses only.(P*)
  13. To calculate pure premium what must be estimated in advance?
    P*. (and that estimate may be wrong)
  14. (break even,profit or loss)Al=EL
    Break even
  15. (break even,profit or loss)AL>EL
  16. (break even,profit or loss)AL<EL
  17. Risk charge
    Reflects the estimation risk of the insurer. It is the extra amount charged by the insurer to represent the estimation risk.
  18. What influences the size/magnitude of the risk charge?(2)
    • The accuracy of the estimate of P*
    • The level of confidence in the estimate of P*.
  19. What do insurers have lots of past information of to help estimate P* accurately?
    There is a lot of data to help predict P* for property,auto,and life insurance.
  20. When estimation risk is low insurers are?
    • very confident in the estimate of P*
    • and there is a very low need for a risk charge
  21. What are some examples of risks that do not have a lot of past information, and therefore have a high estimation risk.
    terrorism,event risk, cyber risk
  22. When there is a lot of estimation risk there is:
    A high need for a risk charge because P* is really an educated guess
  23. What is an example of a company that deals primarily with event risk?
    LLoyds of london
  24. _____ varies inversely with the level of confidence in the estimate of P*
    Risk charge
  25. What are some examples of administrative costs?
    • stake premium taxes
    • mktg and advertising 
    • wages and compensation for employees
  26. What is another term for administrative costs?
    expense loading
  27. mutually exclusive
    two events that cannot occur at the same time.
  28. random variable
    A variable whose outcome or value depends on some chance event.
  29. fair coin
    all outcomes equally as likely
  30. unfair coin
    All outcomes are not equally likely
  31. probability distribution
    Table/graph that indicates for each outcome of a random variable the probability of that particular outcome.
  32. another word for the mean is the
    expected value
  33. how to calculate the mean
    weighted average
  34. What are some measures of dispersion
    • 1.variance
    • 2.std deviation
    • 3. coefficient of variation
  35. What are the 2 things needed to calculate variance?
    • 1.outcomes of a random variable
    • 2.prob of the outcomes
  36. std deviation formula
    take the square root of the variance
  37. what are the 4 columns needed to calculate variance within a table
    • 1. outcomes  
    • 2. mean  
    • 3. outcome-mean
    • 4. (outcome-mean^2 
    • 5. probability
    • 6. 4*5
  38. coefficient of variation
    • s.d.   
    • mean
  39. coefficient of variation
    • can be defined as how much risk is present
    • who faces the most risk
    • and can you quantify the risk
  40. When do you need to calculate when you use the means are different?
    the coefficient of variation
  41. e(f)
    expected value of frequency(gotten by using a probability distribution)
  42. e(s)
    expected value of severity

    • total dollar losses
    • total # losses
  43. expected loss per___ formula
    • total dollar losses
    • total # of ______.
  44. a priori probability
    • deduce in advance based on the nature of the event.
    • (ex outcome of tossing a fair coin once)
  45. What are the 3 assumptions in a priori probability
    • 1. all possible outcomes are known
    • 2. all outcomes are mutually exclusive
    • 3. all outcomes are equally likely
  46. Are statistical or a priori probabilities more common?
  47. statistical probability
    looking at past information to estimate
  48. maximum probably loss
    largest loss that could occur with a very high probability
  49. theoretical probability
    probability based on theoretical principles rather than on actual experience.
  50. empirical probability
    based on actual experience through historical or from the observation of facts.
  51. alternative probability
    the probability that any one of two or more events will occur within a given period.
  52. premium base
    The unit in which the exposure is measured, such as gross sales or payroll.
  53. homogenous
    Units of exposure that face approximately the same expected severity and frequency of loss.
  54. premium base
    The unit in which the exposure is measured such as gross sales or payroll
  55. amount subject
    the total value exposed to loss at any one location from any one event.
  56. reinsurance
    The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium to indemnify another (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.
  57. Measurement
    and Evaluation of Exposures to Loss
    step 2 in the rm process
Card Set:
Risk Management chapter 4
2014-03-19 03:55:32
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