Objective Risk relative variation of actual loss from expected

Measureable
statistically calculated.

Subjective Risk Uncertainty based on a persons mental condit

Chance of loss probability that an event will occur

objective probability long-run relative frequency of an event assum

of observations and no change in the underlyi
Hint:
flipping a coin.

Subjective probability individuals personal estimate of the chance of

Hint:
Buying a lottery ticket on your birthday

Peril Cause of loss.

Hint:
In an auto accident, the collision.

Hazard Condition that increases the chance of loss

physical hazard icy roads, defective wiring, texting

Moral hazard dishonesty or character defects

Morale hazard Carelessness or indifference to a loss because

insurance.

Legal Hazard Characteristics of the legal system or regulato

increase the chance loss
Hint:
Large damage awards in liability lawsuits. 3rd

Pure Risk only is the possibility of loss or no loss

Hint:
earthquake

Speculative Risk one in which both profit or loss are possible

Hint:
Gambling

fundamental Risk affect the entire economy

Hint:
hurricane
Particular Risk affects only the individual

Enterprise Risk encompasses all major risks faced by a busine

Includes: pure, speculative, strategic, operatio

Personal Risk Type of Pure Risk that involves the possibility

in income, extra expenses or depletion of fina
Hint:
Premature death of family head. Insufficient i
Poor Health.

Property Risk Type of Pure Risk. Involves the possibility of

the destruction or theft of property.
Hint:
physical damage to home and personal proper
vandalism

Direct Loss Type of Pure Risk. Financial loss that results

damage, destruction or theft.
Hint:
Think a destroyed road

Indirect Loss Type of Pure Risk. Results indirectly from the

physical damage or theft loss.
Hint:
Think of a business losing profits from the de

Liability risk Type of Pure Risk. possibility of being held li

or property damage to someone else
Hint:
No Max upper limit. Liens can be placed. Lar

Loss Prevention Activities that reduce the frequency of losses.

Loss Reduction Activities to reduce the severity of losses. Thi

Definition of insurance. pooling of fortuitous losses by transfer of such

agree to indemnify insureds for such losses.

Law of Large Numbers Spreading losses incurred by the few over the
that the more we spread it out the loss cost pe

What is Indemnification? when the insured is restored to his or her appr

position prior to the occurrence of the loss.

What are the requirements of an insurable risk? 1) Large Number of exposure units
2) Accidental and unintentional loss
 3) determinable and measurable loss.
4) No catastrophic loss.
5) Calculable chance of loss
6) economically feasible premium

What is adverse Selection? tendency of persons with a high-than-average

at standard rates.

What is underwriting? Selection and classification of applicants for i

Adverse Selection is controlled by? 1) Underwriting

2) policy provisions
Hint:
careful selection. suicide clause.

Difference between Insurance and Gambling? Both benefit from insurance. Someone loses i
Gambling creates a new speculative risk.

Difference between Insurance and Hedging? Hedging involves risks that are typically unin
Hedging does not result in reduced risk.
Hedging = AIG w/ home prices / commoditie

What is Life Insurance? pays a death benefit to beneficiaries when the

What is health insurance? covers medical expenses because of sickness

What is a disability plan? pays income benefits

What is property insurance? indemnifies property owners against the loss o

personal property

What is liability insurance? covers legal liability arising out of property da

to others

What is casualty insurance? insurance that covers what is not covered by f

insur.

What are the two major groups of Private Insurance? What do they do? 1. Personal lines = Real estate & personal pro
legal liability
2. Commercial lines = Business firms, nonpro

What do you know about social insurance? Favors low-income groups

What are the 5 social benefits of insurance? 1. Indemnification of loss

2. Reduction of worry and fear.
3. Source of investment funds
 4. loss prevention
5. enhancement of credit

What are the social costs of insurance? 1. cost of doing business

2. Fraudulent and inflated claims

What is expense loading? amount needed to pay all expenses, including

administrative expenses, state premium taxes.

Definition of Risk Management? Process that identifies loss exposures faced by

selects the most appropriate for treating such

Definition in loss exposure? situation or circumstance in which a loss is po

Hint:
a plant that may be damaged by an earthquake

Definition of Loss frequency? probable number of losses that may occur dur
period

Definition of loss severity? probable size of losses that may occur

What is more important loss severity or loss frequency? Loss severity

Definition of maximum possible loss? worst loss that could happen to the firm durin

Definition of maximum probable loss worst loss that is LIKELY to happen.

What are the three methods of risk control? 1. avoidance
2. loss prevention
3. loss reduction

Definition of avoidance? certain loss exposure is never acquired, or aba

exposure.
Chance of loss reduced to 0.

Installing safety features on hazardous products would be.... type of risk loss prevention
control?

Installing an automatic sprinkler system would be.... type of risk control? loss reduction.

Techniques that provide for the funding of losses? Risk Financing

three methods of risk financing? 1. Retention

2. Non-insurance transfers
3. commercial insurance

Type of risk financing where the firm retains part or all of the losses that can Retention
result from a given loss.

Risk financing where: 1. no other method of treatment is available Retention.

2.worst possible loss is not serious
3. losses are highly predictable

When an insurer owned by a parent firm for the purpose of insuring the Captive Insurer.
parent firms loss exposure. Hint:
often located in the carribean

Type of retention used for workers compensation and group health benefits? Self-Insurance

Group capitive that can write any type of liability coverage except employer risk retention group.
liability, workers comp and personal lines exempt from many state insurance laws.

Advantages of retention? Save money

Lower expenses
encourage loss prevention
increase cash flow

Disadvantages of retention? Possible higher losses

possible higher expenses
possible higher taxes

A risk financing method other than insurance by which a pure risk and its Non-insurance transfer
potential financial consequences are transferred to another party Hint:
 contracts, leases and hold-harmless agreemen

Can transfer some losses that are not insurable Advantages of non-insurance transfers
saves money
Can transfer loss to someone who is in a better position to control losses

Contract language ambiguous disadvantages of non-insurance transfers

if the other party fails to pay, firm is still responsible
insurer may not give credit for transfers

Appropriate for loss exposures that have low probability of loss but for Insurance
which the severity of loss is high.....

Definition of a deductible? provision by which a specified amount is subt

payment otherwise payable to the insured.

What is the policy which the insurer does not participate in the loss until the Excess insurance policy
actual loss exceeds the amount a firm has decided to retain?

What is a policy that is specifically tailored to a firm? Manuscript policy

Firm is indemnified for losses Advantages of insurance

Uncertainty is reduced
Insurers may provide other risk management services
Premiums are tax deductible

Premiums may be costly Disadvantages of insurance

Negotiations of contracts take time & effort
Risk manager may be lax in excercising loss control

When loss frequency is low and loss severity is low. Retention

When loss frequency is low and loss severity is high. Insurance

When loss frequency is high and loss severity is low Loss prevention & Retention

When loss frequency is high and loss severity is high Avoidance

A risk management program can reduce a firms.... Cost of risk.

Identification of pure risks faced by an individual or family, and to the Personal Risk management.
selection of the most appropriate technique for treating such risks

Recent changes in the financial services industry. Consolidations and Convergence

Number of firms has declined due to mergers and acquistitions and corporate Consolidations
structure changes

Existing financial institutions now sell a wide variety of financial products Convergence
that earlier were outside their core business area

Corporation owned by stockholders with the objective to increase value of Stock Insurer
stock and pay dividends

Corporation owned by POLICY holders Mutual Insurer

These insurers sell life and health insurance products, annuities, mutual Life and health insurers (1179)
funds, pension plans and related financial products

These insurers sell property and casualty insurance and related lines, Property and casualty insurers (3300+)
including marine coverages and surety and fidelity bonds

Owned by the policyowners there are no stockholders, and the insurer does Advance Premium Mutual
NOT issue assessable policies

Right to assess policyowners an additional amount if the insurers financial assessment mutual
operations are unfavorable.

Provides life and health insurance to members of a social or religious org. Fraternal Insurer

Stock Insurer, Mutual Insurer, Reciprocal exchanges, Lloyds of London, Types of private insurers
Blue Cross & Blue shield, HMO

What is it called when a mutual company switches to a stock insurer? Demutualization

What are the three ways a mutual company can demutualize? 1. Pure Conversion
2. Merger
3. Bulk Reinsurance

Company that directly or indirectly controls an authorized insurer...... Holding company

A society of members who underwrite insurance in syndicates (marketplace) Lloyds of London. NOT AN INSURER

Unincorporated mutual where insurance is exchanged among the members; Reciprocal exhange
each member insurers other members. Hint:
managed by an attorney-in-fact

Organized as nonprofit, community oriented plans Blue cross & blue sheild

What type of coverage is blue cross? Hospital services

What type of coverage is blue shield? Physician and surgeon fees

Provides comprehensive health care services to its members. HMO

Provided for a fixed prepaid fee.
Cost control is emphasized.
less costly forms of treatment are often provided

Someone who legally represents the principal and has the authority to act on Agent
the principals behalf

Expressed Authority specific

Implied authority incidental

apparent perception

Provides temporary insurance until the policy is actually writen binder

Someone who legally represents the insured while soliciting applications and broker
attempting to place coverage w/ an appropriate insurer. COMMISSION. no
authority to bind.

Licensed to place a business with a nonadmitted insurer Surplus lines broker

Any insurance for which there is no available market w/in the state, and Surplus Lines
coverage must be placed with a nonadmitted insurer

System by which an insurer builds its own agency force by recruiting, Agency building system
financing, training and supervising new agents

independent contractor who only represents one insurer and receives General Agency
commission based on the amount of goods sold. Insurer not responsible for
recruiting, training.

Branch offices established. Managerial system

Branch manager responsible for hiring and training and receives a
commission from insurer.
Insurers pays expenses of branch office but does not cover agency expenses

Marketing system by which an insurer sells its products through established Nonbuilding agency system
agents.

Successful agent who is hired primarily to sell insurance under a contract Personal-producing general agent

Insurance is sold directly to customers without the services of an agent Direct response system
 Hint:
telemarketers, internet, tv ads

business firm repped by several unrelated insurers. Independent agency

Agents paid commish based on amount of business.

Agents rep only one insurer or group under common ownership. exclusive agency system
no expirations or renewal rights.

An insurer in which the salesperson is an employee of the insurer, not an direct writer
independent contractor Hint:
compensated on a salary+

Insurer sells directly to the consumer by television or some other media. Direct response
Primarily for personal lines of insurance

Used by many property and casualty insurers Multiple distribution systems