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Level 97

Risk Management


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Pure Risk
Situation in which there are only the possibilities of loss or no loss. Only possible outcomes are adverse and neutral.
Risk tolerance
Degree of financial loss you are willing to occur.
Categories of Pure Risk
Property, Liability, and Life
Speculative Risk
Situation in which either profit or loss is possible.
Chance of loss
Probability that an event will occur. Can be identical for two different groups.
Peril
The cause of loss.
Hazard
Condition that creates or increased the frequency or severity of loss.
Physical, Moral, Morale
Three types of Hazzard
Natural, human, economic
Three types of losses from peril and hazards
Step One: Identify the Risk
Process in which the organization identifies the areas of relevant loss in their particular business. Lots of companies fail to identify risk or realize the potential loss.
Loss Exposure
Any condition that presents a possibility of loss, whether or not an actual loss occurs.
Property, Liability, Human Asset
Three types of Loss Exposure
ERM
Enterprise Risk Management--process of systematically and comprehensively identifying the risk. Looks for critical risk.
Critical Risk
Risks that would inhibit your company from achieving its primary focus.
Four types of Risk
Hazard, Financial, Operational, Strategic
Interdependency of Risk
Risk interacts and overlaps categories.
Loss of Exposure Checklist
A list of potential losses for companies to go through and identify their own risks.
Financial Statement Analysis
Going through various financial statements to get an idea how the company is spending money.
Flow Charts
Manufacturing settings, examining the flow of the production from start to finish to find things that could disrupt the process.
Contract Analysis
Determin who would be responsible if something happened in a contract.
Onsite Analysis
Inspecting the physical plant.
Statistical Analysis
Looking at the past losses to predict the future.
Evaluate the Risk
Severity and Frequency
Severity
Percentage of total exposure that is lost
Direct Effect
Occurs as a consequence of the peril or risk effecting the value of the asset.
Indirect Effect
The losses that create reductions in net profit as a result of the direct loss.
Expected Cause of Losses
Combination of direct and indirect effect.
Frequency
Measures the number of losses in a given period of time.
Risk Avoidance
Conscious decision not to expose yourself to a specific loss. You must consider two things:
Loss Control
Actions to reduce the frequency and/or severity of losses associated with the particular risk. Two common goals:
Pre-Loss Activities
Implemented, attempt to reduce the severity and frequency (EX caution sign)
Concurrent Activities
Measure which take place at the same time as a loss occurs (EX sprinklers going off)
Separation and Duplication
Two types of Severity Reduction
Separate Reduction
Reduce the maximum probably loss associated with the risk.
Duplication Reduction
Having backup parts on had so that if something goes wrong you can fix it right away.
Risk Retention
The acceptance of a risk and its financial consequences by retaining or assuming the risk of losses that may result.
Planned Risk Retention
Identified the risk and evaluated it and decided that the risk is worth the cost.
Unplanned Risk Retention
Failure to recognize that you could be responsible for the risk, failed to identify the risk or underestimated the risk.
Funded Risk Retention
Risks that the company realizes and realizes that it could happen and if it does happen, they have arranged a way to pay those losses.
Unfunded Risk Retention
A business tends to pay for losses as they occur.
Risk Transfer
provides a means for risk to be transferred from one person to another to some other market participant who for a price is willing to bear it
Hold-Harmless Agreements
Contracts that contain specific provisions of...
insurance
buyer knows more than seller
Parties Involved
Insured--desire to transfer the risk.
risk sharing
occurs when firms create and sell assets that are less risky and use proceeds to buy riskier assets
Risk Pooling
Sharing the total losses among a group.
Law of Large Numbers
Spread the risk wider the less it will hurt you.
Principle of Indemnity
Limits the amount that an insured may collect to the actual cash value of the property insured. Keeps the insured from realizing a gain through a loss. Reduces the likelihood of intentional losses.
Principle of Insurable Interest
Insured must demonstrate the loss in order to collect after the loss. Prevents fraud and keeps insurance from being a gambling contract.
Subrogation
Situation where a party who has indemnified another's loss is entitled to recovery from any liable third parties who were responsible for the loss. The insurance company can go after the negligent company who cause the loss for you.
Higher standard of honest.
Principle of Utmost Good Faith
Representatives
A statement made by an applicant for insurance, before the contract is made, which affects the willingness of the insurer to accept the risk.
Warranties
A clause in an insurance contract that requires certain conditions, circumstances, or facts to be true before or after the contract is in forced.
Concealments
Silence when obligated to speak.
Insurance Agents
Representative of the insurance carrier.
Insurance Broker
Represents the interest of the insured. They interact with several different insurance carriers on your behalf.
Social Insurance
Plans that are offered through some form of government body. EX medicare, unemployment benefits, social security
Declaration Page
Provides basic information regarding the policy.
Insuring Arrangement
Outlines duties, obligations, and conditions of the contract.
Named Peril Agreements
Specifically lists the perils that the policy covers.
All-Risk Agreements
Provides coverage for any and all risks except for those that are excluded from the policy.
Exclusions
Defines what items are specifically not covered under the policy.
Endorsement
A signature on the back of a check that entitles the payee to either receive payment or transfer it to someone else
Conditions
Specify the rules and regulation of the contract.
Basis of Recovery
How the insuring agency is able to restore their financial positions after they have to pay out after a loss.
Actual Cash Value
Replacement costs minus any depreciation.
Replacement Value
There is no deduction for depreciation. The settlement is limited to the cost of repairing and rebuilding in a similar fashion.
Dollar Limits
The carrier specifies how much they will pay in the policy for either a single claim or all claims in that year.
Specific Dollar Limit
You will pay up to $1,000,000 on a single claim.
Aggregate Dollar Limit
You will pay up to $3,000,000 for all claims in that year total.
Deductibles
Predefined dollar amount that the insured must pay before the carrier becomes responsible for payment.
Co-Insurance
A clause that requires the insured to insure to value or share the loss with the insurance company.