Risk Mgmt exam 2

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Risk Mgmt exam 2
2014-04-15 17:03:51

chapters 6, 7, 8 and 9
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  1. Assuming that losses do occur,            deals with sources pf funds to pay for losses.
    Risk financing
  2. what are the three sources of funds to pay for losses that are of the risk financing type?
    • 1. External funds
    • 2. internal funds
    • 3. Alternative risk financing schemes
  3. Selling a house is an example of ____ing a loss exposure.
  4. What are the two types of risk transfers of the financing type?
    Insurance and non insurance risk transfer.
  5. Seeking funds from unrelated third parties to pay for losses.
    risk transfers of the financing type
  6. ______transfers the financial responsibility of a loss to a third party
    risk transfers of the financing type
  7. a lease is an example of____
    a non insurance risk transfer of the financing type
  8. A hold harness agreement is an example of a_________
    non insurance risk transfer of the financing type
  9. A firm/individual engaging in______ assumes financial responsibility for losses that do occur
  10. What 2 Rm financing techniques are illustrated by using insurance with a deductible?
    • 1. risk transfer of the financing type
    • 2.Active retention
  11. Active retention
    Knowingly retaining a loss
  12. passive retention
    Unknowingly retaining a loss
  13. _______usually results from a failure to properly identify the loss exposure or from an underestimation of a loss exposure.
    Passive retention
  14. Funded retention
    A firm sets aside funds every time period to pay for losses.
  15. Unfunded retention
    When losses do occur, they are paid from current revenue or borrowed funds.
  16. ______ retention is better for losses that are higher severity and more predictable.
  17. ______retention is better for losses that are lower in severity and lower in frequency.
  18. Self insurance
    Active, funded retention
  19. What are the 4 types of retention
  20. What are two things that are commonly self insured?
    • 1. health insurance benefits for employees in an employee benefit plan
    • 2.Workers compensation
  21. Self insured retention(SIR)
    insuring for losses up until a certain limit.Ex. alter hall first 10 million of losses is retained by temple. after that, fm global insures.
  22. What are the ideal characteristics of self insurance?(2)
    • 1. fairly predictable(if a firm is large enough)
    • 2.long payout period(workers comp)
  23. Long tailed loss
    A recurring loss that lasts for a long time
  24. What is an example of a long tailed loss?
    Workers compensation for an injury.
  25. Why are long tailed losses easy to retain?
    They allow for the possibility of pre-funding the "known" losses occurring in the future
  26. What is an example of a short tailed loss?why?
    a building burning down because the loss only occurs once.
  27. What are the advantages of self insurance?(4)
    • 1.Potentially less expensive
    • 2.the time value of $
    • 3.Firms can retain the full benefits of successful loss prevention and loss reduction programs
    • 4.flexibility in the design of their "insurance" programs
  28. (___1___cost of self insurance)<(___2___cost of Market insurance)
    • 1. estimated
    • 2.known
  29. cost=p*+adm cost
    cost of self insurance
  30. p*+adm cost+r.c
    formula for the insurance premium
  31. reasons for savings from self insurance?
    • no risk charge
    • no distribution expense
    • no advertising
    • no commissions
    • no state premium taxes
  32. Time value of $
    money can be invested internally at a higher rate of return (ROR) than is credited by the insurer
  33. When using market insurance, savings given to employees from successful loss prevention and loss reduction programs is___________.
    not dollar for dollar.
  34. Moral hazard is more prevalent in________(market insurance or self insurance) contracts.
    Market insurance contracts
  35. For firms that self insure;the flexibility in the design of their insurance programs is only prevalent for________________.
    health insurance
  36. Why is their flexibility in the design of their insurance programs for firms that self insure?
    health insurance contracts are regulated and full of state mandated benefits. self insurance does not have to abide by those rules.
  37. What are the disadvantages of self insurance vs. market insurance?(3)
    • 1. the possibility of a catastrophic loss
    • 2. firms have to perform many of the administrative activities associated with insurance.
    • 3. There are potential employee "PR" problems when denying claims.
  38. Stop loss insurance
    basically insurance with a very large deductible
  39. Specific/individual stop loss
    When a firm retains the first_$___ of an INDIVIDUALloss.
  40. Aggregate stop loss
    Retaining a total amount of losses from all events up to a specified amount.
  41. What is an ASO contract?
    Stands for administrative services only. A contract for firms that self insure.
  42. TPA
    Third party administrator
  43. What are the two ways for self insure firms to eliminate the extra administrative activities associated with insurance.(2)
    • 1.ASO contracts
    • 2.TPA
  44. Captive insurance
    A wholly owned subsidiary of a firm(not in the insurance business).
  45. What is the primary purpose of a captive insurance company
    to insure the risk s of the parent company/companies
  46. What are the two types of insurance captives?
    • Single parent captives
    • association captives
  47. association captives
    a captive for a group of companies, insurers, or municipalities
  48. Risk retention group
    A group captive formed under the requirements of the liability risk retention act of 1986 to insure parent organizations.
  49. Each decision has two types of costs which are___________ and _________.
    • 1. monetary cost(EL)
    • 2. cost of uncertainty(worry value)
  50. Worry value(WV)
    The cost of uncertainty associated with a particular decision.
  51. The worry value of a person is________ to a decision maker.
  52. AFP
    Insurance for P* only.
  53. pMAX
    maximum premium a person is willing to pay for insurance against a particular risk.
  54. Formula for WV
  55. Decision rule
    Choosing the option that minimizes total cost
  56. Risk averse WV
  57. Risk neutral WV
    indifferent WV=0
  58. Risk lovers WV
  59. What are four rm options?
    • retention
    • partial insurance
    • full insurance
    • deductible insurance
  60. formula for total cost of a rm option
  61. A firm or person's WV will increase as:(6)
    • size of max possible loss increases
    • prob of max possible loss increases
    • variability in losses increases
    • The level of confidence in estimate of P* decreases
    • the financial strength of a firm or person decreases
    • the level of insurance coverage decreases
  62. qualitative decision making techniques
    choice of rm options based on characteristics of the loss exposure
  63. best options for low frequency low severity rm options
    unfunded retention
  64. best options for high frequency low severity rm options
    funded retention or loss prevention
  65. best options for low frequency high severity rm options
    insurance or loss reduction
  66. best options for high frequency high severity rm options
    • avoidance(1st choice)
    • loss prevention,loss reduction(2nd best)
    • captives and RRG's
  67. Adding another person to the risk pool_____'s the insurers risk.
  68. As the risk pool increases in size the risk faced by the insurer decreases and eventually approaches_________.
    0 because of the (law of large #'s)
  69. Insurance is a device that(3):
    • Pools exposures of loss of individuals into a group
    • uses funds paid by members of the group to pay for losses as they occur
    • group as a whole is engaged or involved in a loss/risk sharing arrangement.
  70. Loss premiums
    premiums paid by people who had a loss
  71. When purchasing insurance, what is the commodity being purchased?
    • security
    • promise to pay the loss
    • peace of mind
    • certainty
    • enhancement of credit worthiness
  72. when buying insurance you are essentially trading an_______ for a __________.
    unknown loss for a known loss
  73. Insurance involves_____ and _____
    pooling and transfer
  74. What is transferred to an insurer when buying insurance?
    The financial responsibility to pay for a loss to an insurer.
  75. Insurer agrees to_____ the insured in the event of a covered loss.
  76. Indemnify
    to compensate
  77. fully indemnified
    place the insured in the same position financially after the loss as they were in prior to the loss.
  78. Does it make sense for insurers to provide contracts which always provide full indemnification?
    nope, that would create a lot of moral hazard
  79. What are two ways an insurer deals with moral hazard?
    offering deductible or partial insurance instead of insurance contracts that fully indemnify an individual.
  80. What are some forms of indemnification?(3)
    • paying or reimbursing the insured
    • repair /replace an asset
    • provide services
  81. What are two types of ways insurers pay for losses?
    • paying after the loss occurs and determine the amount paid to the insured after the loss.
    • paying for the loss after it occurs, but the amount of the loss is determined in advance
  82. What are some items that have amounts paid determined in advance
    one of a kind items/life insurance/items lost at sea
  83. principle of indemnity
    In the event of a loss, the insured should not collect more than the actual cash value of the loss.
  84. ACV
    simply a way to value/measure a loss(actual cash value)
  85. formula for actual cash value(ACV)
    Replacement cost-depreciation based on replacement cost
  86. replacement cost
    what it would cost to replace an asset with like workmanship and materials (replicate what you have)
  87. What is the purpose of having the principle of indemnity?
    to control moral hazard.
  88. what are 3 common violations of the principle of indemnity
    • life insurance
    • insurance for one of a kind items
    • homeowners insurance
  89. General requirements of an insurable risk
    • a supply of an insurance
    • a demand for insurance
    • a market exists
  90. Why might PI>pmax?
    Pi is too high or Pmax is too low
  91. Why might PI be too high?
    • A. P* is too high
    • b. R.c is too high
    • c. adm costs are high
  92. Why might Pmax be too low?
    • A. underestimate the frequency/severity of a loss
    • B. disaster relief
  93. Specific requirements of an insurable risk (6)
    • 1. loss should be fortuitous in nature
    • 2. loss should be catastrophic in nature
    • 3. definite and measurable
    • 4. large number of exposure units
    • 5.independent and not catastrophic
    • 6. affordable
  94. A risk is insurable if
    PI< pMAX
  95. A risk is not insurable if
  96. who came up with the idea of charity hazard?
    Mark browne
  97. Loss should be fortuitous in nature
    • requirement of an insurable risk
    • random accidental or a matter of chance
    • insured should have no control of the freq/severity of a loss
  98. What are some solutions to the Moral hazard problem?(5)
    • 1. deductibles,copayments
    • 2. experience rating(ex. rate goes down with no accidents)
    • 3. claims investigation
    • 4. loss settlement rules
    • 5. policy limits
  99. Why are cat losses a problem for insurers?
    • 1. Difficult to predict the overall expected loss
    • 2. creates a risk of insolvency for the insurer
    • 3.LLN's assumes that the random events in question are independent events
  100. solutions to catastrophic losses for insurers.
    diversify geographically or financially
  101. How does an insurer diversify financially?
    purchasing re-insurance.
  102. What are some contemporary examples of a catastrophic loss?
    • 1. workers compensation
    • 2. employee benefits
    • 3.terrorism
  103. TRIA
    Terrorism risk and insurance act
  104. Risk pools should be _____ and ______.
    Large and homogenous
  105. Homogenous
    • Same P*
    • same amount of risk
  106. If pools are heterogeneous, the ___1___risked individuals subsidize the ___2____ risked individuals
    • 1.low
    • 2. high
  107. adverse selection
    Arises when the assumption of homogeneous exposure units is violated
  108. Asymmetric information
    insured has more information than the insurer concerning the risks(ex a person lying about smoking)
  109. Why does Adverse selection occur?
    • 1. Insured may give incorrect info on purpose
    • 2. rates that the insurers can charge may be regulated
    • 3. cannot ask insureds the right questions or use observable information (ex.gender rating)
  110. How many rating bands are in the affordable care act
    3 as opposed to the usual five
  111. how is adverse selection controlled?
    • 1. insurer gains more info or engages in more careful underwriting
    • 2.compulsory insurance
    • 3.
  112. 5th requirement of an insurable risk
    loss should be significant to the insured.
  113. 4th requirement of an insurable risk
    definite and determinable
  114. definite
    easy to verify that the loss has occured
  115. easy to verify risks
    • death
    • fire
    • accidents
    • property damage
  116. hard to verify risks
    • theft
    • certain injuries
  117. determinable
    easy to place a dollar value on the loss
  118. What do insurers do to make losses more definite?
    • independent verification of losses such as
    • claims investigators
    • or police reports
  119. What do insurers do to make losses more determinable?(2)
    • settlement rules
    • specifying the amount of the loss before it occurs
  120. two types of compulsory insurance
    • a. a single insurer(ex. social security)
    • b. multiple insurers(ACA)
  121. principle of utmost good faith
    parties to an insurance contract are held to a higher standard of honesty than parties to an non insurance contract.
  122. Can an insurer deny a claim of an insured if they lied about something?
    • only if it is a material fact
    • OR
    • If they breached a warranty
  123. concealment
    • failure on he part of an insurer to reveal a material fact about the risk even though they were not asked.
    • Insureds MUST volunteer material facts about the risk
  124. Breach of warranty
    Any breach of the warranty will void the contract even if unintentional.