Flashcards in Chapter 3 - Introduction To Risk Management Deck (42)
What is the process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.
Define loss exposure
is any situation of circumstance in which a loss is possible, regardless of whether a loss actually occurs.
Risk management has two important objectives. these objectives are?
Pre-loss objectives- important objectives before a loss occurs include _____, ______, and ________. (3)
Economy, reduction of anxiety, and meeting legal obligations
Post-loss objectives- important objectives after a loss occurs include ________, _______,______,______, and _____. (5)
Survival of the firm, continued operations, stability of earnings, continued growth, and social responsibility.
What are the four steps in the risk management process?
-identify loss exposures
-measure and analyze the loss exposures
-select the appropriate combination of techniques for treating the loss exposures
-implement and monitor the risk management program
What are the NINE important loss exposures? (Mahaha)
-property loss exposures
-liability loss exposures
-business income loss exposures
-human resources loss exposures
-crime loss exposures
-employee benefit loss exposures
-foreign loss exposures
-intangible property loss exposures
-failure to comply with government laws and regulations
What are the five sources of information to identify the preceding loss exposures?
-risk analysis questionnaires and checklists
-historical loss data
What does the loss frequency refer to?
refers to the probable number of losses that may occur during some given time period.
What refers to the probable size of the losses that may occur?
What refers to techniques that reduce the frequency or severity of losses?
What does risk financing refer to?
refers to techniques that provide for the funding of losses.
What are the three major risk-control techniques?
What are the three major risk financing techniques?
means that the firm retains part or all of the losses that can result from a given loss.
Retention can be effectively used in a risk management program under the following conditions: (3)
-no other method of treatment is available
-the worst possible loss is not serious
-losses are fairly predicable
If retention is used, the risk manager must have some method for paying losses. the following methods are typically used: (4)
-current net income: losses are treated as current expenses
-unfunded reserve: losses are deducted from a bookkeeping account
-funded reserve: losses are deducted from a liquid fund
-credit line: funds are borrowed to pay losses as they occur
Define captive insurer
an insurer owned by a parent firm for the purpose of insuring the parent firm's loss exposures.
Define a single parent captive (pure captive)
an insurer owned by only one parent, such as a corporation.
Define association or group captive
is an insurer owned by several parents
What are the six main reason captive insurers are formed?
-Parent company may have difficulty in obtaining insurance
-To take advantage of favorable regulatory environment
-easier access to a re-insurer
-formation of a profit center
-may be income-tax advantages to the parent under certain circumstances
True or False
premiums paid to a single parent captive (pure Captive) are NOT income- tax deductible
The IRS argued that there is no substantial transfer of risk from an economic family to an insurer, and that the premiums paid are similar to contributions to a self-insurance reserve.
Premiums paid to captives are not income-tax deductible unless some or all of the following factors are present: (4)
-The transaction is a bona fide insurance transaction, and the captive insurer takes some risk under a defensible business plan.
-the captive insure's owner is organized such that subsidiaries, and not the parent, pay premiums to the captive insurer under a "brother-sister" relationship. (the term brother-sister refers to separate subsidiaries owned by the same parent, such as a captive insurer and an operating subsidiary.)
-The captive insurer writes a substantial amount of unrelated business.
-ownership of the captive insurer is structured so that the insureds are not the same as the shareholders.
Define risk retention group (RRG)
is a group captive that can write ant type if liability coverage except employers' liability, workers compensation, and personal lines.
What are the four advantages of the risk retention technique?
-save on loss costs
-save on expenses
-encourage loss prevention
-increase cash flow
What are the three disadvantages of the retention technique?
-Possible higher losses
-Possible higher expenses
-Possible higher taxes
Define non-insurance transfers
are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. Ex: contracts, leases, and bold-harmless agreements.
What are the three advantages of a non-insurance transfers?
-the risk manager can transfer some potential losses that are not commercially insurable
-non-insurance transfers often cost less than insurances
-the potential loss may be shifted to someone who is in a better position to exercise loss control.
What are the three disadvantages of a non-insurance transfers?
-the transfer of potential loss may fail because of the contract language is ambiguous
-if the part to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim
-an insurer may not give credit for the transfers, and insurance costs may not be reduced