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CPCU500 > Chapter 2 > Flashcards

Chapter 2 Flashcards

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1
Q

Define balance sheet.

A

The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date.

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2
Q

Define statement of cash flows.

A

The financial statement that summarizes the cash effects of an organization’s operating, investing, and financing activities during a specific period.

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3
Q

Define hold harmless agreement.

A

A contractual provision that obligates one of the parties to assume the legal liability of another party.

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4
Q

Define indemnification.

A

The process of restoring an individual or organization to a pre-loss financial condition.

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5
Q

Define hazard analysis.

A

A method of analysis that identifies conditions that increase the frequency or severity of loss.

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6
Q

Define theoretical probability.

A

Probability that is based on theoretical principles rather than on actual experience.

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7
Q

Define empirical probability.

A

A probability measure that is based on actual experience through historical data or from the observation of facts.

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8
Q

Define probability analysis.

A

A technique for forecasting events, such as accidental and business losses, on the assumption that they are governed by an unchanging probability distribution.

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9
Q

Define the law of large numbers.

A

A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.

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10
Q

Define probability distribution.

A

A presentation (table, chart, or graph) of probability estimates of a particular set of circumstances and of the probability of each possible outcome.

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11
Q

Define central tendency.

A

The single outcome that is the most representative of all possible outcomes included within a probability distribution.

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12
Q

Define expected value.

A

The weighted average of all of the possible outcomes of a probability distribution. The weights are the probabilities of the outcomes.

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13
Q

Define mean.

A

The sum of the values in a data set
divided by the number of values
(numeric average). This is used with empirical distribution constructed from historical data. It is only a good estimate of the expected value if underlying conditions remain constant over time.

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14
Q

Define median.

A

The value at the midpoint of a sequential data set with an odd number of values, or the mean of the two middle values of a sequential data set with an even number of values or the mean of the two middle values, if there is an even number of values. he median has a cumulative probability of 50%. The mean can be helpful in selecting retention levels and upper limits of insurance coverage.

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15
Q

Define mode.

A

The most frequently occurring value in a distribution. Knowing this figure allows risk management professionals to focus on the outcomes that are the most common. The relationship between the mean, median,
and mode is illustrated by the distribution’s
shape (i.e. symmetrical vs. skewed)

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16
Q

Define dispersion.

A

The variation among values in a distribution. Dispersion Measures the extent to which the distribution
is spread out rather than concentrated around
the expected value. Less dispersion means less uncertainty about expected outcomes.

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17
Q

Define standard deviation.

A

A measure of dispersion between the values in a distribution and the expected value (or mean) of that distribution, calculated by taking the square root of the variance. Indicates how widely dispersed the values in a distribution are and provides a measure of how sure an insurance or risk management professional can be about estimates of future losses.

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18
Q

Define coefficient of variation.

A

A measure of dispersion calculated by dividing a distribution’s standard deviation by its mean. Compares two distributions with different
shapes, means, or standard deviations. Higher coefficient of variation means greater
relative variability. Can be used to determine whether a particular
loss control measure has made losses more or
less predictable.

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19
Q

Define normal distribution.

A

A probability distribution that, when graphed, generates a bell-shaped curve.

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20
Q

Define maximum possible loss.

A

The total value exposed to loss at any one location or from any one event.

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21
Q

What is the Prouty Approach?

A

A risk exposure analysis method that suggests how to treat loss exposures by classifying loss frequency and loss severity into broad categories.

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22
Q

Define relative loss frequency.

A

The number of losses that occur within a specified period relative to the number of exposure units.

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23
Q

What types of documents are examined to identity loss exposures using document analysis?

A

Risk assessment checklists and questionnaires

financial statements: balance sheets (assets), income statements (profit or loss over a period), statements of cash flows (summarize effects of operating, investing, and financing activities during a period of time)

Contacts: hold-harmless agreement.

Insurance policies.

Flowcharts an organizational charts: show nature and use of resources and sequence and relationships of operations. Organization charts identify key personnel.

Loss histories: organizations own loss history or that of a comparable organization.

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24
Q

How does a compliance review identify loss exposures?

A

Determines compliance with regulations and statutes. Need constant monitoring.

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25
How does expertise within and outside the organization help to identify loss exposures?
Within organization: interview employees from all areas of company to ask what exposures there are. Outside organization: practitioners in law, finance, statistics, accounting, auditing and technology.
26
What are the advantages an disadvantages of analyzing organizational policies and records?
Pro: identifies both loss exposures and pending changes in loss exposures. Con: large volume of documents.
27
Why are the advantages an disadvantages of analyzing flow charts and organization charts?
Pro: flowcharts identify critical loss exposures and potential bottlenecks Pro: org charts track information flow and identify personnel loss exposures. Con: org charts do not reflect the importance of the individual to continued operations.
28
Why are the advantages an disadvantages of analyzing loss histories?
Pro: can indicate current or future loss exposures. Con: cannot identify exposures that have not resulted in past losses.
29
Why are the advantages an disadvantages of compliance reviews?
Pro: can indicate future or current loss exposures. Con: expensive and time consuming.
30
Why are the advantages an disadvantages of personal inspections?
Pro: reveal Los exposures that would not appear on written descriptions. Con: require individuals with specialized background and experience.
31
Why are the advantages an disadvantages of expertise in the context of identifying loss exposures?
In organization, Pro: can elicit information about what happened in the past. Can indicate what might happen in you future. Beyond organization pro: special knowledge of experts in identifying loss exposures is invaluable. Identifies previously overlooked loss exposures.
32
What four criteria should data meet to accurately analyze loss exposure using data on past losses.
1. Revelant 2. Complete 3. Consistent: a. Must be collected on a consistent bases for all recorded losses. b. Must be expressed in constant dollars, to adjust for differences in price levels. 4. Organized
33
When can the law of large numbers be used?
When: 1) The events have occurred in the past under substantially identical condition and have resulted from unchanging, basic causal forces. 2. The events can be expected to occur in the future under the same, unchanging conditions 3. The events have been, and will continue to be, both independent of one another and sufficiently numerous.
34
Define Discrete Probability Distribution
Have a finite number of possible outcomes. Typically used to analyze how often something will occur ( frequency)
35
Define Continuous Probability Distribution
Have an infinite number of possible outcomes. Typically used for severity distributions
36
Define Loss Severity
The dollar amount of loss for specific occurrence.
37
Define Probable Maximum Loss (PML)
An estimate of the largest loss that is likely to occur.
38
What is the Prouty approach?
A method for considering frequency and severity together. See chart here: http://imgur.com/VnjolqA Loss Frequency Categories (top): 1. almost nil, 2. slight, 3. moderate, 4. definite Severity Categories: a. slight, b. signifigant, c. severe 1a: reduce or prevent/transfer 1b: Reduce or prevent/transfer 1c: reduce or prevent/retain 2a. Reduce or prevent/transfer 2b: Reduce or prevent/transfer 2c: Reduce/retain 3a: reduce or prevent/retain 3b: reduce or prevent/retain 3c: reduce or prevent/retain 4a: avoid 4b: avoid 4c: prevent/retain
39
Define total dollar losses
The total dollar amount of losses for all occurrences during a specific period.
40
Define timing
When losses occur and when loss payments are made.
41
Define data credibility
The level of confidence that available data can accurate indicate future losses.
42
What four criteria should data meet to accurately analyze loss exposure using data on past losses.
1. Revelant 2. Complete 3. Consistent: a. Must be collected on a consistent bases for all recorded losses. b. Must be expressed in constant dollars, to adjust for differences in price levels. 4. Organized
43
When can the law of large numbers be used?
When: 1) The events have occurred in the past under substantially identical condition and have resulted from unchanging, basic causal forces. 2. The events can be expected to occur in the future under the same, unchanging conditions 3. The events have been, and will continue to be, both independent of one another and sufficiently numerous.
44
Define Discrete Probability Distribution
Have a finite number of possible outcomes. | Continuous
45
Define Continuous Probability Distribution
Have an infinite number of possible outcomes.
46
Define Loss Severity
The dollar amount of loss for specific occurrence.
47
Define Probable Maximum Loss (PML)
An estimate of the largest loss that is likely to occur.
48
What is the Prouty approach?
A method for considering frequency and severity together. See chart here: http://imgur.com/VnjolqA Loss Frequency Categories (top): 1. almost nil, 2. slight, 3. moderate, 4. definite Severity Categories: a. slight, b. signifigant, c. severe 1a: reduce or prevent/transfer 1b: Reduce or prevent/transfer 1c: reduce or prevent/retain 2a. Reduce or prevent/transfer 2b: Reduce or prevent/transfer 2c: Reduce/retain 3a: reduce or prevent/retain 3b: reduce or prevent/retain 3c: reduce or prevent/retain 4a: avoid 4b: avoid 4c: prevent/retain
49
Define total dollar losses
The total dollar amount of losses for all occurrences during a specific period.
50
Define timing
When losses occur and when loss payments are made.
51
Define data credibility
The level of confidence that available data can accurate indicate future losses.
52
Describe the characteristics of a normal distribution.
Helps forecast the variability of physical phenomena. 95.44% of outcomes are within 2 standard deviations of the mean. 5% are above 2% in either direction. .26% are outside 3 standard deviations.
53
Why is timing important in analyzing loss exposures?
the time value of money. money held in reserve can earn interest until the payment is made. in addition, when a loss is counted affects accounting and tax treatment
54
describe the steps used for calculating the standard deviation of a set of individual outcomes not involving probabilities
1. calculate the mean of the outcomes 2. subtract the mean from each of the outcomes 3. square each of the resulting differences 4. sum these squares 5. divide this sum by the number of outcomes minus one ( variance) 6. calculate the square root of the variance
55
list 2 requirements to construct an empirical probability distribution
1. provide a mutually exclusive, collectively exhaustive list of outcomes, loss categories ( bins) must be designed so that all losses can be included 2. distribution must define the set of probabilities associated with each of the possible outcomes
56
How is the mean used by risk management professionals in assessing loss exposures?
It is the single best guess as to forecasting future events.
57
How is the median used by risk management professionals in assessing loss exposures?
It is helpful in selecting retention levels or helping select upper limits of coverage..
58
How is the mode used by risk management professionals in assessing loss exposures?
Helps focus on most commonly occurring items and helps select dedutible levels.
59
What is standard deviation?
Average of differences (deviations) between the values in a distribution and the expected value (mean) of that distribution. Measure how widely dispersed the values are. It measures how sure a rm professional can be about projected the frequency and severity of losses.
60
How do you calculate the standard deviation of a set of individual outcomes not involving probabilities
1) Calculate mean of outcome. 2) Subtract mean from each outcome. 3) Square each of the resulting differences 4) Sum these squares 5) Divide this sum by the number of outcomes minus one (this is the variance). 6) Calculate the square root of the variance.
61
What can rm professionals use the coefficient of variation for when evaluating a loss control measure?
They can determine if a loss control measure has made losses more or less predictable.
62
Describe two approaches a risj management professional may use when jointly analyzing the frequency and loss severity of a loss exposure.
1) Combining frequency and severity distributions to create a single total claims distribution. 2) Prouty approach: 4 categories of frequency 3 of severity.
63
``` Which one of the following refers to dollar values today and involves inflating historical values to reflect the effect of inflation? A. Current dollars B. Nominal dollars C. Constant dollars D. Actual Dollars ```
A. Current dollars
64
Probability Density Functions
The outcomes in a continuous probability distribution.
65
Insurance professionals may be able to use measures of dispersion around estimated losses to determine: A. The likelihood of specific types of losses. B. The standard deviation. C. What premium to charge for a particular coverage. D. Whether to offer insurance coverage to a potential insured.
D. Whether to offer insurance coverage to a potential insured.
66
How is the mean used by risk management professionals in assessing loss exposures?
It is the single best guess as to forecasting future events.
67
How is the median used by risk management professionals in assessing loss exposures?
It is helpful in selecting retention levels or helping select upper limits of coverage..
68
How is the mode used by risk management professionals in assessing loss exposures?
Helps focus on most commonly occurring items and helps select dedutible levels.
69
What is standard deviation?
Average of differences (deviations) between the values in a distribution and the expected value (mean) of that distribution. Measure how widely dispersed the values are. It measures how sure a rm professional can be about projected the frequency and severity of losses.
70
How do you calculate the standard deviation of a set of individual outcomes not involving probabilities
1) Calculate mean of outcome. 2) Subtract mean from each outcome. 3) Square each of the resulting differences 4) Sum these squares 5) Divide this sum by the number of outcomes minus one (this is the variance). 6) Calculate the square root of the variance.
71
What can rm professionals use the coefficient of variation for when evaluating a loss control measure?
They can determine if a loss control measure has made losses more or less predictable.
72
Describe two approaches a risj management professional may use when jointly analyzing the frequency and loss severity of a loss exposure.
1) Combining frequency and severity distributions to create a single total claims distribution. 2) Prouty approach: 4 categories of frequency 3 of severity.
73
``` Which one of the following refers to dollar values today and involves inflating historical values to reflect the effect of inflation? A. Current dollars B. Nominal dollars C. Constant dollars D. Actual Dollars ```
A. Current dollars
74
Probability Density Functions
The outcomes in a continuous probability distribution.
75
Insurance professionals may be able to use measures of dispersion around estimated losses to determine: A. The likelihood of specific types of losses. B. The standard deviation. C. What premium to charge for a particular coverage. D. Whether to offer insurance coverage to a potential insured.
D. Whether to offer insurance coverage to a potential insured.
76
What are two ways contracts can lead up a liability loss exposure?
Accepting the liability loss exposure for another party through a hold-harmless agreement. Failure to fulfill a valid contract.
77
Why is use of loss histories, alone, inadequate when identifying loss exposures?
Loss histories will not identify any loss exposures which have not resulted in past losses.

CPCU500 (8 decks)

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